|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 2007
Commission File Number 000-31989
CONVERA CORPORATION(Exact name of registrant as specified in its charter)
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|Delaware                                                           |  | 54-1987541                              
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|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                   |  |                                         

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|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  o  No x
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  o  No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been subject to the filing
requirements for the past 90 days. Yes  x  No o
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, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer __  Accelerated Filer  x  Non-Accelerated Filer __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes  o  No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July
31, 2006 (based on the closing sales price as reported on the NASDAQ National Market System) was
$189,130,713.
The number of shares outstanding of the registrants Class A common stock as of March 28, 2007
was 52,926,544.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated
by reference into Part III.
The Index to Exhibits begins on Page 45

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|CONVERA CORPORATION
ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED JANUARY 31, 2007
TABLE OF CONTENTS
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|ITEM 1.                 
BUSINESS
FORWARD-LOOKING STATEMENTS
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|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, including without limitation statements about the expectations,
  beliefs, intentions or strategies regarding the future of Convera Corporation (hereinafter referred
  to as Convera, the Company, 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 the
  Companys 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 the Company on the date hereof, and the Company assumes no obligation to update any
  such forward-looking statements. The forward-looking statements contained herein involve risks and
  uncertainties discussed under the heading Risk Factors below. The Companys actual
  results could differ materially from those anticipated in these forward-looking statements as a result
  of such factors, including those set forth in this annual report,
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|OVERVIEW
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|Convera is a leading provider of search technologies for professional workers. 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. The Companys main corporate telephone number is (703)
  761-3700.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|The Companys search technology products are delivered as either a licensed enterprise search
software product (RetrievalWare®, also known as TrueKnowledge for Enterprise) or a hosted
internet search services offering (Excalibur, also known as TrueKnowledge for Web). The
Company is developing a bundled hardware and software product (Discovery, also known
as TrueKnowledge for Discovery). We believe that thousands of government and business professionals
in 40 countries rely on Convera search solutions to power a broad range of mission critical applications
within government agencies and commercial enterprises. These applications include knowledge management,
enterprise portals, intelligence gathering and analysis, safety and national security, law enforcement,
research and discovery, regulatory compliance and customer service.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|The Company offers training, consulting, maintenance, and support services with its products and solutions
  to ensure an optimal use of its technologies and the seamless integration of those technologies into
  customer environments. In addition to its Vienna, Virginia headquarters it operates facilities in:
  Bracknell, England, Carlsbad, California, Columbia, Maryland and Montreal, Canada.
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|As of January 31, 2007 and 2006, Allen Holding, Inc., together with Allen & Company Incorporated,
Herbert A Allen and certain related parties (collectively Allen & Company) beneficially
owned approximately 42% and 47% of the voting power of the Company, and would therefore in each instance
be able to effectively control the outcome of matters requiring a stockholder vote.
RECENT DEVELOPMENTS
|                                                                                                                                                                                                                                                                                                                                                                                                            

|On March 31, 2007, the Company agreed to sell the assets of its RetrievalWare business and provide
  a royalty-free license for certain intellectual property for $23.0 million in cash to Fast Search & Transfer (FAST). Under this agreement, FAST will assume certain obligations of
  the business and will retain the professionals serving its enterprise search customers. The Company
  anticipates that the closing of this transaction will occur in the second quarter of fiscal 2008.
  For further discussion of this transaction, see Note 18, Subsequent Events, to the Notes
  to Consolidated Financial Statements.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The closing of the sale RetrievalWare business to FAST will restrict the Companys ability to
  market Discovery to customers in the defense and intelligence community, Discoverys target
  market. The Company is evaluating other markets for Discovery to determine whether to continue the
  development of Discovery after the transaction with FAST closes.                                                                                                                                                                                                                                                                     

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|Additionally, on March 31, 2007, the Company licensed FAST Ad Momentum from FAST. FAST Ad Momentum
  is a private-label contextual advertising and monetization platform developed with the support of
  leading online publishers. FAST Ad Momentum will be integrated with Excalibur, the Companys
  hosted vertical search solution, and will enable publishers to directly manage and improve their
  professional communities search experiences and pursue search-based revenues for their Web
  sites. The Company believes that the addition of the private-label contextual advertising and monetization
  platform features included in Ad Momentum enhances the value of the Excalibur offering
  to its customers.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|PRODUCTS
The Company presently offers two products: RetrievalWare and Excalibur.
RetrievalWare
RetrievalWare is a secure enterprise software product for a broad range of mission-critical, search
and categorization applications. RetrievalWare distributed architecture provides a high performance,
high scalability infrastructure for indexing, searching, categorizing and linking information across
more than 200 forms of text, video, image and audio information, in more than 45 languages.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|The Company believes that RetrievalWare is the industrys first enterprise search product to offer
  multimedia and cross-lingual search as off-the-shelf product features. By providing users with a
  single product that simultaneously searches and organizes all data types (such as text, video, image
  and audio files) in multiple languages from a single user interface, customers do not have to buy
  and piece together several disparate systems to manage multiple data types and languages.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|RetrievalWare provides access to both unstructured and structured information across enterprise networks,
  workgroup LANs, and intranets. The software may be deployed on a single server or across any number
  of distributed physical servers. RetrievalWare server solutions can be run on multiple platforms
  including leading UNIX, LINUX and Windows platforms.                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|RetrievalWare was developed using the modern Application Server Architecture, effectively supporting
  those customers who have chosen to adopt the Service Oriented Application Architecture within their
  enterprises. The support of open Application Programming Interfaces (APIs) like Java
  Services and Web Services APIs allows RetrievalWare to be integrated into a variety of enterprise
  applications with relative ease.                                                                  

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|Typical RetrievalWare applications include enterprise portals, knowledge management, intelligence gathering,
profiling, corporate policy compliance, regulatory compliance, and customer service. These applications
are utilized within corporate intranets, Internet e-commerce, online publishing and OEM market segments.
RetrievalWare is well suited for organizations that face the following challenges:
|                                                                                                                                                                                                                                                                                                                                                                                                                

| |  | Searching a large collection of unstructured information assets distributed in information silos across
the enterprise;
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| |   |                                                                                                                        
| |  | Dealing with large volumes of incoming unstructured data on a daily basis;                                             
| |   |                                                                                                                        

| |  | Searching disparate collections of documents and records regardless of their format, including scanned
paper, text, audio, video, images and relational databases;
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| |   |                                                                                                                                                                   
| |  | Tightly integrating the search solution as part of the corporate security infrastructure;                                                                         
| |   |                                                                                                                                                                   
| |  | Providing a robust, scalable and highly available information discovery platform; and                                                                             
| |   |                                                                                                                                                                   
| |  | Searching information that exists in multiple languages                                                                                                           
| |   |                                                                                                                                                                   

|The most recent version of RetrievalWare is RetrievalWare 8.2, released in October 2006. RetrievalWare
8.2 included more than a dozen new performance and productivity enhancements:
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|                                                                                                                                                                                    

| |  | Distributed Indexing.           
| | - | --------------------------------
| |   |                                 
| |  | Job Recovery and Batch Indexing.

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| |  | Indexing Alerts.                                                     
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| |   |                                                                      
| |  | Enhanced User Administration.                                        
| |   |                                                                      
| |  | Flexible Security.                                                   
| |   |                                                                      
| |  | Proxy Log-in.                                                        
| |   |                                                                      
| |  | Access Control.                                                      
| |   |                                                                      
| |  | Clearing Search Indices.                                             
| |   |                                                                      
| |  | Enhanced Search User Interface.                                      
| |   |                                                                      
| |  | New Migration Tools.                                                 
| |   |                                                                      
| |  | Dedicated New Convera Performance Lab.                               
| |   |                                                                      
| |  | Platform Support (SQL 2005, Oracle® 10g, Red Hat®, AS 4, Solaris10).
| |   |                                                                      
| |  | Application Server Support (WebSphere®, Oracle 10g).                 

|                                             
|---------------------------------------------
|The RetrievalWare 8.2 product suite includes:
|                                             

| | RetrievalWare Search (Base Product)                     
| | --------------------------------------------------------
| |                                                         
| | Optional Components:                                    
| | RetrievalWare Categorization and Dynamic Classification;
| | RetrievalWare Profiling;                                
| | RetrievalWare Language and Cartridge Support            
| | RetrievalWare Language Processors;                      
| | RetrievalWare Semantic Network Cartridges;              
| | RetrievalWare Taxonomy Cartridges;                      
| | RetrievalWare Synchronizers;                            
| | Internet Spider 2.1;                                    
| | Knowledge Workbench 3.0.2;                              
| | FileRoom 2.0;                                           
| | RetrievalWare Software Development Kits; and            
| | Maintenance and Support.                                
| |                                                         

|RetrievalWare Search, priced on a per CPU and number-of-users basis, provides a secure, scalable information retrieval
  and knowledge discovery infrastructure utilizing advanced indexing, search and categorization technology.
  The RetrievalWare distributed process architecture enables users to integrate information assets
  into a single point of access, to navigate that information and to collaborate on retrieved information
  to achieve mission-critical objectives. By utilizing multi-mode searching built around the Companys
  proprietary semantic network technologies, APRP and Boolean search, RetrievalWare Search empowers
  users to securely access and retrieve mission critical information assets across multiple data types.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|APRP identifies patterns in digital information. In text applications, it allows users to retrieve
  relevant information regardless of spelling errors contained in queries or the existence of inconsistencies
  in the searched data that may be caused by errors in optical character recognition processes. The
  software works at high speed and supports the rapid development of multi-language text-retrieval
  systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|With RetrievalWares semantic networks and natural language processing, users can easily find
  needed information with concept searches without having to specify exact keywords. RetrievalWare
  Search incorporates syntax, morphology and the actual meaning of words in its search algorithms.
  The baseline semantic network in the English language version of RetrievalWare gives users a built-in
  knowledge base of approximately 500,000 word meanings, 50,000 language idioms and 1.6 million word
  associations. Users submit plain English queries that are automatically expanded to include related
  terms and concepts, thereby increasing the likelihood that highly relevant content will be retrieved.
  RetrievalWare Search also supports domain-specific semantic networks to further enhance search precision
  and recall in specific fields of interest, including: Biology, Chemistry, Computers, Electronics,
  Finance, Food Science, Geography, Geology, Health Sciences, Information Science, Law, Mathematics,
  Medical, Military, Petroleum, Natural Gas & Petrochemicals, Pharmaceutical, Pharmacology, Physics,
  Plastics, Rubber and Telecommunications. Other disciplines can be supported through the use of tools
  that enable the development of enterprise-specific semantic networks.

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|RetrievalWare Search supports more than 200 document formats stored on file servers, in groupware systems,
  relational databases, document management systems, intranets and the Internet. RetrievalWare Search
  provides real time profiling which enables users to automatically receive incoming documents of interest.                                                                                                                                                                                                                                                                                                                                                                                                             
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|RetrievalWare Categorization and Dynamic Classification, priced on a per CPU basis, enables enterprises to bring consistency and scalability to the organization
  and access of information assets through the use of stable, industry standard taxonomies. One or
  more taxonomies are used to extract concepts and context from information assets. These assets can
  then be organized into specific views that reflect the personalized knowledge requirements, roles
  and perspectives of each user. This approach to organizing information facilitates knowledge discovery
  and collaboration among knowledge workers.                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Profiling, priced on a per CPU basis, automatically detects routes and stores relevant documents in user-defined
  profiles, thus accelerating the timely discovery of relevant information as it enters the RetrievalWare
  environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Language and Cartridge Support, priced on a per CPU basis, allows users to expand their query terms to related terms in other languages.
  These cartridges contain thousands of terms all linked based on their lexical relationships to one
  another and their unique meanings, as well as their linguistic equivalent in other languages.                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Language Processors, enable indexing and searching in a variety of languages. Support for English is included at no additional
  charge with all licenses. French, Spanish and German languages are included at no additional charge
  with all licenses in those countries. Otherwise, RetrievalWare Language Processors are priced on
  a per CPU basis.                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Semantic Network Cartridges, priced on a per CPU basis, allow users to expand their query terms using lexical concepts and semantic
  relationships. These cartridges contain thousands of general concepts and terms, all linked based
  on their lexical relationships to one another and their unique meanings.                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Taxonomy Cartridges, priced on a per CPU basis, can be used for categorization and dynamic classification and in support
  of concept search.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Synchronizers, priced on a per CPU basis, provide document-level secure access for users to search multiple native
  repositories from a single point of access. Supported repositories include Lotus Notes, Microsoft
  Exchange, Documentum, FileNET Panagon, native file systems and major relational database management
  systems including Microsoft SQL Server, Oracle, DB2, Sybase, Informix, Teradata and any ODBC-compliant
  database.                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Internet Spider 2.1, priced on a per CPU basis, is a multimedia, high-performance Web spider/crawler for augmenting the
  retrieval capabilities of RetrievalWare, for stand-alone use, or for integration with other applications.
  In addition to HTML-based Web pages, Internet Spider 2.1 retrieves word processing, PDF and multimedia
  assets including audio, video and images. It is highly configurable and multi-threaded and can provide
  deep, broad and repetitive crawling. Users who want immediate notification when items of interest
  arrive can post Agent Profiles to pull links to related documents to their desktops. Components can
  be deployed on multiple machines for optimum performance and bandwidth.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Knowledge Workbench 3.0.2, priced on a per CPU basis, is a suite of tools combining manual and automated methods to streamline
  taxonomy and classification creation, benchmarking, testing and deployment. The entire lifecycle
  of information resources can be better planned, developed and managed using these tools.                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|FileRoom 2.0, included with all licenses, is a standalone component that allows loading, indexing, viewing and
  managing of scanned documents, images and text. Users access a hierarchy of documents, where each
  tier in the hierarchy is a container for storing documents. Users can directly view the scanned image
  of a retrieved document, graphs, diagrams, handwritten notations and signatures in the retrieved
  document are immediately accessible. Document-level security lets organizations control user access
  at the library, cabinet, drawer, folder and document level.                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|RetrievalWare Software Development Kits, priced on a per kit and number-of-users basis, provide a suite of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|development toolkits for modifying the RetrievalWare system, integrating RetrievalWare with other applications,
building custom search applications and building RetrievalWare language plug-ins and other custom
components and extensions.
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|                                                                                                                                                                                                                                            

|Maintenance and Support includes technical support, software updates, and maintenance releases of the licensed software version
  during the active maintenance period. Maintenance and Support pricing is based on the value of the
  included licenses in accordance with the Companys maintenance pricing policies.                                                                                                                                                                                                      
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|On March 31, 2007, the Company agreed to sell the assets of its RetrievalWare business for $23.0 million
  in cash to FAST. Under this agreement, FAST will assume certain obligations of the business and will
  retain the professionals serving its enterprise search customers. The Company anticipates the closing
  of this transaction will occur in the second quarter of fiscal 2008. For further discussion of this
  transaction, see Note 19, Subsequent Events, to Notes to Consolidated Financial Statements.

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|Excalibur
During fiscal year 2005, the Company initiated a research and development project aimed at applying
portions of the Companys existing enterprise search technology to searching and indexing contextually
relevant information on the World Wide Web. This next-generation search technology achieved its initial
development milestone in October 2004 by creating an Alpha stage search platform for
open-source or Web-based content. By February 2005, the Companys development efforts had advanced
to Beta stage as the technology contained more than one billion documents in the search
index. In November 2005 the Company announced that this next-generation search technology, now named
Excalibur, was commercially available and a redundant hosting environment was established
with AT&T. At that time, Excalibur contained more than four billion documents in the index.
Excalibur has been developed to add structure to the Web with vertical search through the use of customer-defined
scopes of crawled Web content (whitelist), proprietary taxonomies and ontologies, intelligent query
analysis and other semantic resources like language processors, and entity extraction. End users
are provided with more relevant search results and a better understanding of Web content. Excalibur
may be used independently or in concert with other information access technologies including RetrievalWare,
the Companys enterprise search solution, or with an organizations existing internal applications
to create an integrated portal offering blended results from both Intranet and Web-based
searches.
Excalibur has incorporated a large set of commercially recognized taxonomies in addition to privately
compiled taxonomies and thesauri to create a large and very granular Web index. These two core design
features enable Excalibur 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.
Excalibur offers blended results  incorporating information from the Web at large, as well as
from both whitelisted crawl and multiple proprietary sources  enabling content providers and
Web portals to readily consolidate relevant content and information. End users are presented with
relevant search results in a comprehensive, consolidated manner, regardless of the repository source
or location. All results can be presented to the user through an integrated, intuitive and dynamic
page layout that is designed, controlled and branded by the Web site or portal owner.
The Company owns and operates the Excalibur Web infrastructure and Excalibur is offered as a hosted
search service deployed at one or more Tier 1 co-location facilities with full redundancy and automated
failover. The Excalibur search service delivered through search technology agreements with publishers
and other companies with Web sites and Web portals where high quality, advanced Web search is a priority.
Excalibur is a vertical search capability offering site owners greater control over viewers and Web
stickiness and the opportunity to develop, deliver and control content, advertising channels
and relationships.
Layered on top of the Excalibur index are additional knowledge resources which enable Excalibur to
dynamically identify connections between topically and contextually related content and deliver search
results that are vertical, personal and focused. These knowledge resources are:
Taxonomies. A taxonomy is a division of data or information into ordered groups or categories. Excalibur uses
a collective taxonomic resource of more than five million assertions covering commercial, technical
and social realms

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|of both vertical and general interest. This taxonomic knowledge base comprises much publicly-available
as well as privately-compiled data augmented by the Companys years of information retrieval
and knowledge management expertise involving thousands of large-scale search projects worldwide and
ongoing ontological research. All of these taxonomic resources are used to index the Web providing
organization and precision of response for relevant Web content retrieval.
Entities. Excalibur identifies and extracts entities (people, places, things) using large-scale, proprietary
resources of known entities in addition to dynamic entity detection rules that identify and extract
likely entities to aid in disambiguation. For example, Excalibur recognizes George Bush
as the 43rdPresident of the United States and not just a proper noun, two adjacent terms, or a shrub that might
be named George. The Company believes that the breadth, depth and sophistication of Excaliburs
entity recognition are some of the factors driving improved accuracy and relevance of results.
Ontologies. An ontology provides a powerful semantic model that logically groups and represents related information.
Excalibur employs ontological representations to define connections between topically related content
and then to dynamically present relevant content in the context most closely related to a users
search. An entertainment-focused ontology would understand that celebrities have biographical information,
official Web sites, discographies, gossip, awards, events and so on. A sports oriented ontology would
understand that a given sport has teams, rosters, game schedules, news, gossip, fantasy teams, scores
and results, and so. For each case, the ontology helps to define the various types of information
that would interest a user on a given subject.
Facets. Excalibur utilizes hundreds of pre-defined facets to identify relevant aspects of different subject
areas or ontological groupings that are likely to be of interest to a broad cross section of users.
For example, facets chosen to define the context for a music celebrity might include: news, controversy
(or scandal), books, CDs, DVDs, biography, film clips and so on. Alternatively, facets defining a
context for a politician might include: news, poll results, blogs, events and biographical information.
Facets are linked through one or more ontologies and are triggered when conceptually related results
are found in response to a Web search. Facets are dynamically triggered to populate a focused, relevant
and comprehensive set of results.
Verticalization.Excalibur results are vertically oriented, allowing users to achieve a very focused yet comprehensive
search result set within a predefined and authoritative subset (scope) of the total Web index. For
example, a search for thyroid disease should return results that include information about diagnosis,
research, experts, news and so on. Thyroid disease should also be understood as an endocrine
disease with many related terms and concepts, both more general and more specific. This breadth
of information can only be represented through the incorporation of large-scale vertically oriented
taxonomies and compared against an authoritative scope of Web content. By employing deep taxonomic
analysis and whitelisted crawl, Excalibur understands scientific and technical subject matter at
a level of granularity and specificity that is unique when compared to existing Web-scale analysis.
Personalization. Excalibur strives to solve the enormous and complex task of consolidating billions of pages of Web
content and independent information sources to find and present the most relevant results in a compelling
and personalized manner. It does this by understanding what is actually intended by the query and
returning not just the most relevant list of results, but also information originated by related
facets. Presenting information in this way provides the user with a broader, but better focused view
of information that is more informative and easier to digest.
Authority. One of Excaliburs features is its use of content analysis and authority determination mechanisms.
This analysis attempts to comprehend the editorial quality of content and its embedded meaning in
a manner that is more insightful and less subject to manipulation that existing ranking methods.
These ranking mechanisms eliminate low-value or low-quality content and return content with the highest
possible quality regardless of its popularity or obscurity. Multiple elements including source, author,
genre, date, density and specificity are collectively weighed to determine authority and value.
Blending. Excaliburs blending mechanism is supported through direct and indirect access to non-Web and
proprietary content sources, including valued thirdparty content channels, content partners and advertisers. This is useful to organizations that wish
to combine search results from the general Internet along with information residing within specific
controlled datasets or datasets they license from content producers and aggregators. Leveraging these
sources in a process that is transparent to the user, Excalibur can return blended results,
enabling content
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|6
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|providers or users to comb for the best, most relevant information using the terms and contexts most
familiar to them. At the same time, Excalibur safeguards protected data by building in
a number of tunable authentication and access controls.
Multi-Lingual. The same set of knowledge resources and language processing capabilities that power Excalibur search
over English language content, is planned to be extended and optimized to other languages including
Spanish, French, German, Dutch, Portuguese, Chinese, Japanese, Korean and so on. 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.
Localization. Excalibur can enable global localization services since it uses a large set of consolidated geographical
and geospatial semantic resources. These resources are used during indexing and results generation
to understand content in relation to worldwide locations. Geographic reference data might include:
country, city, population, place names, longitude, latitude, ZIP codes (where applicable), and so
on. Collectively, these resources allow Excalibur to provide geographic understanding with enhanced
granularity.
Multimedia Search. Excalibur incorporates multimedia search of Adobe Systems Portable Document Format (PDF), image files
and other data formats. Excaliburs 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 capability insures that Excalibur can retrieve and display relevant
information from news or video archives, as well as other multimedia repositories.
Whitelisting.Excalibur enhances verticalization by crawling, ingesting and indexing a customer-defined authoritative
subset of Web content that is relevant to its business. This includes a secure user portal which
gives both the Company and the customer the capability of refining and enhancing the sites to be
included in any search and monitoring crawl progress.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|On March 31, 2007, the Company licensed FAST Ad Momentum from FAST. FAST Ad Momentum is a private-label
  contextual advertising and monetization platform developed with the support of leading online publishers.
  FAST Ad Momentum will be integrated with Excalibur, the Companys hosted vertical search solution,
  and will enable publishers to directly manage and improve their professional communities search
  experiences and pursue search-based revenues for their Web sites. The Company believes that the addition
  of the private-label contextual advertising and monetization platform features included in Ad Momentum enhances
  the value of the Excalibur offering to its customers.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PRODUCT UNDER DEVELOPMENT
Discovery
Discovery is a highly scalable professional search appliance that provides the most relevant results
across multiple data repositories, including the Web. Discovery offers much of the same functionality
as Excalibur but is offered as a bundled hardware and software product which resides behind a firewall
on customer premises, Discovery will allow professionals to search millions of documents both within
the enterprise and on the Web, uncovering the most relevant, precise information necessary for dependable
analysis and immediate action. Discovery aggregates dissimilar data across all customer data repositories,
making them fully searchable within the customers existing security architectures. Discovery
is still under development and is not expected to be released until October 2007.
The closing of the sale RetrievalWare business to FAST will restrict the Companys ability to
market Discovery to customers in the defense and intelligence community, Discoverys target
market. The Company is evaluating other markets for Discovery to determine whether to continue the
development of Discovery after the transaction with FAST closes

|7
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|BUSINESS STRATEGY
RetrievalWare
The Company licenses RetrievalWare software products directly to government agencies and commercial
enterprises throughout North America, Europe and other parts of the world. The Company also distributes
these products through license agreements with systems integrators, Original Equipment Manufacturers
(OEMs), value-added resellers, and other strategic partners. The Companys technology
may also be customized to meet the specific needs of its customers..
On March 31, 2007, the Company agreed to sell the assets and provide a royalty-free license for certain
intellectual property of its RetrievalWare business for $23.0 million to FAST. If this disposition
is consummated, the Company would shift its business strategy and resources to Excalibur and, potentially
to Discovery, if released, and focus on growing those businesses.
Excalibur
The Company partners directly with leading professional business-to-business (B2B) publishers
offering its Excalibur vertical search capabilities to the publications they own, offering a more
cost effective way to accelerate the transition from providing periodical hard content in printed
form to providing their content dynamically to viewers and participants of interactive online communities.
B2B publishers are being forced to make this change by changing reader habits, changing buying habits
and the rapid advance of the internet. As a consequence of the continued change in their industry
climate, B2B publishers are pursuing plans to graduate from their current on-line presence (generally
a simple website) to a more content-rich web service offering that would contain editorial, web content
and search-based advertising. Excalibur affords these publishers the opportunity do this without
incurring the substantial upfront investment in technology and increased staffing costs required
to complete this transition.
Excalibur allows a publisher to deliver a vertical slice of the Web that is totally relevant for a
particular vertical community. The Company works with the editorial team of a publication to develop
a whitelist of authoritative Web sites that are highly relevant to each vertical market. These can
include public, private, government, trade association, social, community and subscription sites.
The Company 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 Web site. These features allow the websearch
results using Excalibur to be the most focused relevant search results for topics of greatest
interest of the target audience for each publication, allowing the professional users of these sites 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 target high-value, unique users within a specific online
professional community, particularly as consumer search engines are transforming media advertising
revenues to commodity levels.
The B2B trade publishing market in the US and UK in 2006 was estimated at $23 billion and is comprised
of print, exhibition and online revenues. The online portion of this market was estimated at $3 billion,
or 13%; by 2010, the B2B trade publishing market is expected to grow to $30 billion, with the on-line
portion expected to grow to $6 billion or 20%.
The Company has targeted the top 50 B2B publishers in the US and UK, which own approximately 5,000
vertical titles, and represent 77% of the market revenues or approximately $2.3 billion in 2006,
growing to an estimated $4.6 billion by 2010. Approximately 1,000 of these titles (20%) presently
meet the size and revenue potential to be viable candidates for the Excalibur product.
The Companys Excalibur revenue strategy is to execute search technology agreements wherein the
Company receives percentages of customer advertising revenue (typically between 20% and 50% of net
advertising revenues) or subscription fees or income based on the level of end user search queries.
The Company can also generate professional services fees depending upon customer Web site customization
requirements.
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|8
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|Discovery
As previously noted, The closing of the sale of the RetrievalWare business to FAST will restrict the
Companys ability to market Discovery to customers in the products target market, the
defense and intelligence community. The Company is evaluating other markets to determine whether
to continue the development and distribution of Discovery after the transaction with FAST closes.
TECHNICAL SUPPORT, PROFESSIONAL SERVICES AND EDUCATION
The Company provides technical support and maintenance to customers through its technical support personnel
located in the Companys Columbia, Maryland and Carlsbad, California facilities; and through
certain product distributors. Technical support consists of bug fixes, telephone support and upgrades
or enhancements of particular software product releases when and if they become generally available.
Technical support typically is provided to customers under a renewable annual contract. All Company
service plan customers have access to the Convera Online Technical Support Web site that provides
the latest product information, general service updates and Web forums for technical discussions.
The Web site also provides electronic forms for opening technical support cases and suggesting product,
service and Company enhancements.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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

|                             
|-----------------------------
|MARKETING AND SALES
Marketing
|                             

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

|                   
|-------------------
|RetrievalWare Sales
|                   

|The Companys RetrievalWare sales strategy focuses on the licensing of Company products to customers
  both through a direct sales force and through distribution partners and OEMs. Members of the North
  American direct sales team are primarily located throughout the United States, and the majority of
  the international direct sales team is located in the United Kingdom. Distribution throughout the
  Europe, Middle East, Africa and Asia Pacific regions is also covered by a network of reseller partners.
  RetrievalWare products are typically licensed to end-users as either an enterprise-wide or work-group
  level solution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company generally has three license types: OEM, reseller and end user. Each of these license
  types generally includes the same standard terms regarding such things as confidentiality, infringement,
  indemnification and limitations of liability. OEM licenses generally stipulate royalties due to the
  Company based on the sale of the OEM customers product incorporating the Companys technology.
  OEM contracts generally require the customer to pay some of the royalties in advance of the sale
  of their integrated product. Reseller licenses generally include a predetermined discount or margin
  that the reseller is required to pay the Company based on their sales of the Companys products
  to their customers. Reseller agreements are occasionally structured to include minimum amounts due
  from the resellers in advance of their sales to end user customers. This is generally in consideration
  for some type of exclusivity arrangement in a particular territory. Generally, arrangements with
  OEM customers and resellers are structured as term licenses ranging from two to five years. This
  provides future revenue opportunities to the Company through term renewals. End-user license agreements
  are generally structured as perpetual software licenses for a specific number of users and/or for
  use on a specific number of servers. Payment terms generally tend to be shorter on end user perpetual
  licenses compared to those of OEM licenses.

|9
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|Excalibur Sales
Excalibur is sold as a hosted service. Excalibur hosted service arrangements are based on search technology
agreements which reflect similar standard terms as noted above regarding confidentiality, infringement,
indemnification and limitations of liability. As discussed previously, these search technology agreements
stipulate that the Company receive percentages of customer advertising revenue (typically between
20% and 50%) or subscription fees or income based on the level of end user search queries. The agreements
may also provide for professional services fees depending upon customer Web site customization requirements.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|Excalibur sales efforts are targeted at the top 50 B2B publishers that have large, rapidly changing
  content collections in diverse formats and have large numbers of users and end users. The Company
  has adopted a direct selling model with respect to Excalibur and is also exploring the prospect of
  strategic partners such as large advertising agencies or resellers who may provide increased distribution,
  access to incremental human resources and possible hosting facility alternatives.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company expects additional revenue growth to be generated by the FAST Ad Momentum platform
it acquired on March 31, 2007. This Ad platform is being integrated with Excalibur, and will enable
publishers to directly manage and improve their professional communities search experiences
and pursue search-based revenues for their Web sites. This Ad Platform is also expected to work as
an additional marketing channel that will connect the publisher websites supported by Excalibur directly
with the providers of advertising inventory increasing the opportunities for the Excalibur supported
sites to further increase their Ad revenues.
RESEARCH AND DEVELOPMENT
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|The Companys research and development program focuses on enhancing and expanding the capabilities
  of its products and services to address emerging markets and customer requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Excalibur is an open-source search technology, capable of searching and indexing Web-based content.
  However, it may also evolve to offer certain internal search and categorization features similar
  to those of RetrievalWare.                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Certain elements of the Companys developed technologies are provided to the Company pursuant
  to license agreements with other independent software vendors. The technologies acquired by the Company
  in this manner include word processing filters, optical character recognition engines, dictionaries,
  language analyzers, spider and thesauri in electronic form, image and audio processing, and face
  and speech recognition technologies. These license agreements have varying terms and the Company
  makes periodic royalty payments to licensors generally based on either actual or anticipated revenues
  or units.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The Companys research and development expenditures were $15.0 million, $8.3 million, and $13.8
  million in the years ended January 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                
|------------------------------------------------
|INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
|                                                

|The Company regards its software as proprietary and relies primarily on a combination of patents, copyright,
  trademark and trade secret laws of general applicability, employee confidentiality and invention
  assignment agreements, software distribution protection agreements and other intellectual property
  protection methods to safeguard its technology and software products. The Company holds one
  patent related to its current business strategy. This patent, which concerns multimedia document
  retrieval, expires on August 24, 2018. The Company owns several other patents and patent applications
  unrelated to its current business strategy. The Company is actively engaged in seeking additional
  patents specifically related to its Excalibur Web offering. The Company has undertaken to protect
  all significant marks used to identify the Companys core software products and related services.
  The Company owns U.S. trademark registrations or pending applications for its material trademarks,
  including CONVERA, RETRIEVALWARE, SCREENING ROOM and EXCALIBUR. Renewals are due at various
  dates between July 2008 and August 2013. In addition, the Company owns numerous foreign
  applications and registrations for its material trademarks.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
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|COMPETITION
|-----------
|           

|Competition in the information access industry in general, and the search sector in particular, is
  intense. The Companys products and services compete primarily in the search and categorization
  software market. Within this market, there are current competitors who are larger and more established
  than the Company and have significantly greater financial, technical, marketing and other resources.
  There are also potential and emerging competitors entering the market with increasingly differentiated
  technologies.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company considers its principal competitive advantages are that its search solution: (1) provides
  more accurate results due to an extensive semantic network and APRP technologies, (2) offers superior
  connectivity to unstructured and semi-structured data repositories, (3) offers the ability to produce
  authoritative results through exhaustive ingestion of content sources and (4) is scalable due to
  its distributed-processing architecture.                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company has sold several enterprise-wide RetrievalWare licenses into the government defense and
  intelligence agencies marketplace, both in the United States and overseas. In this marketplace, the
  Company believes that RetrievalWare is instrumental in offering highly scalable, secure, mission-critical
  search applications which facilitate fighting terrorism and stopping criminal activity.                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Competition in the market which RetrievalWare serves includes traditional enterprise search software
  and bundled enterprise search appliance vendors. Enterprise search software competitors include Autonomy,
  FAST, Endeca, IBM, Oracle and Microsoft. Bundled enterprise search appliance competitors include
  Google, Thunderstone and Network Appliance.                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Competition in the market which Excalibur serves includes 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). Competition from RetrievalWare
  competitors selling their solutions to publishers who are determined to build their own online solution
  are another alternative to the Excalibur hosted services solution.                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|There can be no assurance that the Company will be able to compete successfully against current or
  future competitors and that competition will not have a material adverse effect on the Companys
  operating results and financial condition in the future.                                                                                                                                                                                                                                                                             

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|SEGMENT AND GEOGRAPHIC AREA FINANCIAL INFORMATION
The Company has two reportable segments: Enterprise Search (RetrievalWare) and Web Indexing (Excalibur).
For segment revenues, profit and loss statements and total assets see Note 14 to Notes to Consolidated
Financial Statements.
The Company derives revenue from contracts and orders issued by agencies of the U.S. Government. See
Note 14 to Notes to Consolidated Financial Statements.
In the fiscal years ended January 31, 2007, 2006 and 2005, one customer accounted for approximately
8%, 14% and 17%, respectively, of the Companys total revenue.
The Companys revenue is derived principally in the United States and in the United Kingdom. For
geographic area revenues and long-lived assets see Note 14 to Notes to Consolidated Financial
Statements.
EMPLOYEES
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|The Company had 180 employees at January 31, 2007, of whom 80 were in research and development; 35
  in sales and marketing; 27 in finance and administration; 16 in technical support, professional services
  and training; 10 in Web hosting operations and 12 in Web service implementation. At January 31, 2007,
  employee headcount by business line was: RetrievalWare  68, Excalibur  82, and General,
  Administrative and Corporate  30.                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Employees are not covered by collective bargaining agreements, and the management of the Company considers
  relations with employees to be good. Competition for qualified personnel within the Companys
  industry is intense. There can be no assurance that the Company will be able to continue to attract,
  hire or retain qualified personnel, and an inability to do so could have a material adverse effect
  upon the Companys operating results and financial condition.

|11
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|OTHER CORPORATE INFORMATION
The Companys Internet Web site address is www.convera.com. The Company makes available free of charge through its Web site its 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 the Companys Web site are not part of, or incorporated
into, this document. The SEC also maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that file electronically
with the SEC.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
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|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.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2007, we had an accumulated deficit of $1.1 billion. We have operated at a
loss for each of the past three fiscal years. For the fiscal years ended January 31, 2007, 2006,
and 2005, our net losses were approximately $44.8 million, $14.3 million, and $19.8 million, respectively.
These losses include expenditures associated with selling software products, further developing software
products during these years and developing our Excalibur Web product. We expect that our losses will
continue for the foreseeable future as we continue to invest in Excalibur and these other programs
and, accordingly, we cannot assure you that we will be able to achieve or maintain profitability
in the future. Our failure to achieve and sustain our profitability will negatively impact the market
price of our common stock.
On March 31, 2007, we announced that we had agreed to sell the assets of our RetrievalWare business
for $23.0 million in cash to FAST. In 2007, $16.4 million, or 98.4%, of the Companys revenue
of $16.7 million was derived from RetrievalWare. The closing of the sale of RetrievalWare will in
the short term substantially reduce the Companys revenue base and continue its trend of operating
losses and uses of cash at least for the short term until the revenue base for Excalibur grows to
sufficient levels to support its expense. Completion of the RetrievalWare sale would have an extreme
adverse impact on our revenue base and we would expect significant operating losses at least for
the short term.
Our ability to achieve profitability is highly dependent on our Excalibur Web offering and if Excalibur
fails to achieve market acceptance we will be unable to grow our business and achieve profitability.
We have expended significant financial resources, as well as management attention, on Excalibur and
expect that our expenditures on Excalibur will continue to be significant. We believe that our future profitability will depend on our ability to successfully market, and achieve
market acceptance for, Excalibur, our Web product. The degree of market acceptance of Excalibur will
depend upon a number of factors, including:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |  | the advantages of Excalibur over competing products;           
| | - | ---------------------------------------------------------------
| |   |                                                                
| |  | our ability to innovate and develop new features for Excalibur;
| |   |                                                                
| |  | customer needs for search products;                            
| |   |                                                                
| |  | the price and cost-effectiveness of Excalibur; 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 Excalibur achieves
market acceptance, we may not be able to maintain that market acceptance over time if competing products
are introduced that are viewed as more effective or are more favorably received than Excalibur. If
Excalibur does not achieve and maintain market acceptance, we will not be able to generate sufficient
revenue to attain profitability. Our dependence on the Excalibur Web offering will increase substantially
in the event we consummate the sale of our RetrievalWare business to FAST.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
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|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 capitalduring or after that time. We may need additional capital in the future, and it may not be available on acceptable terms, or at
  all, and if we do not receive any necessary additional capital, it could harm our financial condition
  and future prospects.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                           

|As of January 31, 2007, our balances of cash and cash equivalents were approximately $47.4 million.
  We believe our current balance ofcash, cash equivalents, and investmentsand proceeds from the sale of the RetrievalWare assets to FAST, if consummated, will be sufficient
  to meet our working capital and capital expenditure requirements for at least the next twelve monthsbased upon our estimates of funds required to operate our business during such period. However, during orafter 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 including
  the Excalibur Web product;            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                            
| |  | 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 shareholders 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. For example, our total revenue for each of the four quarters of the fiscal year ended January 31, 2007
was $4.7 million, $3.3 million, $5.9 million and $2.8 million, respectively, and the price per share
of our common stock during those quarters ranged from $10.25 to $3.50.  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 Excalibur, our Web product to achieve market acceptance;                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                   
| |  | the downturn in capital spending by customers as a result of general economic conditions;                                         
| |   |                                                                                                                                   
| |  | the level of customer demand for our products and services;                                                                       
| |   |                                                                                                                                   
| |  | the delay or deferral of customer implementations;                                                                                
| |   |                                                                                                                                   
| |  | the budget cycles of our customers;                                                                                               
| |   |                                                                                                                                   
| |  | seasonality of individual customer buying patterns;                                                                               
| |   |                                                                                                                                   
| |  | an increase in competition in the software and search industries;                                                                 
| |   |                                                                                                                                   
| |  | the size and timing of individual transactions;                                                                                   
| |   |                                                                                                                                   
| |  | the timing of new software introductions and software enhancements by us and our competitors;                                     
| |   |                                                                                                                                   
| |  | changes in operating expenses and personnel;                                                                                      
| |   |                                                                                                                                   
| |  | changes in accounting principles, such as the requirement that stock options be included in compensation;                         
| |   |                                                                                                                                   
| |  | the overall trend towards industry consolidation; and                                                                             
| |   |                                                                                                                                   
| |  | changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In particular, our period-to-period operating results have historically been dependent upon the timing
of the closing of significant license agreements. Since purchasing our software products often requires
significant capital investment, our customers may defer or decide not to make their purchases. This
means sales can involve sales cycles of six months or more. We derive a significant portion of our
revenue from sales to agencies of the U.S. Government, and, therefore, the budget cycle of the U.S.

|14
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|Government impacts total revenue. In certain financial quarters, we may derive a significant portion of our revenue from a single customer. For example, although
no individual customer accounted for more than 10% of the Companys total revenues in fiscal
year 2007, revenue derived from one customer accounted for approximately 14% of total revenue in
fiscal year 2006. We have historically recorded a significant portion of our total quarterly license
revenue in the third month of a quarter, with a concentration of this revenue occurring in the last
half of that third month. We expect these revenue patterns to continue. Despite these uncertainties
in our revenue patterns, we base our operating expenses upon anticipated revenue levels, and we incur
these expenses on an approximately ratable basis throughout a quarter. As a result, if expected revenue
is deferred or otherwise not realized in a quarter for any reason, our business, operating results
and financial condition would be materially adversely affected.
In addition, steps which we have taken or may take in the future to control operating expenses may
hamper our development, sales and marketing efforts and, ultimately, our operating results. For instance,
we aligned our resources through a number of reorganizations during fiscal years 2002 through 2005
to attempt to focus on markets that have been consistently successful for us. These reorganizations
were intended to streamline our professional services, customer support and sales organizations by
reducing the number of our employees, improve the productivity of each of those organizations and
reduce management personnel and other overhead costs in our marketing, development and administrative
organizations. However, the loss of key personnel in such restructurings and any severance and other
costs incurred in such restructurings could negatively affect our quarterly operating results and
adversely affect our stock price.
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 and software industries 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. 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. Increased
  competition may result in price reductions, reduced gross margins and loss of market share, any of
  which could have a material adverse effect on our business, financial condition or results of operations.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In order for our strategy to succeed and to remain competitive, we must leverage our core technology
  to develop new product offerings, update existing features and add new components to our current
  products such as support for new datatypes and taxonomies for specific vertical markets. These development
  efforts 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, complete
  them on a timely basis or at all, achieve market acceptance or generate significant revenues with them.                                                                                                              

|                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|We design our products to work with certain systems and changes to these systems may render our products
incompatible with these systems, and we may be unable to sell our products.
|                                                                                                                                                                                    

|Our ability to sell our products depends on the compatibility of our products with other software and
  hardware products. These products may change or new products may appear that are incompatible with
  our products. If we fail to adapt our products to remain compatible with other vendors software
  and hardware products or fail to adapt our products as quickly as our competitors, we may be unable
  to sell our products.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------
|Our software products are complex and may contain errors that could damage our reputation, decrease
sales and delay product development and enhancement.
|                                                                                                                                                        

|Our complex software products may contain errors that people may detect at any point in the products life cycles. We cannot assure you that, despite our testing and quality assurance efforts and similar
  efforts by current and potential customers, errors will not be found. The discovery of an error may
  result in loss of or delay in market
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
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|acceptance and sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|In our research and development spending plan, we plan for a certain level of engineering activity
associated with sustaining issues. Sustaining issues include fixing problems
in released products that were not identified in the development and testing cycle. During any period,
if more sustaining issues arise than anticipated, we may have to divert resources away from scheduled
product development and enhancement activities. A delay in product development and enhancement activities
could have a material adverse effect on our future revenue and operating results.
We derive a significant portion of our revenues from sales to U.S. Government agencies, which are subject
to budget cuts and, consequently, a change in the size and timing of our U.S. Government contracts
may materially affect our operating results.
For the year ended January 31, 2007, total revenue derived from sales to agencies of the U.S. Government
was approximately $9.5 million, representing 57% of total revenue. For the year ended January 31,
2006, revenue derived from sales to agencies of the U.S. Government was approximately $11.3 million,
or 54% of total revenue. While the U.S. Government has recently increased spending on defense, information
systems and homeland security initiatives, some government agencies have realized budget reductions
which may adversely impact their purchasing decisions and timing. While the nature and timing of
these opportunities, as well as the ability to complete business transactions related to these opportunities,
is subject to certain risks and uncertainties, successful completion of any of these transactions
could have a material impact on our future operating results and financial position. There can be
no assurance that we will complete any of these potential transactions.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
We must comply with and are affected by laws and regulations relating to the award, administration
and performance of U.S. Government contracts. Government contract laws and regulations affect how
we do business with our customers and, in some instances, impose added costs on our business. In
some instances, these laws and regulations impose terms or rights that are more favorable to the
government than those typically available to commercial parties in negotiated transactions. A violation
of specific laws and regulations could result in the imposition of fines and penalties or the termination
of our contracts or debarment from bidding on contracts.
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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|For the year ended January 31, 2007, total revenue derived from international sales was approximately
  $5.4 million, representing approximately 32% of total revenue. For the year ended January 31, 2006,
  revenue derived from international sales was approximately $5.2 million, representing approximately
  25% of total revenue. 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
  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, 2007, approximately 34% and 11% of our
  total consolidated accounts receivable were denominated in British pounds and Euros, respectively.
  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         

|16
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| |  | 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 Excalibur Web 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 for both our primary and back-up hosting facilities to support our Excalibur Web
product. We do not control the operation of these AT&T facilities and each may be subject to
damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures or
similar events. These facilities may also be subject to break-ins, sabotage, intentional acts of
vandalism or similar misconduct. Despite precautions taken at these facilities, the occurrence of
a natural disaster, cessation of operations by our third-party web hosting provider or its decision
to close a facility without adequate notice or other unanticipated problems at either facility could
result in lengthy interruptions in our service. In addition, the failure by these facilities 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 Excalibur service is unreliable.
We depend on proprietary technology licensed from third parties; if we lose these licenses, it could
delay shipments of products incorporating this technology and could be costly.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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

|                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 competitive position.
|                                                                                                                                                                                                        

|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, distribution and OEM software
  protection agreements and other methods to safeguard our technology and software products. 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.                  

|17
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|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 software 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 our key personnel, the loss of whom would adversely affect 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,
  marketing, technical and operational personnel. 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 operating results. We also believe that our future success will depend in large
  part upon our ability to attract and retain additional highly skilled management, technical, marketing,
  product development, operational personnel and consultants. Competition for such personnel, particularly
  software developers, professional service consultants and other technical personnel, is intense,
  and pay scales in the software industry have significantly increased. There can be no assurance that
  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, 2007, the market price per share of our common stock ranged from $10.25 to $3.50. 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 software companies, will continue. Factors that could cause such volatility include:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |  | future announcements concerning us or our competitors;                                                            
| | - | ------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                   
| |  | quarterly variations in our operating results;                                                                    
| |   |                                                                                                                   
| |  | actual or anticipated announcements of technical innovations or new product developments by us or our competitors;
| |   |                                                                                                                   
| |  | general conditions in our industry;                                                                               
| |   |                                                                                                                   
| |  | concentrated holdings of our common stock;                                                                        
| |   |                                                                                                                   
| |  | developments concerning litigation; and                                                                           
| |   |                                                                                                                   
| |  | worldwide economic and financial conditions.                                                                      
| |   |                                                                                                                   

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

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

|As of January 31, 2007, we had net operating loss carryforwards of approximately $205 million. The
  deferred tax assets representing the benefits of these carryforwards have been offset completely
  by a valuation allowance due to
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Allen
Holding Inc. and related parties exercise voting control over a significant percentage of our outstanding
shares, and our other shareholders may not have an effective say in any matters upon which our shareholders
vote.
As of 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 our voting power, and would therefore be able to effectively control the
outcome of matters requiring a stockholder vote. These matters could include offers to acquire us
and elections of directors. Allen & Company may have interests which are different than the interests
of our other stockholders.
Legislative
actions and potential new accounting pronouncements are likely to impact our future financial position
or results of operations.
Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations
and affect our financial position or results of operations. New pronouncements and varying interpretations
of pronouncements have occurred with frequency in the past and may occur again in the future and
as a result we may be required to make changes in our accounting policies. For example, the recent
requirement to expense stock options in accordance with SFAS No. 123(R) resulted in $4.9 million
in stock-based compensation expense in the fiscal year ended January 31, 2007. 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

|19
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|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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.
We have filed an Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 2006 to restate the consolidated financial statements for the three
and nine months ended October 31, 2006 and increase the reported operating loss for those periods
by approximately $481,000. The restatement gives effect to adjustments resulting from the identification
of material errors related to the understatement of Excalibur impairment charges (approximately $401,000)
and the reversal of revenue on a single contract that was prematurely recognized during the quarter
(approximately $80,000).
We have determined that we lack sufficiently trained accounting and finance personnel. This inadequate
level of skilled resources resulted in accounting processes which were completed neither effectively
nor on a timely basis. Accordingly, there were material weaknesses in internal controls over our
accounting close and reporting and revenue recognition processes.
We are taking remedial measures to add effective internal and external resources to these processes.
Until these process deficiencies are remediated, there is more than a remote likelihood that a material
misstatement to the annual or interim consolidated financial statements could occur and not be prevented
or detected by our internal controls in a timely manner.

|20
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|Item 1B.          Unresolved Staff Comments
There are no material unresolved SEC staff comments as of the date of this report.
Item 2.            Properties
The Companys corporate headquarters facility is occupied under a lease agreement that expires
in December 2007 for a total of approximately 13,200 square feet of space in an office building located
at 1921 Gallows Road, Vienna, Virginia 22182.
The Companys principal development and customer support centers are located in Carlsbad, California
and Columbia, Maryland. The Company leases additional space in Montreal, Canada, and Bracknell, United
Kingdom. The Company believes that its facilities are maintained in good operating condition and
are adequate for its operations.
Item 3.            Legal Proceedings
On November 1, 2001, DSMC, Incorporated (DSMCi) filed a complaint against the Company in

the U.S. District Court for the District of Columbia in which it alleged that the Company misappropriated

DSMCis trade secrets, and engaged in civil conspiracy with the NGT Library, Inc. (NGTL),

an affiliate of the National Geographic Society, to obtain access to DSMCis trade secrets,

and was unjustly enriched by the Companys alleged access to and use of such trade secrets.

In its complaint, DSMCi seeks $5 million in actual damages and $10 million in punitive damages
from
the Company. DSMCi subsequently amended its complaint to add copyright infringement-related
claims.
NGTL intervened in the litigation as a co-defendant with Convera, and filed counterclaims
against
DSMCi. Convera moved to compel arbitration of DSMCis claims; the District Court denied
the
motion, and Convera filed an interlocutory appeal. The D.C. Circuit, in November 2003, ruled
that
it did not have jurisdiction to consider the appeal. During December 2005, DSMCi and NGTL
entered
into a Settlement Agreement and Release. The U.S. District Court dismissed claims against
NGTL on December 23, 2005.
In July 2006, the Company filed a motion for summary judgment, seeking dismissal of all claims made
by DSMCi in the U.S. District Court. On March 27, 2007, the U.S. District Court partially granted
the Companys motion for summary judgment. The Companys motion for dismissal of the claims
of misappropriation of DSMCi trade secrets and copyright infringement were both denied, however,
the motions for dismissal of all claims of civil conspiracy leveled against the Company by DSMCi
were granted. The Court also affirmed that Convera is entitled to set off the full amount of DSMCis
settlement of the NGTL claim against any damages awarded in trial.
The U.S. District Court issued a pretrial order directing the parties to file a joint pre trial statement

by May 15, 2007, in preparation for trial, which is presently expected to be scheduled to commence

in the fall of 2007.
In connection with this litigation, the Company brought an arbitration claim against NGTL on September
13, 2005, seeking indemnification for its defense costs and potential liability pursuant to an indemnity
provision in a service agreement between NGTL and the Company. In response, NGTL brought a cross
claim against the Company under the same contract provision for indemnification of NGTLs respective
costs and liability. On June 5, 2006, the parties entered a joint stipulation to stay the arbitration
pending completion of summary judgment briefing in the underlying litigation between the Company
and DSMCi to avoid duplication of efforts. The resolution of the issues in that underlying litigation
may also resolve some or all of the matters at issue in the arbitration.
In addition, from time to time, the Company is a party to various legal proceedings, claims, disputes

and litigation arising in the ordinary course of business, including that noted above. The Company

believes that the ultimate outcome of these matters, individually and in the aggregate, will not

have a material adverse affect on its financial position, operations or cash flow. However, because

of the nature and inherent uncertainties of litigation, should the outcome of these actions or
future
actions be unfavorable, Converas financial position, operations and cash flows could
be materially
adversely affected.
Item 4.            Submission of Matters to
a Vote of Security Holders
None.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21
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|PART II
Item 5.            Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Companys Class A common stock is traded in the over­-the-counter market and is listed
on the National Market System of the NASDAQ Stock Market under the symbol CNVR.
The following table sets forth the high and low sale prices for Convera common stock for the period
from February 1, 2005 through January 31, 2007, as reported by the National Market System of NASDAQ.
The number of shareholders of record as of January 31, 2007 was 932. The Company has never declared
or paid dividends on its common stock and anticipates that, for the foreseeable future, it will not
pay dividends on its common stock.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                  | High |       | Low |  
|------------------------------------------------- | ---- | ----- | --- | -
|
|Fiscal 2007 (February 1, 2006  January 31, 2007) |      |       |     |  
|                                                 
|First Quarter                                     | $    | 10.25 |     | $
|Second Quarter                                    |      | 8.50  |     |  
|Third Quarter                                     |      | 6.80  |     |  
|Fourth Quarter                                    |      | 5.57  |     |  
|                                                  |      |       |     |  
|Fiscal 2006 (February 1, 2005  January 31, 2006) |      |       |     |  
|                                                 
|First Quarter                                     | $    | 6.06  |     | $
|Second Quarter                                    |      | 8.83  |     |  
|Third Quarter                                     |      | 15.00 |     |  
|Fourth Quarter                                    |      | 20.20 |     |  

|22
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|Performance Graph
The following graph is a comparison of the cumulative total return to stockholders of the Companys
common stock at January 31, 2007 since January 31, 2002 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, 2002 and the reinvestment of dividends.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|
|

|23
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|Item 6.            Selected Financial Data
The selected financial data presented below have been derived from the Companys consolidated
financial statements. The balance sheet data as of January 31, 2007 and 2006, and the statement of
operations data for the fiscal years ended January 31, 2007, 2006 and 2005 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, |           
|-------------------------------------------------------------------------------------------------- | ------------------------------ | ----------
|
|
|
|                                                                                                  
|Revenues                                                                                           | $                              | 16,671    
|Operating expenses:                                                                                |                                |           
|Cost of revenues (1)                                                                               |                                | 12,596    
|Sales and marketing                                                                                |                                | 11,506    
|Research and product development                                                                   |                                | 15,044    
|General and administrative                                                                         |                                | 15,167    
|Amortization of capitalized research
     and development costs                                    |                                | 3,045     
|Incentive bonus payments to employees                                                              |                                |          
|Restructuring (recoveries) charges                                                                 |                                |          
|Impairment of capitalized research
     and development costs, equipment
     and prepaid expenses |                                | 6,407     
|Acquired in-process research and
     development                                                  |                                |          
|                                                                                                   |                                |           
|                                                                                                   |                                | 63,765    
|                                                                                                   |                                |           
|Operating loss                                                                                     |                                | (47,094   
|Other income, net                                                                                  |                                | 2,267     
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|Net loss before income taxes                                                                       |                                | (44,827   
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|Income tax benefit                                                                                 |                                |          
|                                                                                                   |                                |           
|Net loss                                                                                           | $                              | (44,827   
|                                                                                                   |                                |           
|Net loss per common share  basic and
   diluted                                                   | $                              | (0.86     
|Weighted-average number of common shares
   outstanding  basic and diluted                        |                                | 52,222    
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|                                                                                                   |                                |           
|Balance Sheet Data (at end of period)                                                              |                                |           
|Cash and cash equivalents                                                                          | $                              | 47,433    
|Working capital                                                                                    |                                | 44,326    
|Total assets                                                                                       |                                | 59,281    
|Long-term obligations                                                                              |                                | 221       
|Accumulated deficit                                                                                |                                | (1,115,533
|Total shareholders equity (2)                                                                     |                                | 51,097    

|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts in fiscal years 2007 and 2006 exclude Amortization of capitalized research and development
costs shown separately below. There were no such costs prior to fiscal year 2006.
|    |                                                                                                                                                                                     
|(2) | No dividends have been declared or paid on the Companys common stock.                                                                                                              

|24
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|Item 7.            Managements Discussion
and Analysis of Financial Condition and Results of Operations
The Company principally earns revenues from the licensing of its software products and the provision
of services in deployment of the Companys technology to government agencies and commercial
businesses throughout North America, Europe and other parts of the world. The Company licenses its
RetrievalWare software to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment manufacturers and other
strategic partners. Revenues are generated from software licenses with customers and from the related
sale of product maintenance, training and professional services. Additions to the number of authorized
users, licenses issued for additional products and the renewal of product maintenance arrangements
by customers pursuant to existing licenses also provide revenues to the Company. Under software maintenance
contracts, customers are typically entitled to receive telephone support, software bug fixes and
upgrades or enhancements of particular software products when and if they are released. With respect
to the Companys Excalibur Web product, revenues may be derived from either a license model
as described, or from a hosted service offering.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|The Company believes its RetrievalWare product has unique capabilities supporting the needs of customers
  within government agencies that will enable it to capitalize on current market opportunities and
  achieve its operational goals. Going forward, the Company expects to focus a substantial amount of
  resources on further penetration of the national security, defense, law enforcement and intelligence
  gathering community with the United States and its allies. An important objective in this market
  is to upgrade existing installations of older versions of RetrievalWare to the RetrievalWare 8 platform
  that includes technical advancements such as categorization, dynamic classification, profiling and
  distributed indexing software capabilities.                                                                                      
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|On March 31, 2007, the Company agreed to sell the assets of its RetrievalWare business for $23.0 million
  in cash to Fast Search & Transfer (FAST). Under this agreement, FAST will assume
  certain obligations of the business and will retain the professionals serving its enterprise search
  customers, The Company anticipates that the closing of this transaction will occur in the second
  quarter of fiscal 2008. For further discussion of this transaction, see Note 19, Subsequent
  Events, to Notes to Consolidated Financial Statements. Further, the Company expects to increase
  its development, selling & marketing efforts with regard to its Excalibur Web product. Excalibur
  is an advanced effort aimed at applying portions of the Companys existing technology to searching
  and indexing contextually relevant information on the Web.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Excalibur platform became commercially available on November 1, 2005. The primary market for the
Excalibur platform is the B2B publisher industry, which has thousands of printed periodicals that
are distributed to professionals. The Company partners directly with leading B2B Publishers in its
Excalibur offering, Excalibur provides B2B publishers with a more cost-effective way to accelerate
the transition from providing periodical hard content in printed form to providing their content
dynamically to viewers and participants of interactive on-line vertical communities. Excalibur delivers
a vertical slice of the Web that is [totally] relevant for a particular vertical community, affording
the professional users ready access to the most relevant information to perform their work. Under
its agreements with the B2B publishers the Company receives a percentage of website advertising
revenue (typically between 20% and 50% of net advertising revenues) or subscription fees or income
based on the level of end user search queries. The Company can also generate professional services
fees depending upon customer Web site customization requirements.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|The first Excalibur supported site was launched into production in November 2006. As of March 31, 2007,
there are a total of six Excalibur supported websites in production from four B2B publishers and
a total of 25 websites in pilot phase awaiting launch. We believe that these pilot sites will be
launched within the next 90 days.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company expects additional revenue growth to be generated by the FAST Ad Momentum platform
it acquired on March 31, 2007. This Ad platform is being integrated with Excalibur, and will enable
publishers to directly manage and improve their professional communities search experiences
and pursue search-based revenues for their Web sites. This Ad Platform is also expected to work as
an additional marketing channel that will connect the publisher websites supported by Excalibur directly
with the providers of advertising inventory, increasing the opportunities for the Excalibur supported
sites to further increase their Ad revenues.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|In concert with the Excalibur product offering, the Company entered into a hosting facility agreement
with AT&T and, as of January 31, 2006, had established two hosting centers (San Diego, CA and
Dallas, TX).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
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|
|
|

|Excalibur sales and marketing efforts are focused on the top 50 B2B publishers. These publishers possess
  large, rapidly changing content collections in diverse formats and reach a large number of end users.
  Excalibur Operating costs, including the cost of Excalibur hosted services and Excalibur research
  and product development costs, totaled $18.9 million in fiscal 2007. Going-forward, cash outlays
  will be limited to equipment, personnel and general operating costs, including marketing activities.
  The Company expects to continue to increase its investment in Excalibur and may also elect to seek
  additional funding sources for this effort. The Company may also elect to seek additional and/or
  alternative market segments for the Excalibur offering over the coming quarters.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Managements primary objective is to achieve profitability and positive cash flow from operations
without hampering development, sales and marketing efforts. The Company is committed to investing
in the enhancement of its products to meet the needs of its customers and prospects. To achieve its
main objective, the Company continually evaluates revenue opportunities to determine the market sectors
in which the Company should concentrate its sales and marketing efforts. The Companys business
environment and the search software industry in general are characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new market segments. The
Company competes within the commercial sector where its market position has not been as strong as
it has been within the government sector. As such, the Company has elected to focus the majority
of its efforts within the commercial setting on the media and publishing sectors. The Company believes
this segment may afford greater opportunities when compared to addressing a wide array of commercial
market segments. The Companys competitors include many companies that are larger and more established
and have substantially more resources. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Companys business, financial condition or results of
operations. To address the competition, the Company will continue to invest in research and development
to advance its leadership position in linguistic analysis, scalability, performance, and taxonomy
development and deployment. The Company may also make additional investments in specific product
features to better serve the needs of customers looking for online customer service and support solutions
and with regard to the Excalibur Web product, may elect to create a public search portal.
On August 18, 2004, the Company announced that it further streamlined its expense structure. As part
of the restructuring, the Company reduced its personnel related costs, eliminated certain marketing
programs, renegotiated real estate obligations and decreased other general operating expenses. The
Company recorded a restructuring charge of $518,000 during the third quarter of fiscal 2005 related
to this effort. Further, on December 10, 2004 the Company announced an additional re-alignment of
its operational infrastructure. This action included a general workforce reduction (including the
transfer of certain resources to the Companys Excalibur Web product), facility consolidations,
reduced marketing related expenses and decreased other general operating costs. As part of this restructuring,
the Company also announced that it would increase its focus on accelerating its Excalibur development
activities and would seek to advance the Companys existing presence in the high-end search
market, specifically within the government and intelligence gathering community as well as the media
and publishing sectors. The Company recorded a net restructuring charge of $426,000 during the fourth
quarter of fiscal 2005 related to this effort. The Company will continue to invest in its Excalibur
Web product, such that on a consolidated basis, the Company is expected to remain in a net loss position
until such time as Excalibur is accepted into the commercial marketplace and certain levels of revenue
are attained. A detailed review of the numerous risks and challenges facing the Company is contained
in the Risk Factors section beginning on page 13.
Critical Accounting Policies
Converas consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. For a comprehensive discussion of the Companys accounting
policies, see Note 2 in the accompanying consolidated financial statements included in this Form
10-K. Convera does not have any material ownership interest in any entities that are not wholly owned
and consolidated subsidiaries of the Company. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Management bases those estimates,
including those related to bad debts, goodwill and other intangible assets, restructuring costs,
income taxes and litigation, on historical experience and other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets,

|26
|--



|liabilities and equity that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Convera believes the following accounting policies affect the more significant judgments and estimates
used in the preparation of the Companys financial condition and results of operations.
Revenue Recognition
The Company generally derives revenue from selling: (1) software licenses, (2) providing training and

professional services, (3) selling software maintenance and (4) providing hosted services . RetrievalWare

revenue generally consists of software license, training and professional services and software
maintenance,
Excalibur revenue generally consists of hosted services and can include training and
other professional
services and advertising revenue shares .
The Company recognizes revenue for its 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. All revenue is recognized net of sales tax. Software licenses are sold
to
customers as a permanent license (perpetual license) or as a license for a definitive

period of time (term license) Historically, the Company has not experienced significant

returns or exchanges of its products.
Provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection

of the resulting receivable is considered probable, revenue from the sale of perpetual licenses
and
term licenses is recognized upon shipment of product if VSOE exists using the residual method.
When
VSOE cannot be established, term license revenue is recorded ratably over the term of the
license.
To the extent that a discount exists in a multiple element or bundled arrangement that

includes a software license, the Company attributes that discount entirely to the delivered elements

utilizing the residual method as described in paragraph 12 of SOP 97-2 as amended by SOP 98-9.
The
Company generally utilizes the residual methodology for recognizing revenue related to multi-element

software agreements. Under the residual methodology, the Company recognizes the arrangement fee
as
follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific
objective
evidence (VSOE), is deferred and (b) the difference between the total arrangement
fee
and the amount deferred for the undelivered elements is recognized as revenue related to the
delivered
elements. This assumes that (a) all other applicable revenue recognition criteria in
SOP 97-2 are
met and (b) the fair value of all of the undelivered elements is less than the arrangement fee.
Certain of the Companys customers are Original Equipment Manufacturers (OEMs) and resellers.
OEM contracts generally stipulate that the Company receive royalty payments from the sale of the
OEMs integrated product over the specified contract term, which generally range from two to
five years. The Company generally receives prepaid royalties, due at varying dates, and is entitled
to receive additional royalties in the event that the OEM product sales exceed the level provided
for by the guaranteed prepaid royalties. With prepaid royalties, the Company recognizes revenue upon
shipment of the software and/or software developers kit, as appropriate, provided the payment
terms are considered normal and customary for these types of arrangements, the fee is considered
fixed and determinable, and all other criteria within SOP 97-2 have been met. To the extent the OEM product
sales exceed the level provided for by the guaranteed prepaid royalty and additional royalties
are due, the Company generally recognizes the additional royalties as the sales occur. Reseller
contracts generally stipulate royalties due to the Company on the resale of the Companys products
and call for a guaranteed minimum royalty payment in exchange for the right to sell the Companys
products within a specified territory over a specified period of time. The Company recognizes the
prepaid royalties as revenue upon delivery of the initial copy of the software, provided the payment
terms are considered normal and customary for these types of arrangements, the fee is considered
fixed and determinable, and all other criteria within SOP 97-2 have been met. To the extent the resellers
product sales exceed the level provided for by the guaranteed minimum royalty and additional royalties
are due, the Company generally recognizes the additional royalties as the reseller sales occur.
Customization work is sometimes required to ensure that the Companys software functionality meets
the requirements of its customers. Under these circumstances, the Companys revenues are derived
from fixed price contracts and revenue is recognized using the percentage of completion method based
on the relationship of actual
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
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|costs incurred to total costs estimated over the duration of the contract. Estimated losses on such
contracts are charged against earnings in the period such losses become known. These cost estimates
underlie the Companys determinations as to overall contract profitability and the timing of
revenue recognition. Further, we believe that this method of recognition is closely aligned with
the evolution of the work product as defined.
Maintenance revenue related to customer support agreements is deferred and recognized ratably over

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

services are sold as part of a bundled software license agreement as well as separately to customers

who have previously purchased software licenses. When training or professional services that are

not essential to the functionality of the software are sold as part of a bundled license agreement,

the fair value of these services, based on the price charged for the services when sold separately,

is deferred and recognized when the services are performed. Deferred revenue consists of deferred

training and professional services revenues, deferred maintenance revenues and deferred license
revenues.
The Company incurs shipping and handling costs which are recorded in cost of license revenues.
Excalibur hosted service revenues are recognized in accordance with SEC Staff Accounting Bulletin No.

104 (SAB 104) Revenue Recognition. The Company evaluates Excalibur hosted 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, multiple deliverable arrangements that contain elements that do not qualify as separate

units of accounting are recognized ratably over term of the hosting arrangement. Excalibur Hosted

service agreements typically include monthly contract minimums and can also include advertising
share
revenue agreements. 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. No advertising revenue has been recorded
to date under
any of the hosted services agreements, however, as additional publisher vertical
sites are launched
and hosted on the Companys Excalibur product, the Company will become
dependent on its publisher
customers to provide timely and accurate reports of the web advertising
revenue sold by the publisher
on each of these sites to determine its revenue.
Provision for Doubtful Accounts
Convera maintains an allowance for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. A considerable amount of judgment is required in assessing
the ultimate realization of individual accounts receivable balances. The allowance for doubtful accounts
is determined based on an analysis of the Companys historical collection experience and the
Companys portfolio of customers taking into consideration the general economic environment
as well as the industry in which the Company operates. To the extent Convera does not recognize deterioration
in its customers financial condition in the period it occurs, or to the extent Convera does
not accurately estimate its customers ability to pay, the amount of bad debt expense recognized
in a given reporting period will be impacted.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|28
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|Goodwill and Other Intangible Assets
Converas prior acquisitions of other companies resulted in the acquisition of certain intangible
assets and goodwill. Goodwill resulting from these acquisitions is associated with the Companys
enterprise search software products reporting segment. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
the impairment of goodwill is assessed on an annual basis or whenever changes in circumstances indicate
that the fair value of the Company is less than the carrying value. This assessment is performed
by comparing the market value of the Companys outstanding common stock with the carrying amount
of the Companys net assets. If the market value exceeds the carrying amount of the Companys
net assets, impairment of goodwill does not exist. If the market value is less than the carrying
amount of the Companys net assets, the Company will perform further analysis and may be required
to record an impairment. The analysis performed at the end of fiscal year 2007 revealed no impairment of goodwill.
The Company evaluates all of its long-lived assets, including intangible assets other than goodwill,

for impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment

or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets and intangible assets

other than goodwill be evaluated for impairment whenever events or changes in circumstances indicate

that the carrying value of an asset may not be recoverable based on expected undiscounted cash
flows
attributable to that asset. Should events indicate that any of the Companys assets
are impaired,
the amount of such impairment will be measured as the difference between the carrying
value and the
fair value of the impaired asset and the impairment will be recorded in earnings
during the period
of such impairment.
Research and Product Development Costs
Software development costs are included in research and product development and are expensed as incurred.
Historically, the period between achieving technological feasibility and the general availability
of the Companys core software products has been short, and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company has not capitalized any software
development costs related to its software product, the RetrievalWare product suite. The Companys
new Excalibur web product encountered a longer period between technological feasibility and the attainment
of commercial availability and, as a result, the Company began capitalizing software development
costs related to Excalibur during the first quarter of fiscal year 2006 and continued to do so until
such time as commercial availability was determined. Capitalization of software development
costs associated with Excalibur ceased and amortization of previously capitalized software development
costs for this offering commenced on November 1, 2005 and was to continue over a twenty-four month period.
During the quarter ended October 31, 2006, management made the determination that due to the lack of
revenues generated to date and the loss of a significant potential contract that the asset group
related to its Excalibur web product may be impaired. The Company analyzed the recoverability of
the capitalized software development as required by SFAS No. 86 *Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.* *This analysis concluded that the estimated future gross revenues, as reduced by the costs associated
with generating such revenues, were insufficient to recover the capitalized cost and, accordingly
the Company recognized an impairment charge on those capitalized costs of $4.1 million,*equal to the unamortized balance of the related capitalized research and development costs. For further
information related to impairment charges see Note 3 -Impaiment of Long-Lived Assets in the accompanying
consolidated financial statements included in this Form 10-K. As Discovery achieved technological
feasibility in the third quarter of fiscal 2007, as a derivative product of Excalibur, the development
costs that would otherwise be capitalized under SFAS No. 86 were impaired, and accordingly, have
been expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates all of its long-lived assets, including intangible assets other than goodwill,
for impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets and intangible
assets other than goodwill be evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable based on expected undiscounted
cash flows attributable to that asset. Should events indicate that any of the Companys assets
are impaired, the amount of such impairment will be measured as the difference between the
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|29
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|carrying value and the fair value of the impaired asset and the impairment will be recorded in earnings
during the period of such impairment. During the quarter ended October 31, 2006, the Company determined
that certain assets used to host its TrueKnowledge for Web product were impaired and recorded an
impairment charge of $2.3 million during the quarter ended October 31, 2006 For further information
related to impairment charges see Note 3 -Impaiment of Long-Lived Asset in the accompanying consolidated
financial statements included in this Form 10-K.
Deferred Taxes
Convera records a valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. Realization of the deferred tax assets is principally dependent upon
the achievement of projected future taxable income. If the estimates and related assumptions change
in the future, the Company may be required to adjust its valuation allowance against its deferred
tax assets, resulting in a benefit or a charge to income in the period such determination is made.
As of January 31, 2007, the Company has recorded a full valuation allowance against the net deferred
tax asset.
Stock-Based Compensation
On February 1, 2006, the Company 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.
The Company uses 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.
The Company has elected the modifiedprospective transition method as permitted by SFAS 123(R).
The consolidated financial statements for prior periods have not been restated to reflect, and do
not include the impact of the adoption of SFAS 123(R). The modified prospective transition
method requires that stock-based compensation expense be 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 on February 1, 2006, the first day of the Companys 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), the Company measured compensation expense for its employee stock-based

compensation plans using the intrinsic method prescribed by APB No. 25. The Company 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 the Companys stock options was equal to the market price of
the underlying stock on the date of grant, no compensation expense was recognized. Nonvested shares
of stock (referred to as deferred stock) granted under the Companys stock option plan are measured
at fair value on the date of grant based on the number of shares granted and the quoted price of
the Companys common stock. Such value is recognized as compensation expense over the corresponding
service period. If an employee leaves the Company prior to the vesting of the deferred stock, the
estimate of compensation expense recorded in previous periods is adjusted by decreasing compensation
expense in the period of forfeiture.
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|30
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|Results of Operations
For the fiscal year ended January 31, 2007, total revenues were $16.7 million, a decrease of 21% compared
to revenues of $21.0 million in fiscal year 2006. The net loss for fiscal year 2007 was $44.8 million,
or $0.86 per common share, compared to $14.3 million, or $0.33 per common share, in fiscal year 2006.
For the fiscal year ended January 31, 2006, total revenues decreased 18% from total revenues of $25.7
million in fiscal year 2005. The net loss for fiscal year 2005 was $19.8 million, or $0.56 per common
share.
The following charts summarize the components of revenues and the categories of expenses, including
the amounts expressed as a percentage of total revenues, for each of the three fiscal years in the
period ended January 31, 2007 (dollars in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                                                 | *Components of Revenue and Expenses
      Fiscal years ended January 31,* |         | *Increase 
      (Decrease)
      from 2006 
      to 2007* |  | *Increase 
      (Decrease)
      from 2005 
      to 2006* |  
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ------- | ----------------------------------------------------------- |  | ----------------------------------------------------------- | -
|
|*Revenues:*                                                                                     
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Excalibur hosted services*                                                                      | $                                                                         | 269     |                                                             |  | 2                                                           | %
|*License*                                                                                        |                                                                           | 7,629   |                                                             |  | 46                                                          | %
|*Services*                                                                                       |                                                                           | 1,558   |                                                             |  | 9                                                           | %
|*Maintenance*                                                                                    |                                                                           | 7,215   |                                                             |  | 43                                                          | %
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Total revenues*                                                                                 | $                                                                         | 16,671  |                                                             |  | 100                                                         | %
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Expenses:*                                                                                      |                                                                           |         |                                                             |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Cost of Excalibur hosted services
   revenue*                                                   | $                                                                         | 8,138   |                                                             |  | 49                                                          | %
|*Cost of license revenue*                                                                        |                                                                           | 1,283   |                                                             |  | 8                                                           | %
|*Cost of services revenue*                                                                       |                                                                           | 1,970   |                                                             |  | 12                                                          | %
|*Cost of maintenance revenue*                                                                    |                                                                           | 1,205   |                                                             |  | 7                                                           | %
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Total cost of revenues (1)*                                                                     |                                                                           | 12,596  |                                                             |  | 76                                                          | %
|*Sales and marketing*                                                                            |                                                                           | 11,506  |                                                             |  | 69                                                          | %
|*Research and product development*                                                               |                                                                           | 15,044  |                                                             |  | 90                                                          | %
|*General and administrative*                                                                     |                                                                           | 15,167  |                                                             |  | 91                                                          | %
|*Amortization of capitalized research
   and development costs*                                  |                                                                           | 3,045   |                                                             |  | 18                                                          | %
|*Impairment of capitalized research
   and development costs, equipment
   and prepaid expenses* |                                                                           | 6,407   |                                                             |  | 38                                                          | %
|*Restructuring charges*                                                                          |                                                                           |        |                                                             |  |                                                            |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Total expenses*                                                                                 | $                                                                         | 63,765  |                                                             |  | 382                                                         | %
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Operating loss*                                                                                 | $                                                                         | (47,094 | )                                                           |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Other income, net*                                                                              |                                                                           | 2,267   |                                                             |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Net loss before income taxes*                                                                   | $                                                                         | (44,827 | )                                                           |  |                                                             |  
|*Income tax benefit*                                                                             |                                                                           |        |                                                             |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  
|*Net loss*                                                                                       | $                                                                         | (44,827 | )                                                           |  |                                                             |  
|                                                                                                 |                                                                           |         |                                                             |  |                                                             |  

|                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Fiscal years 2006 and 2007 totals exclude amortization of capitalized research and development
costs shown separately below. There were no such cost in fiscal year 2005.

|31
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|Revenues
As of January 31, 2007 Convera had two reportable business segments: RetrievalWare and Excalibur. RetrievalWare
revenue consists of license, professional services and maintenance, while Excalibur consists of hosted
services revenue.
RetrievalWare license revenue for the year ended January 31, 2007 decreased 28% to $7.6 million from
$10.6 million in fiscal year 2006. The average size for fiscal year 2007 was $141,000, representing
a 14% decrease when compared to the average size of $164,000 in the prior fiscal year. A total of
52 license transaction were realized during fiscal year 2007, a 17% decrease compared to 63 such
transactions realized for fiscal year 2006. The decrease in RetrievalWare license revenue in fiscal
year 2007 included declines in the domestic federal and commercial license transactions of $2.1 million
and $1.5 million, respectively, offset in part by an increase in international license revenues of
$0.7 million. The decline in federal license revenue was due to a lengthier sales cycle caused by
delays in government funding that impacted the fourth fiscal quarter. The commercial decline was
the result of managements prior decision to temper its marketing and selling activities within
this segment, the increase in international license revenues was due to higher deal volumes.
RetrievalWare license revenue for the year ended January 31, 2006 decreased 26% to $10.6 million from
$14.4 million in fiscal year 2005. The average size for fiscal year 2006 was $164,000, representing
a 26% increase when compared to the prior fiscal year. Approximately 63 license transactions were
realized during fiscal year 2006, a 42% decrease compared to 109 for fiscal year 2005. The decrease
in total license revenues in fiscal year 2006 compared to fiscal year 2005 was primarily attributed
to three factors: 1) A shift in marketing and selling efforts towards the Excalibur product, 2) A
decrease in international revenue due primarily to a large compliance transaction recognized during
fiscal 2005 and the absence of a like-sized transaction in fiscal 2006, and 3) A decrease in the
commercial RetrievalWare business segment due to managements prior decision to temper its selling
and marketing activities within this market segment.
RetrievalWare services revenue, which includes professional services and training, was $1.6 million
for the year ended January 31, 2007, a 35% decrease when compared to services revenue of $2.4 million
for fiscal year 2006. Declines were witnessed for all RetrievalWare segments due to lower professional
services revenues resulting from new license integration engagements, lower fixed price services
engagements, and lower training revenue.
RetrievalWare services revenue for fiscal 2006 were $2.4 million, a 36% decrease from the services
revenues of $3.7 for fiscal 2005. The decline in fiscal year 2006 services revenue versus fiscal
year 2005 was due primarily to a decline in professional services revenues in our federal and commercial
business segments resulting from the completion of two major engagements, offset by improvements
in professional services revenues in our international segments.
RetrievalWare maintenance revenue was $7.2 million for the year ended January 31, 2007, compared to
$8.0 million for fiscal year 2006. The decrease in fiscal year 2007 maintenance revenue versus fiscal
year 2006 was due primarily to a $1.0 million decline in commercial maintenance revenue and lower
renewal rates resulting from the aforementioned decision by management to temper its selling activities
to commercial customers. RetrievalWare maintenance revenue was $8.0 million for the year ended January
31, 2006, compared to $7.6 million for fiscal year 2005. The increase in maintenance revenues during
the fiscal 2006 was attributed to the fiscal year 2005 implementation of new maintenance renewal
processes and a continued emphasis on identifying lapsed renewals from within the existing customer base.
Excalibur hosted services revenue increased to $269,000 in fiscal year 2007, from $19,800 in fiscal
year 2006 (3 months), Excalibur became commercially available in November 2005 and had limited distribution
in fiscal 2006. The first Excalibur supported site was launched into production in November 2006,
As of March 31, 2007, there are a total of six Excalibur supported websites in production from four
B2B publishers and a total of 25 websites in pilot phase awaiting launch.
Revenue from international operations is generated from RetrievalWare and Excalibur sales. RetrievalWare
revenue is derived from software licenses with various European commercial and government customers
and a well-established European reseller network. The Companys international sales operation,
Convera Technologies International, Ltd. (CTIL), is headquartered in the United Kingdom.
International revenues of $5.2 million in
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|32
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|fiscal year 2007 were consistent with the $5.2 million in international revenues generated in fiscal
2006. In fiscal year 2006, international revenues decreased 30% to $5.2 million from $7.5 million
in fiscal year 2005 due to a large contract compliance transaction recognized during fiscal 2005
and the absence of a like-sized transaction in fiscal 2006. CTIL satellite offices in Paris, France
and Munich, Germany were closed during fiscal year 2005.
Revenue derived from contracts and orders issued by agencies of the U.S. Government was approximately
56%, 54%, and 45%, of total revenues for fiscal years 2007, 2006, and 2005, respectively. In fiscal
year 2007 no customer accounted for more than 10% of revenues. One customer accounted for approximately
14% of revenues in fiscal year 2006. One reseller customer accounted for approximately 17% of revenues
for fiscal 2005.
Operating Expenses
Cost of Revenues
RetrievalWare cost of license revenue was $1.3 million for the year ended January 31, 2007 and was
consistent with $1.3 million in the prior fiscal year. The RetrievalWare cost of license revenue
decrease to $1.3 million in fiscal year 2006 from $1.7 million for fiscal year 2005 was the result
of decrease in third party royalty obligations stemming from the aforementioned decline in RetrievalWare
license revenue.
RetrievalWare cost of services revenue decreased 38% to $2.0 million for the year ended January 31,
2007 from $3.2 million in fiscal year 2006. The decrease in cost of services revenue for fiscal year
2007 is due primarily to a decrease in personnel-related and outsourcing costs in our International
subsidiary due to the aforementioned decline in RetrievalWare services revenue. Average headcount
declined 44% versus the prior fiscal year. Cost of services revenue in fiscal 2006 decreased to $3.2
million or 4%, from $3.3 million in fiscal year 2005. This decrease was the result of a decrease
in personnel-related costs resulting from lower average headcount.
RetrievalWare cost of maintenance revenue for the year ended January 31, 2007 increased 23% to $1.2
million from $1.0 million in fiscal 2006. The increase in cost of maintenance revenues in fiscal
year 2007 is attributed to outsourcing costs to support a component of RetrievalWare. Cost of maintenance
revenue decreased 43% to $1.0 million from $1.7 million in fiscal year 2005 due to lower personnel-related
costs resulting from the restructuring actions undertaken in fiscal year 2005.
Excalibur 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 in Excalibur Hosted services cost of
revenue 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. Excalibur hosted services costs include the royalties paid on third-party software embedded
into our Excalibur product software, the costs associated with the AT&T web hosting facilities
and increased personnel-related expense

Sales & Marketing
Sales and marketing expense increased 40% to $11.5 million for the year ended January 31, 2007 from
$8.2 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, higher
marketing program costs, stock option expenses, and third-party consulting costs. Sales and marketing
expense for the year ended January 31, 2006, decreased 43% to $8.2 million from $14.5 million in
fiscal year 2005. The decrease in sales and marketing expenses for fiscal year 2006 versus fiscal
year 2005 was attributed to lower personnel-related costs stemming from the fiscal 2005 restructurings
that resulted in a 47% year-over-year decrease in average monthly headcount and lower marketing programs
costs.
Research and Development
Reported RetrievalWare research and product development costs decreased 24% to $4.3 million for the
year ended January 31, 2007 from $5.6 million for the prior fiscal year. The decrease in RetrievalWare
research and product development in fiscal year 2007 is due to lower personnel-related costs due
to the continued reallocation of personnel to the Companys Excalibur product (13% decline in
average monthly headcount), reduced depreciation expense, and reduced third party consulting expense.
Reported RetrievalWare research and development costs in fiscal year 2006 decreased to $5.6 million
or 42% from $9.6 million in fiscal year 2005. The decrease in fiscal 2006
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
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|is the result of a reallocation of personnel from the RetrievalWare research and product development
team to the Excalibur product development team (57% decline in average monthly headcount for the
RetrievalWare product development team).
Reported Excalibur research and product development costs increased 295% to $10.8 million for the year
ended January 31, 2007 versus $2.7 million in the prior fiscal year. As previously disclosed, the
Company adopted SFAS No. 86 during the first quarter of fiscal 2006, resulting in the capitalization
of $8.1 million of research and development costs for the first three quarters of fiscal year 2006.
Absent the capitalization of these development costs, gross research and development costs of $10.8
in fiscal year 2007 million remained consistent with the gross Excalibur research and product development
costs of $10.8 million incurred in fiscal year 2006. Reported research and development costs decreased
35% to $2.7 million in fiscal year 2006 from $4.2 million in fiscal year 2005, due to the aforementioned
capitalization of $8.1 million of research and development costs. Absent the capitalization of these
costs, gross research and development costs grew by 160% to $10.8 million in fiscal year 2006 when
compared to $4.2 million for fiscal year 2005. This increase is attributed to costs associated with
the establishment and management of two hosting facilities, increased headcount and consulting fees
for the period of February 1, 2005 (attainment of technological feasibility) through October 31,
2005 for the Excalibur product.
General and Administrative
General and administrative expense grew by 36% to $15.2 million for the year ended January 31, 2007
from $11.1 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. General and administrative expense increased 14% to
$11.1 million from $9.8 million in fiscal year 2005; this increase was principally due to increased
accounting fees associated with the Companys required Section 404 compliance efforts under
the Sarbanes-Oxley Act.
Restructuring charge
The Company had no restructuring expense in for the year ended January 31, 2007, as compared to a $57,000
restructuring credit in fiscal year 2006. During fiscal year 2006 the Company recorded a $57,000
restructuring credit to account for the reversal of previously accrued utilities expense for the
Hillsboro, Oregon facility. The early termination of that lease caused this reversal. During fiscal
2005 the Company incurred $0.9 million in restructuring charges to reduce operating expenses through
general workforce reductions, facility consolidations, reduced marketing expenses and decreased other
general operating costs. In connection with these restructurings, the Company reduced its workforce
by 77 employees worldwide, including 23 employees within the engineering group, 20 from sales and
marketing group, 19 from the professional services group and five from the general and administrative.
Amortization of capitalized software development costs
For the year ending January 31, 2007, the Company amortized $3.0 million in previously capitalized
software development costs associated with its Excalibur product offering, in accordance with SFAS
No. 86., as compared to K$1.0 million of amortization of software development costs in fiscal 2006.
The Company commenced amortizing the capitalized software development costs upon achieving commercial
availability in November 2005. There was no amortization of capitalized software development costs
in fiscal year 2005. Capitalized software development costs were amortized over a 24 month period
through the third quarter of fiscal 2007, when it was determined that the underlying asset was impaired
and was written off, as discussed further below.
Impairment of capitalized software development costs, fixed assets and prepaid expenses
In the third quarter of fiscal year 2007, an analysis of the recoverability of the capitalized software
development costs and fixed assets used in hosting the Excalibur Web product solution concluded that
such assets were impaired. As a result, an aggregate impairment charge of $6.4 million comprised
of a $4.1 million impairment charge for capitalized software development costs analyzed in accordance
with SFAS No 86, and a $2.3 million impairment charge recognized in accordance with SFAS No. 144.
The Company recognized no impairment charges in fiscal 2006 or fiscal 2005.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|34
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|Other income
Other income increased to $2.3 million, or 277% in fiscal year 2007, from $0.6 million in fiscal year
2006. This increase was due to a higher average quarterly cash balance and higher interest yields.
Other income increased to $0.6 million in fiscal year 2006 from $0.2 million in fiscal year 2005.
Contractual Obligations
The Company has obligations under certain contractual arrangements to make future payments for goods
and services. These contractual obligations secure the future rights to various assets and services
to be used in the normal course of operations. For example, the Company is contractually committed
to make certain minimum lease payments for the use of property under operating lease agreements.
In accordance with applicable accounting rules, the future rights and obligations pertaining to firm
commitments such as operating lease obligations and certain purchase obligations under contracts
are not reflected as assets or liabilities on the accompanying consolidated balance sheet.
As of January 31, 2007, the Company had the following contractual obligations associated with its lease
commitments, debt facility and other contractual obligations for the periods indicated below:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|Contractual Obligations       | Payments Due By Fiscal Period (in thousands) |      
|----------------------------- | -------------------------------------------- | -----
|
|
|                              |                                              |      
|Operating leases              | $                                            | 3,204
|Other contractual obligations |                                              | 4,338
|                              |                                              |      
|Total                         | $                                            | 7,542

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating lease obligations  represents the minimum lease rental payments under non-cancelable
  leases, primarily for the Companys office space and operating equipment in various locations
  around the world.                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Other contractual obligations  represents severance payments to a former officer of the
  Company as well as the principal amounts due on outstanding contractual obligations relating to hosting
  agreements between the Company and AT&T related to the Excalibur Web product. The AT&T balance
  includes 100% of the remaining contractual obligation although the agreement is cancelable for an
  immediate payment of 50% of the remaining balance at the time of cancellation.

|                                                                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Liquidity and Capital Resources
The Companys combined balance of cash, cash equivalents and restricted cash at January 31, 2007
as compared to January 31, 2006 is summarized below (in thousands).
|                                                                                                                                                                                                    

|                          | January 31,
      2007 |        | January 31,
      2006 |   | Change | 
|------------------------- | ---------------------- | ------ | ---------------------- | - | ------ | 
|                          |                        |        |                        |   |        | 
|Cash and cash equivalents | $                      | 47,433 |                        | $ | 37,741 | 
|Restricted cash           |                        | 71     |                        |   | 71     | 
|                          |                        |        |                        |   |        | 
|Total                     | $                      | 47,504 |                        | $ | 37,812 | 
|                          |                        |        |                        |   |        | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At January 31, 2007, the Companys principal source of liquidity was cash and cash equivalents
of $47.4 million.
The Companys operating activities consumed $23.1 million in cash in 2007. The primary use of
cash from operating activities was the net loss of $44.8 million. The net loss was reduced for non-cash
expenses represented by depreciation and amortization of $7.0 million, stock-based compensation of
$6.8 million and impairment charges of $6.4 million. The significantly higher level of depreciation
and amortization expense in 2007 relative to 2006 was due to the full-year depreciation effect from
significant capital expenditures and capitalized research and development costs totaling $15.0 million
in 2006. The significantly higher level of stock-based compensation expense in 2007 relative to 2006
was primarily due to the implementation of SFAS 123(R) in 2007. Impairment charges totaling $6.4
million ,consisting of

|35
|--



|write-offs of: approximately $4.1 million of capitalized software development costs, approximately
$400,000 in prepaid licenses, and a write-down of $1.9 million in property and equipment. These write-offs
and write-down arose from an assessment that the carrying value of assets associated with Excalibur
was no longer fully recoverable when compared to the estimated remaining future cash flows. An accounts
receivable decrease of $1.1 million and a deferred revenue decrease of $479,000 represented sources
and uses of cash, respectively. The changes in accounts receivable and deferred revenue were primarily
due to the lower level of revenue which was $16.7 million in 2007 compared to $21.0 million in 2006.
There were no significant changes in the Companys accounts receivable collection policies and
practices in 2007.
The Companys investing activities consumed $442,000 in cash in 2007. Equipment and leasehold
improvement expenditures relating to Excalibur had been substantially completed upon Excaliburs
introduction in 2006.
The Companys financing activities provided $33.1 million in cash in 2007. On February 28, 2006
the Company completed a private placement of 5,103,333 newly-issued shares of its 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 the Company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 4%. The Company used $5.0 million in proceeds from the private placement
to retire a Silicon Valley Bank term loan, which had been made in 2006 and related to financing Excalibur
capital equipment expenditures. The issuance of common stock relating to the exercise of employee
stock options and pursuant to the employee stock purchase plan provided approximately $1.6 million
and $113,000 in cash, respectively. Cash used for the repurchase of common shares was approximately $366,000.
As discussed previously, in April 2007, the Company announced that it had agreed to sell the assets
of its RetrievalWare business for $23.0 million in cash to FAST. In 2007, $16.4 million, or 98.4%,
of the Companys revenue of $16.7 million was derived from RetrievalWare. The closing of the
sale of RetrievalWare will in the short term substantially reduce the Companys revenue base
and continue its trend of operating losses and uses of cash at least for the short term until the
revenue base for Excalibur grows to sufficient levels to support its expense base.
Other Factors
Inflation
The Company believes that inflation has not had a material effect on the results of its operations
to date.
Recent Pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin 108 (SAB 108), Considering

the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial

Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal
of prior year misstatements should be considered in quantifying a current year misstatement.
The
SEC staff believes that registrants should quantify errors using both a balance sheet and an
income
statement approach and evaluate whether either approach results in quantifying a misstatement
that,
when all relevant quantitative and qualitative factors are considered, is material. The provisions

of SAB No. 108 are effective for the Company for the fiscal year ended January 31, 2007.

The adoption of SAB No. 108 did not have a material impact on the Companys consolidated

financial position, results of operations or cash flows.
In the first quarter of 2006, the Company adopted SFAS No. 154 (SFAS 154), Accounting Changes
and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
154 changed the requirements for the accounting for and reporting of a voluntary change in accounting
principle. The adoption of this Statement did not affect the Companys Consolidated Financial
Statements in the period of adoption. Its effects on future periods will depend on the nature and
significance of any future accounting changes subject to this statement.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--



|In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation

No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an interpretation

of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises

financial statements in accordance with Statement of Financial Accounting Standards (SFAS)

No. 109, Accounting for Income Taxes. It prescribes that a company should use a more-likely-than-not

recognition threshold based on the technical merits of the income tax position taken. Income tax

positions that meet the more-likely-than-not recognition threshold should be measured in order
to
determine the tax benefit to be recognized in the financial statements. FIN 48 is effective
in fiscal
years beginning after December 15, 2006. The Company is currently evaluating the impact
of FIN 48
on its consolidated results of operations and financial condition.
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. SFAS 157 is effective for fiscal years beginning
after November
15, 2007. The Company is in the process of determining what effect, if any, the
adoption of SFAS
157 will have on its 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. The Statement also establishes presentation and disclosure requirements
to help financial statement users understand the effect of the election. SFAS No. 159 is effective
as of the beginning of the first fiscal year beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS 159.
Item 7A.                 Quantitative
and Qualitative Disclosures about Market Risk
The Companys market risk is principally confined to changes in foreign currency exchange rates
and potentially adverse effects of differing tax structures. International revenues from CTIL, the
Companys foreign sales subsidiary located in the United Kingdom were approximately 32% of total
revenues in fiscal year 2007. International sales are made predominantly from the Companys
foreign subsidiary and are typically denominated in British pounds, EUROs or U.S. Dollars. As of
January 31, 2007, approximately 34% and 11% of total consolidated accounts receivable were denominated
in British pounds and EUROs, respectively. The majority of these receivables are due within 90 days
of the end of fiscal year 2007, and all receivables are due within one year. Additionally, the Company
is exposed to potential foreign currency gains or losses resulting from intercompany accounts that
are not of a long-term nature. The Company is also exposed to foreign exchange rate fluctuations
as the financial results of CTIL are translated into U.S. dollars in consolidation. As exchange rates
vary, those results when translated may vary from expectations and adversely impact overall expected profitability.
As of January 31, 2007, less than one percent of the Companys 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. The
Company also has certificates of deposit of $71,000 and $450,000, included in restricted cash and
other assets respectively, 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 the Companys exposure to fluctuations in interest
rates is limited.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



|Item 8.            Financial Statements and
Supplementary Data
Financial statements and supplementary data of the Company are submitted as a separate section of this
Form 10-K.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|None.
Item 9A.        Controls and Procedures
(a)                   Evaluation
of Disclosure Controls
The Company, under the supervision and with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Companys disclosure controls and procedures as defined in Rule 13a-15(e)
under the Securities Exchange act of 1934 (the Exchange Act) as of the end of the period covered
by this Annual Report on Form10-K. Based on that evaluation, management concluded that the Companys
disclosure controls and procedures were not effective, as of January 31, 2007 at a reasonable assurance
level, because of material weaknesses in internal control over financial reporting as described below.
Notwithstanding the material weaknesses that existed as of January 31, 2007, management has concluded
that the consolidated financial statements included in this Annual Report on Form 10-K present fairly,
in all material respects, the financial position, results of operation and cash flows of the Company
and its subsidiaries in conformity with U.S generally accepted accounting principles (GAAP).
(b)                   Managements
Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The 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.
Internal control over financial reporting includes the 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 Companys assets; (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 the Companys management and directors; 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. 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.
Management has assessed the effectiveness of the Companys internal control over financial reporting
as of January 31, 2007. In making its assessment of internal control over financial reporting, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control  Integrated Framework.
A material weakness is a control deficiency, or a combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. As of January 31, 2007, we identified the following
material weaknesses in the Companys internal control over financial reporting:

|38
|--



|The Company lacked a sufficient compliment of trained accounting and finance personnel with knowledge
of the Companys accounting close and financial reporting processes and adequate technical expertise
in the application of U.S. generally accepted accounting principles. As a result, errors occurred
in the accounting for certain transactions. Managements review of transactions and the related
account analyses and reconciliations were not sufficient to detect these errors. The errors affected
the calculation of impairment of the Companys web hosting assets and the balances for prepaid
expenses, accruals and general and administrative expenses.
The Companys controls over its accounting for revenue were not sufficient to ensure that revenue
contracts were appropriately interpreted and accounted for using applicable revenue recognition criteria
under current accounting principles. In addition, the Companys control monitoring processes
were not sufficient to identify the resulting accounting errors on a timely basis. As a result, revenues
were recorded before all appropriate revenue recognition criteria had been met.
These material weaknesses resulted in post-closing adjustments in interim periods and in the preparation
of the January 31, 2007 consolidated financial statements and also resulted in the restatement of
the unaudited interim financial statements for the three and nine month periods ended October 31,
2006.
Because of these material weaknesses, management concluded that the Company did not maintain effective
internal control over financial reporting as of January 31, 2007, based on criteria established in
Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Our managements assessment of the effectiveness of our internal control over financial reporting
as of January 31, 2007, has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included herein.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | (c) | Remediation of Material Weaknesses
| | --- | ----------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of the filing date of this report, the Company has not fully remediated the material weaknesses
in the Companys internal control over financial reporting as of January 31, 2007. However,
during fiscal year 2008, management has taken a number of steps that it believes will impact the
effectiveness of our internal control over our financial reporting including the following:
|                                                                                                                                                                                                                                                                                                                                                                                           

| | Accounting close and financial reporting processes: The following procedures have been identified to remediate this material weakness:
| | --------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                       

| | (1) | The Company will hire additional staff with the appropriate level of training and experience to further
  improve the quality of the existing processes and controls.                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                              
| | (2) | The Company has hired an outside consultant to perform a thorough review of our accounting close and
  financial reporting process and we will enhance our procedures to ensure that a thorough review of
  the underlying accounting and reporting guidance by appropriately trained and qualified personnel
  is performed.
| |     |                                                                                                                                                                                                                                                                                                                              

| | Revenue recognition process :  The following procedures have been identified to remediate this material weakness:
| | -----------------------------------------------------------------------------------------------------------------
| |                                                                                                                  

| | (1) | The Company has 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.                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                 
| | (2) | The Company has engaged a consultant with expertise in interpreting and applying the appropriate revenue
  recognition accounting guidance to perform a detailed review of all contracts and revenue computations
  to provide assurance that the resulting revenue recognition entries are accurately prepared.
| |     |                                                                                                                                                                                                                                                                                                                 
| | (3) | The Company has added a supplemental review procedure for the CFO to review all significant contracts
  during each reporting period, prior to approving the entries to recognize revenue.                                                                                                                      

|                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|We believe that the above enhancements to our internal controls over revenue recognition and the accounting
close and financial reporting process will improve the quality and accuracy of the Companys
future financial statements. Until these deficiencies are remediated, there is more than a remote
likelihood that a material misstatement to the

|39
|--



|annual or interim consolidated financial statements could occur and not be prevented or detected by
the Companys internal controls in a timely manner.
The Company believes that it will be able to improve its internal control procedures and remedy the
material weakness and additional control deficiencies identified as part of its assessment process.
Notwithstanding the Companys remediation efforts, because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(d)                   Changes
in Internal Control over Financial Reporting
Except as otherwise discussed herein, there have been no changes in the Companys internal control
over financial reporting during the most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Companys internal control over financial
reporting.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|40
|--



|Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting
The Board of Directors and Shareholders of Convera Corporation
We have audited managements assessment, included in the accompanying Managements Report
on Internal Control Over Financial Reporting, that Convera Corporation did not maintain effective
internal control over financial reporting as of January 31, 2007, because of the effect of the material
weaknesses discussed below, based on the 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. Our responsibility is to express an opinion on managements assessment and an opinion
on the effectiveness of 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, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, 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.
A material weakness is a control deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial statements
will not be prevented or detected. The following material weaknesses have been identified and included
in managements assessment as of January 31, 2007:
The Company lacked a sufficient compliment of trained accounting and finance personnel with knowledge
of the Companys accounting close and financial reporting processes and adequate technical expertise
in the application of U.S. generally accepted accounting principles. As a result, errors occurred
in the accounting for certain transactions. Managements review of transactions and the related
account analyses and reconciliations were not sufficient to detect these errors. The errors affected
the calculation of impairment of the Companys web hosting assets, and the balances for prepaid
expenses, accruals and general and administrative expenses.
The Companys controls over its accounting for revenue were not sufficient to ensure that revenue
contracts were appropriately interpreted and accounted for using applicable revenue recognition criteria
under current accounting principles. In addition, the Companys control monitoring processes
were not sufficient to identify the resulting accounting errors on a timely basis. As a result, revenues
were recorded before all appropriate revenue recognition criteria had been met.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|41
|--



|These material weaknesses resulted in post-closing adjustments in interim periods and in the preparation
of the January 31, 2007 consolidated financial statements and also resulted in the restatement of the
unaudited interim financial statements for the three and nine month periods ended October 31, 2006.
Until these material weaknesses are remediated, there is more than a remote likelihood that a material
misstatement to the annual or interim consolidated financial statements could occur and not be prevented
or detected by the Companys controls in a timely manner.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests
applied in our audit of the fiscal year 2007 financial statements, and this report does not affect
our report dated April 26, 2007 on those financial statements.
In our opinion, managements assessment that Convera Corporation did not maintain effective internal
control over financial reporting as of January 31, 2007, is fairly stated, in all material respects,
based on the COSO criteria. Also, in our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the control criteria, Convera Corporation
has not maintained effective internal control over financial reporting as of January 31, 2007, based
on the COSO criteria.
/s/ ERNST & YOUNG LLP
McLean, VirginiaApril 26, 2007
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42
|--



|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 the Companys definitive Proxy Statement




for the 2007 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission



no later than 120 days after January 31, 2007, which information is incorporated
in this report


by
reference.
Item 11.         Executive Compensation
The information required for this Item will be included in the Companys definitive Proxy Statement




for the 2007 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission



no later than 120 days after January 31, 2007, 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 the Companys definitive Proxy Statement




for the 2007 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission



no later than 120 days after January 31, 2007, 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 the Companys definitive Proxy Statement




for the 2007 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission



no later than 120 days after January 31, 2007, 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 the Companys definitive Proxy Statement




for the 2007 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission



no later than 120 days after January 31, 2007, which information is incorporated
in this report


by
reference.

|43
|--



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

|                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Index to Consolidated Financial StatementsReport
of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated
Statements of Operations and Comprehensive LossConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsNotes 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.
| | ----------------------------------------

|44
|--



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

|Exhibit No. |  | Exhibit Title                                                                                                        |  | Incorporated by Reference from the Following Documents                   
|----------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------
|            |  |                                                                                                                      |  |                                                                          
|           
|3.1         |  | Amended and Restated Certificate of Incorporation of Convera                                                         |  | Form S-4 (Registration No. 333-50172), November 17, 2000                 
|           
|3.2         |  | By-laws of Convera (Amended and Restated)                                                                            |  | Form 10-K, April 30, 2003                                                
|           
|3.3         |  | Amendment to By-Laws                                                                                                 |  | Form 10-K, March 31, 2006                                                
|           
|10.1        |  | 1995 Incentive Plan, dated November 1995                                                                             |  | Proxy Statement dated October 16, 1995 for Annual Meeting of Shareholders
|           
|10.2        |  | Convera Stock Option Plan                                                                                            |  | Form 8-K, May 3, 2000                                                    
|           
|10.3        |  | Office Lease ( 1808 Aston Avenue , Carlsbad , California ) commencing November 1, 2001                               |  | Form 10-K, April 30, 2002                                                
|           
|10.4        |  | Amended and Restated Convera Corporation 1996 Employee Stock Purchase Plan                                           |  | Definitive Form 14C, December 18, 2001                                   
|           
|10.5        |  | Employment Agreement with John R. Polchin, dated April 1, 2004                                                       |  | Form 10-Q, June 14, 2004                                                 
|           
|10.6        |  | Office Lease Amendment ( 1921 Gallows Road , Vienna Virginia ) commencing October 6, 2004                            |  | Form 10-Q, December 12, 2004                                             
|           
|10.7        |  | AT&T Master Agreement dated August 24, 2004                                                                          |  | Form 10-K, April 1, 2005                                                 
|           
|10.8        |  | Office Lease ( Radius Court , London Road, Bracknell , Berkshire United Kingdom ) commencing March 21, 2005          |  | Form 10-K, March 31, 2006                                                
|           
|10.9        |  | Office Sublease (Sublandlord  MWH Americas, 6760 Alexander Bell Drive , Columbia Maryland ) commencing June 1, 2005 |  | Form 10-K, March 31, 2006                                                
|           
|10.10       |  | Office Lease ( 6760 Alexander Bell Drive , Columbia Maryland ) commencing August 20, 2005                            |  | Form 10-K, March 31, 2006                                                
|           
|10.11       |  | Employment Agreement with Kurt Gastrock dated October 25, 2005                                                       |  | Form 10-K, March 31, 2006                                                
|           
|10.12       |  | Employment Agreement with Patrick C. Condo dated October 24, 2005                                                    |  | Form 10-K, March 31, 2006                                                
|           
|10.13       |  | Separation Agreement between the Company and John R. Polchin                                                         |  | Form 10-Q, September 11, 2006                                            
|           
|10.14       |  | Separation Agreement between the Company and Kurt C. Gastrock                                                        |  | Filed Herewith                                                           
|           
|10.15       |  | Office Lease Amendment ( 1808 Aston Avenue , Carlsbad , California ) commencing January 17, 2007                     |  | Filed Herewith                                                           
|           
|10.16       |  | Employment Agreement with Matthew Jones, dated December 6, 2006                                                      |  | Filed Herewith                                                           
|           
|21.01       |  | Subsidiaries of Convera                                                                                              |  | Form 10-K, April 30, 2004                                                
|           
|23.01       |  | Consent of Independent Registered Public Accounting Firm                                                             |  | Filed Herewith                                                           
|           
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)                                        |  | Filed Herewith                                                           
|           
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)                                        |  | Filed Herewith                                                           

|45
|--



|32.1 |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Herewith
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|    
|32.2 |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Herewith

|46
|--



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

| |                     |                                      
| | ------------------- | -------------------------------------
| | CONVERA CORPORATION
| |                     |                                      
| | By:                 | /s/ Patrick C. Condo                 
| |                     |                                      
| |                     | Patrick C. Condo                     
| |                     | President and Chief Executive Officer

|                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date:  April 30, 2007
      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,          |  | April 30, 2007
|Patrick C. Condo         |  | and Director (Principal Executive Officer)   |  |               
|                         |  |                                              |  |               
|/s/Matthew G.. Jones     |  | Vice President , Chief Financial Officer,    |  | April 30, 2007
|Matthew G. Jones         |  | (Principal Financial and Accounting Officer) |  |               
|                         |  |                                              |  |               
|/s/Ronald J. Whittier    |  | Chairman of the Board                        |  | April 30, 2007
|Ronald J. Whittier       |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Herbert A. Allen      |  | Director                                     |  | April 30, 2007
|Herbert A. Allen         |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Herbert A. Allen, III |  | Director                                     |  | April 30, 2007
|Herbert A. Allen, III    |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Stephen D. Greenberg  |  | Director                                     |  | April 30, 2007
|Stephen D. Greenberg     |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Eli S. Jacobs         |  | Director                                     |  | April 30, 2007
|Eli S. Jacobs            |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Donald R. Keough      |  | Director                                     |  | April 30, 2007
|Donald R. Keough         |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Ajay Menon            |  | Director                                     |  | April 30, 2007
|Ajay Menon               |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Sydney Pollack        |  | Director                                     |  | April 30, 2007
|Sydney Pollack           |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Carl J. Rickertson    |  | Director                                     |  | April 30, 2007
|Carl J. Rickertson       |  |                                              |  |               
|                         |  |                                              |  |               
|/s/Jeffrey White         |  | Director                                     |  | April 30, 2007
|Jeffrey White            |  |                                              |  |               
|                         |  |                                              |  |               
|/s/John C. Botts         |  | Director                                     |  | April 30, 2007
|John C. Botts            |  |                                              |  |               

|47
|--



|/s/Alexander F. Parker |  | Director |  | April 30, 2007
|---------------------- |  | -------- |  | --------------
|Alexander F. Parker    |  |          |  |               

|48
|--

Index to Consolidated Financial Statements

PageReports of
Independent Registered Public
  Accounting Firm

F-1Consolidated
Balance Sheets As of January
  31, 2007 and 2006

F-2Consolidated
Statements of Operations and
  Comprehensive Loss For the fiscal years ended January 31, 2007, 2006 and 2005

F-3Consolidated
Statements of Shareholders
  Equity For the fiscal years ended January 31, 2007, 2006 and 2005

F-4Consolidated
Statements of Cash Flows For
  the fiscal years ended January 31, 2007, 2006 and 2005

F-5Notes to
Consolidated Financial Statements

F-6 49   REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of
Directors and Stockholders of Convera Corporation:

We have
audited the accompanying consolidated balance sheets of Convera Corporation as
of January 31, 2007 and 2006, and the related consolidated statements of
operations and comprehensive loss, shareholders equity, and cash flows, and
for each of the three years in the period ended January 31, 2007. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2007, 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 Paymentand 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 effectiveness of Convera
Corporations internal control over financial reporting as of January 31, 2007,
based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated April 26, 2007, expressed an unqualified opinion on
managements assessment, and an adverse opinion on the effectiveness of
internal control over financial reporting.

McLean,
Virginia
April 26, 2007

F-1

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

As of January 31,2007

2006ASSETSCurrent
Assets:Cash and cash equivalents

$
47,433

$
37,741Restricted cash


71


71Accounts receivable, net of allowance for
  doubtful accounts of $367 and $218, respectively


3,023


4,364Prepaid expenses and other


1,762


2,396Total current assets


52,289


44,572Equipment
and leasehold improvements, net
  of accumulated depreciation of $14,847 and $15,683, respectively


3,928


9,152Other
assets


761


819Capitalized
research and development costs





7,102Goodwill


2,275


2,275Other
intangible assets, net of accumulated
  amortization of $1,318 and $1,049, respectively


28


297Total assets

$
59,281

$
64,217LIABILITIES AND SHAREHOLDERS EQUITYCurrent
Liabilities:Accounts payable

$
1,837

$
1,367Accrued expenses


2,680


2,680Deferred revenues


3,446


3,931Current maturities of long-term debt





1,283Total current liabilities


7,963


9,261Deferred
revenues  long-term


221


398Long-term
debt, net of current portion





3,717Total liabilities


8,184


13,376Commitments
and ContingenciesShareholders Equity:Common stock Class A, $0.01 par value,
  100,000,000 shares authorized; 53,469,299 and 47,803,186 shares issued,
  respectively; 52,812,744 and 47,128,833 shares outstanding, respectively


535


478Treasury stock at cost, 656,555 and 674,353
  shares, respectively


(1,517
)

(1,558
)Additional paid-in-capital


1,168,907


1,124,067Accumulated deficit


(1,115,533
)

(1,070,706
)Accumulated other comprehensive loss


(1,295
)

(1,440
)Total shareholders equity


51,097


50,841Total liabilities and shareholders equity

$
59,281

$
64,217See accompanying notes.

F-2

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

For the Fiscal Years Ended January
312007

2006

2005Revenues:Excalibur hosted services

$
269

$
20

$
License


7,629


10,573


14,360Services


1,558


2,379


3,746Maintenance


7,215


8,036


7,59216,671


21,008


25,698Operating
expenses:Cost of revenues (excluding
  amortization of capitalized research and development costs shown separately
  below):Excalibur hosted services


8,138


1,797


License


1,283


1,302


1,658Services


1,970


3,187


3,332Maintenance


1,205


981


1,718Sales and marketing


11,506


8,190


14,476Research and product
  development


15,044


8,346


13,801General and administrative


15,167


11,113


9,764Amortization of capitalized
  research and development costs


3,045


1,012


Impairment of capitalized
  software development costs, equipment and prepaid expenses


6,407





Restructuring (recoveries)
  charges





(57
)

944Total operating expenses


63,765


35,871


45,693Operating
loss


(47,094
)

(14,863
)

(19,995
)Other
income, net


2,267


602


175Net loss
before income taxes


(44,827
)

(14,261
)

(19,820
)Income tax
benefit








Net
loss

$
(44,827
)
$
(14,261
)
$
(19,820
)Basic and
diluted net loss per
  common share

$
(0.86
)
$
(0.33
)
$
(0.56
)Weighted-average number of
  common shares outstanding  basic and diluted


52,221,644


43,088,677


35,432,754Comprehensive loss:Net loss


(44,827
)

(14,261
)

(19,820
)Foreign currency translation
  adjustment


145


(56
)

(29
)Comprehensive loss

$
(44,682
)
$
(14,317
)
$
(19,849
)See accompanying notes.

F-3

CONVERA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(in thousands, except share data)


|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|----------------------------------------------------------- |  | ------------ | ---------- | ------ | - | -------------- |  | ------------------------------ | -------- | ------ |  | -------- | --------------------- | - | --------------------------------------------------------- | ----- | - | --------- | - | - | ---------- | - | - | ------ | - | - | ------- | -
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   | Accumulated
  Other
  Compre-
  hensive
  Income
  (Loss) |       |   |           |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |          
|                                                            |  | Common Stock |            |        |   | Treasury Stock |  |                                |          |        |  |          |                       |  
|                                                            |  |              |            |        |   |                |  | Additional
  Paid-in
  Capital |          |        |  |          |                       |  
|                                                            |  | Shares       |            | Amount |   | Warrants       |  | Shares                         |          | Amount |  |          | Accumulated
  Deficit |   |                                                           | Total |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Balance, January 31,
2004                                   |  |              | 34,655,344 |        | $ | 347            |  |                                | 137,711  |        |  | (813,257 | )                     | $ | (1,879                                                    | )     | $ | 1,070,880 |   | $ | (1,036,625 | ) | $ | (1,355 | ) | $ | 31,368  |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Private placement                                           |  |              | 3,433,333  |        |   | 34             |  |                                |         |        |  |         |                       |   |                                                          |       |   | 10,266    |   |   |           |   |   |       |   |   | 10,300  |  
|Issuance of common stock upon
exercise of options           |  |              | 465,469    |        |   | 5              |  |                                |         |        |  |         |                       |   |                                                          |       |   | 1,835     |   |   |           |   |   |       |   |   | 1,840   |  
|Issuance of treasury stock for
Employee Stock Purchase Plan |  |              |           |        |   |               |  |                                |         |        |  | 86,849   |                       |   | 201                                                       |       |   | (6        | ) |   |           |   |   |       |   |   | 195     |  
|Issuance of warrants to third
party                         |  |              | 84,744     |        |   |               |  |                                | (137,711 | )      |  |         |                       |   |                                                          |       |   |          |   |   |           |   |   |       |   |   |        |  
|Stock-based
compensation                                    |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   | 1,416     |   |   |           |   |   |       |   |   | 1,416   |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Issuance of stock for deferred
stock compensation plan      |  |              | 101,325    |        |   | 1              |  |                                |         |        |  |         |                       |   |                                                          |       |   | (122      | ) |   |           |   |   |       |   |   | (121    | )
|Foreign currency translation
adjustment                     |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   |          |   |   |           |   |   | (29    | ) |   | (29     | )
|                                                           
|Net loss                                                    |  |              |           |        |   |               |  |                                |          |        |  |          |                       |   |                                                          |       |   |          |   |   | (19,820    | ) |   |        |   |   | (19,820 | )
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Balance, January 31,
2005                                   |  |              | 38,740,215 |        | $ | 387            |  |                                |         |        |  | (726,408 | )                     | $ | (1,678                                                    | )     | $ | 1,084,269 |   | $ | (1,056,445 | ) | $ | (1,384 | ) | $ | 25,149  |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Private placement                                           |  |              | 6,555,556  |        |   | 66             |  |                                |         |        |  |         |                       |   |                                                          |       |   | 28,699    |   |   |           |   |   |       |   |   | 28,765  |  
|Issuance of common stock upon
exercise of options           |  |              | 2,406,090  |        |   | 24             |  |                                |         |        |  |         |                       |   |                                                          |       |   | 9,646     |   |   |           |   |   |       |   |   | 9,670   |  
|Issuance of treasury stock for
Employee Stock Purchase Plan |  |              |           |        |   |               |  |                                |         |        |  | 52,055   |                       |   | 120                                                       |       |   | 95        |   |   |           |   |   |       |   |   | 215     |  
|Stock-based
compensation                                    |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   | 1,584     |   |   |           |   |   |       |   |   | 1,584   |  
|Issuance of stock for deferred
stock compensation plan      |  |              | 101,325    |        |   | 1              |  |                                |         |        |  |         |                       |   |                                                          |       |   | (226      | ) |   |           |   |   |       |   |   | (225    | )
|Foreign currency translation
adjustment                     |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   |          |   |   |           |   |   | (56    | ) |   | (56     | )
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Net loss                                                    |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   |          |   |   | (14,261    | ) |   |       |   |   | (14,261 | )
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Balance, January 31,
2006                                   |  |              | 47,803,186 |        | $ | 478            |  |                                |         |        |  | (674,353 | )                     | $ | (1,558                                                    | )     | $ | 1,124,067 |   | $ | (1,070,706 | ) | $ | (1,440 | ) | $ | 50,841  |  
|                                                           
|Private placement                                           |  |              | 5,103,333  |        |   | 51             |  |                                |         |        |  |         |                       |   |                                                          |       |   | 36,693    |   |   |           |   |   |       |   |   | 36,744  |  
|Issuance of common stock upon
exercise of options           |  |              | 461,455    |        |   | 5              |  |                                |         |        |  |         |                       |   |                                                          |       |   | 1,645     |   |   |           |   |   |       |   |   | 1,650   |  
|Issuance of treasury stock for
Employee Stock Purchase Plan |  |              |           |        |   |               |  |                                |         |        |  | 17,798   |                       |   | 41                                                        |       |   | 71        |   |   |           |   |   |       |   |   | 112     |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Stock-based
compensation                                    |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   | 6,797     |   |   |           |   |   |       |   |   | 6,797   |  
|Issuance of stock for deferred
stock compensation plan      |  |              | 101,325    |        |   | 1              |  |                                |         |        |  |         |                       |   |                                                          |       |   | (366      | ) |   |           |   |   |       |   |   | (365    | )
|Foreign currency translation
adjustment                     |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   |          |   |   |           |   |   | 145    |   |   | 145     |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Net loss                                                    |  |              |           |        |   |               |  |                                |         |        |  |         |                       |   |                                                          |       |   |          |   |   | (44,827    | ) |   |       |   |   | (44,827 | )
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  
|Balance, January 31,
2007                                   |  |              | 53,469,299 |        | $ | 535            |  |                                |         |        |  | (656,555 | )                     | $ | (1,517                                                    | )     | $ | 1,168,907 |   | $ | (1,115,533 | ) | $ | (1,295 | ) | $ | 51,097  |  
|                                                            |  |              |            |        |   |                |  |                                |          |        |  |          |                       |   |                                                           |       |   |           |   |   |            |   |   |        |   |   |         |  

See accompanying notes. F-4   CONVERA CORPORATION
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

For the Fiscal Years Ended January 31,2007

2006

2005Cash Flows from Operating
Activities:Net loss

$
(44,827
)
$
(14,261
)
$
(19,820
)Adjustments to reconcile net
loss to net
  cash used in operating activities:Depreciation
and amortization


7,045


4,184


1,853Non-cash
restructuring credit





(57
)

(137
)(Benefit)
provision for doubtful accounts


143


(10
)

(401
)Stock-based
compensation


6,797


1,584


1,416Impairment of
capitalized research and
  development costs, equipment and prepaid expenses


6,407





Changes in operating assets and
  liabilities:Accounts
receivable


1,078


2,038


(560
)Prepaid
expenses and other assets


320


718


860Accounts
payable, and accrued expenses


437


(1,968
)

(1,471
)Restructuring
reserve





(776
)

(533
)Deferred
revenues


(479
)

118


526Other
long-term liabilities








(1,647
)Net cash used
in operating activities


(23,079
)

(8,430
)

(19,914
)Cash Flows from Investing
Activities:Purchases of
equipment and leasehold
  improvements


(442
)

(6,915
)

(4,959
)Capitalized
research and development costs





(8,095
)

Net cash used
in investing activities


(442
)

(15,010
)

(4,959
)Cash Flows from Financing
Activities:Proceeds from
the private placement of
  stock, net


36,744


28,765


10,300Proceeds from
the exercise of stock options


1,650


9,670


1,840Proceeds from
borrowings of long-term debt





5,000


Proceeds from
the issuance of common stock,
  net


(253
)

(10
)

73Repayment of
long-term debt


(5,000
)




Net cash
provided by financing activities


33,141


43,425


12,213Effect of exchange rate changes
on Cash


72


(10
)

(104
)Net increase (decrease) in Cash
and Cash
  Equivalents


9,692


19,975


(12,764
)Cash and Cash Equivalents,
beginning of
  year


37,741


17,766


30,530Cash and Cash Equivalents, end
of year

$
47,433

$
37,741

$
17,766See accompanying notes.

F-5
CONVERA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(tabular amounts expressed in thousands, except share
and per share data)

(1)
THE COMPANYOperations and Organization

Convera
Corporation (Convera or the Company) was established through the
combination on December 21, 2000 of the former Excalibur Technologies
Corporation (Excalibur) and Intel Corporations (Intel) Interactive Media
Services (IMS) division (the Combination).

As of January
31, 2007 and January 31, 2006, Allen Holding, Inc., together with Allen &
Company Incorporated, Herbert A. Allen and certain related parties
(collectively Allen & Company) beneficially owned approximately 42% and
47%, respectively, of the voting power of Convera.

Convera
principally earns revenues from the licensing of its software products and the
provision of services in deployment of the Companys technology to government
agencies and commercial businesses throughout North America, Europe and other
parts of the world. The Company licenses its software to end users directly and
also distributes its software products through license agreements with system
integrators, original equipment manufacturers, resellers and other strategic
partners. Revenues are generated from software licenses with customers and from
the related sale of product maintenance, training and professional services.
Further, during fiscal year 2005, the Company embarked on an advanced Web indexing
development effort focused on applying portions of the Companys existing
technology to also locate contextually relevant information on the World Wide
Web (the Web). On November 1, 2005, the Company announced that the Excalibur
Web product was commercially available as the technology had advanced to then
contain more than 4 billion documents in the index and a redundant hosting
environment was established with AT&T. The Company began focusing much of
its selling and marketing resources on establishing distribution channels for
this technology. The Company is targeting both the commercial and the
government sectors for the Excalibur Web product at this time. Excalibur
revenues may be derived from either a license model as described, or from a hosted
service offering.

The Companys
operations are subject to certain risks and uncertainties including, but not
limited to, the effect of general business and economic trends; the ability to
continue funding operating losses and achieve profitability; the ability of
Excalibur to gain market acceptance; the availability of additional capital
financing on terms acceptable to the Company, if at all; fluctuations in
operating results including impacts from reduced corporate IT spending and
lengthier sales cycles; reduced customer demand for the Companys products and
services; continued success in technological advances and development including
the Excalibur Web product; the delay or deferral of customer software
implementations; the potential for U.S. Government agencies from which the
Company has historically derived a significant portion of its revenues to be
subject to budget cuts; a dependence on international sales; actual and
potential competition by entities with greater financial resources, experience and
market presence than the Company; reliance on third party hosting facilities
for our Excalibur Web product; changes in software and hardware products that
may render the Companys products incompatible with these systems; the
potential for errors in its software products that may result in loss of or
delay in market acceptance and sales; the dependence on proprietary technology
licensed from third parties; possible adverse changes to the Companys
intellectual property which could harm its competitive position; the need to
retain key personnel; the ability of the Company to use net operating loss
carryforwards; and the present ownership structure of the Company which
includes Allen Holdings Inc. and related parties who exercise voting control of
the Company such that other shareholders will not have an effective say in any
matters upon which its shareholders vote. Although management believes that its
current cash position is sufficient to sustain operations through January 31,
2007, should cash needs dictate, additional cost saving measures could be
enacted to conserve cash.

F-6
(2)
SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation

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

Use of Estimates

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

Revenue Recognition

The Company
generally derives revenue from selling: (1) software licenses, (2) providing
training and professional services, (3) selling software maintenance and (4)
providing hosted services. RetrievalWare revenue generally consists of
software license, training and professional services and software maintenance,
Excalibur revenue generally consists of hosted services and can include
training and other professional services and advertising revenue shares.

The Company
recognizes revenue for its 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. All revenue
is recognized net of sales tax. Software licenses are sold to customers as a
permanent license (perpetual license) or as a license for a definitive period
of time (term license) Historically, the Company has not experienced
significant returns or exchanges of its products.

Provided that
the fee is fixed and determinable, persuasive evidence of an arrangement exists
and collection of the resulting receivable is considered probable, revenue from
the sale of perpetual licenses and term licenses is recognized upon shipment of
product if VSOE exists using the residual method. When VSOE cannot be
established, term license revenue is recorded ratably over the term of the
license.

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

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

F-7

the prepaid
royalties as revenue upon delivery of the initial copy of the software,
provided the payment terms are considered normal and customary for these types
of arrangements, the fee is considered fixed and determinable, and all other
criteria within SOP 97-2 have been met. To the extent the resellers product
sales exceed the level provided for by the guaranteed minimum royalty and
additional royalties are due, the Company generally recognizes the additional
royalties as the reseller sales occur.

Customization
work is sometimes required to ensure that the Companys software functionality
meets the requirements of its customers. Under these circumstances, the
Companys revenues are derived from fixed price contracts and revenue is recognized
using the percentage of completion method based on the relationship of actual
costs incurred to total costs estimated over the duration of the contract.
Estimated losses on such contracts are charged against earnings in the period
such losses become known. These cost estimates underlie the Companys
determinations as to overall contract profitability and the timing of revenue
recognition. Further, we believe that this method of recognition is closely
aligned with the evolution of the work product as defined.

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

Revenue from
training and professional services is recognized when the services are
performed. Such services are sold as part of a bundled software license
agreement as well as separately to customers who have previously purchased
software licenses. When training or professional services that are not
essential to the functionality of the software are sold as part of a bundled
license agreement, the fair value of these services, based on the price charged
for the services when sold separately, is deferred and recognized when the
services are performed. Deferred revenue consists of deferred training and
professional services revenues, deferred maintenance revenues and deferred
license revenues. The Company incurs shipping and handling costs which are
recorded in cost of license revenues.

Excalibur
hosted service revenues are recognized in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104) Revenue Recognition. The Company evaluates
Excalibur hosted 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, multiple deliverable
arrangements that contain elements that do not qualify as separate units of
accounting are recognized ratably over term of the hosting arrangement.
Excalibur Hosted service agreements typically include monthly contract minimums
and can also include advertising share revenue agreements. 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. No advertising revenue
has been recorded to date under any of the hosted services agreements, however,
as additional publisher vertical sites are launched and hosted on the Companys
Excalibur product, the Company will become dependent on its publisher customers
to provide timely and accurate reports of the web advertising revenue sold by
the publisher on each of these sites to determine its revenue.

Research and Product Development Costs

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

F-8

Excalibur
during the first quarter of fiscal year 2006 and continued to do so until such
time as commercial availability was determined. Total costs capitalized in
connection with the Excalibur product were $8.1 million. Amortization of
previously capitalized software development costs for this offering commenced
on November 1, 2005 and was to continue over a twenty-four month period. During
the third quarter of fiscal year 2007, due to the lack of revenues generated to
date and the loss of a significant potential contract during that quarter, the
Company performed an impairment analysis on the assets associated with the
Excalibur product. The result of the net realizable value analysis performed
for the Excalibur product over the next three fiscal years revealed that the
carrying value of the assets directly associated with the Excalibur product was
impaired. As a result an impairment charge of $4.1 million equal to the
unamortized balance of the related capitalized research and development costs was
recorded in the third quarter of the current fiscal year. See Note 3 for
additional information related to impairment charges. Discovery achieved
technological feasibility in the third quarter of fiscal 2007 As a derivative
product of Excalibur, the development costs for Discovery that would otherwise
be capitalized under SFAS 86 were impaired, and accordingly, have been expensed
as incurred.

Advertising

Advertising
costs are expensed as incurred and included with sales and marketing in the
consolidated statements of operations and comprehensive loss. The Company
incurred approximately $28,000, $55,000 and $197,000 in advertising costs for
the years ended January 31, 2007, 2006 and 2005, respectively.

Stock-based Compensation

Adoption of Statement of Financial Accounting Standard 123(R)

On February 1,
2006, the Company 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.

The Company
uses 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.

The Company
has elected the modifiedprospective transition method as permitted by SFAS
123(R). The consolidated financial statements for prior periods have not been
restated to reflect, and do not include the impact of the adoption of SFAS
123(R). The modified prospective transition method requires that stock-based
compensation expense be 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 the Companys 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. During the fiscal year
ended January 31, 2007 the Company has recorded an incremental $4.9 million of
stock-based compensation expense as a result of the adoption of SFAS 123(R). As
of January 31, 2007, a total of $15.9 million of unrecognized compensation cost
related to stock options are expected to be recognized over a weighted average
period of 2.7 years.

Prior to the
adoption of SFAS 123 (R), the Company measured compensation expense for its
employee stock-based compensation plans using the intrinsic method prescribed
by APB No.25. The Company
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.

F-9

25, when the
exercise price of the Companys stock options was equal to the market price of
the underlying stock on the date of grant, no compensation expense was
recognized.

Had
compensation cost for the Companys stock-based compensation plans been
determined based on the fair value at the grant dates for awards made under the
respective plans in fiscal years 2006 and 2005 consistent with the method of
SFAS No. 123, the Companys net loss and basic and diluted net loss per common
share would have been increased to the pro forma amounts indicated below.

2006

2005Net loss, as
  reported

$
(14,261
)
$
(19,820
)Stock-based
  compensation, as reported


1,419


1,416Total
  stock-based compensation determined under fair value based method for all
  awards


(5,539
)

(10,406
)Pro forma
  net loss

$
(18,381
)
$
(28,810
)Basic and
  diluted net loss per common share, as reported

($
0.33
)
($
0.56
)Basic and
  diluted net loss per common share, pro forma

($
0.43
)
($
0.81
)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.

Further
information regarding stock-based compensation can be found in Note 13 of these
Consolidated Financial Statements.

Net Loss Per Common Share

The
Company follows SFAS No. 128, Earnings Per Share, for computing and
presenting net loss per share information. Basic loss per common share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted loss per
common share excludes common stock equivalent shares and unexercised stock
options as the computation would be anti-dilutive. A reconciliation of the net
loss available to common stockholders and the number of shares used in
computing basic and diluted net loss per share is in Note 12.

Translation of Foreign Financial Statements

The functional
currency of the Companys foreign subsidiaries is their local currency. Accordingly,
assets and liabilities of the Companys foreign 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 (losses) gains were
approximately ($336,000), 39,000, and $81,000 for the years ended January 31,
2007, 2006, and 2005, respectively.

Financial Instruments

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

Concentrations
of Credit Risk

F-10

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

Valuation Accounts(in
thousands):

Balance at
  Beginning of
  Period

Charged
  (Credited) to
  Costs and
  Expenses

Uncollectible
  Accounts
  Written Off,
  Net of 
  Recoveries

Balance at
  End of
  PeriodYear Ended
January 31, 2007:Deducted from
asset accounts:Allowance for
doubtful accounts

$
218

$
143

$
6

$
367Year Ended
January 31, 2006:Deducted from
asset accounts:Allowance for
doubtful accounts

$
537

$
(10
)
$
(309
)
$
218Year Ended
January 31, 2005:Deducted from
asset accounts:Allowance for
doubtful accounts

$
1,793

$
(401
)
$
(855
)
$
537Cash and Cash
Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of funds deposited in money market accounts. Consequently,
the carrying amount of cash and cash equivalents approximates this fair value.
Substantially all cash and cash equivalents are on deposit with two major
financial institutions.

Restricted Cash

As of January 31, 2007 the Company has certificates of deposit of
$71,000 and $450,000, which are pledged to collateralize letters of credit
required for leased facilities. The certificate of deposit for $71,000 is
pledged as collateral for a lease expiring in December 2007 and is designated
as restricted cash on the consolidated balance sheet. The certificate of
deposit for $450,000, which is pledged to a lease commitment through February
2010, is included with Other assets on the consolidated balance sheet. As of
January 31, 2006 the Company had the certificate of deposit of $71,000 only.

Income Taxes

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

F-11

realized. The Company provided a full valuation allowance against its
net deferred tax assets as of January 31, 2007.

Equipment and Leasehold Improvements

Office furniture and computer equipment are recorded at cost.
Depreciation of office furniture and equipment is provided on a straight-line
basis over the estimated useful lives of the assets, generally three to five
years. Amortization of leasehold improvements and leased assets are provided on
a straight-line basis over the shorter of the term of the applicable lease or
the useful life of the asset.

Expenditures for normal repairs and maintenance are charged to
operations as incurred. The cost of property and equipment retired or otherwise
disposed of and the related accumulated depreciation or amortization are
removed from the accounts and any resulting gain or loss is reflected in
current operations.

Goodwill and Other Intangible Assets

Converas prior acquisitions of other companies resulted in the
acquisition of certain intangible assets and goodwill. Goodwill resulting from
such acquisitions is associated with the Companys core software products
segment. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, the impairment of
goodwill is assessed on an annual basis or whenever changes in circumstances
indicate that the fair value of the Company is less than the carrying value. This
assessment is performed by comparing the market value of the Companys
reporting units the carrying amount of the reporting units net assets,
including goodwill. If the market value exceeds the carrying amount of the
reporting units net assets, impairment of goodwill does not exist. If the
market value is less than the carrying amount of the reporting units net
assets, the Company will perform further analysis and may be required to record
an impairment. The Company continues to amortize intangible assets that are
deemed to have a finite useful life, and amortization is being expensed on a
straight-line basis over the periods estimated to benefit. Acquired developed
technology is being amortized on a straight-line basis over five years. There
were no goodwill impairment charges required in fiscal year 2007 or 2006.

The Company evaluates all of its long-lived assets, including
intangible assets other than goodwill, for impairment in accordance with the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires that long-lived assets and intangible
assets other than goodwill be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. Should events indicate that any of the Companys assets are impaired,
the amount of such impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset and the impairment will
be recorded in earnings during the period of such impairment.

Impairment of Long-Lived Assets

The Company evaluates all of its long-lived assets, including
intangible assets other than goodwill, for impairment in accordance with the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires that long-lived assets and intangible
assets other than goodwill be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable based on expected undiscounted cash flows attributable to that
asset. Should events indicate that any of the Companys assets are impaired,
the amount of such impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset and the impairment will
be recorded in earnings during the period of such impairment. During the
quarter ended October 31, 2006, the Company determined that certain assets used
to host its Excalibur product were impaired and recorded an impairment charge
of $2.3 million during the quarter ended October 31, 2006. See Note 3 for
additional information related to impairment charges.

Reclassifications

Certain
amounts presented in the prior years financial statements have been
reclassified to conform to the fiscal year 2007 presentation.

F-12

Other 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 $154,000. For
fiscal year 2006 other income consisted of $908,000 of net interest income
offset by interest expense of $306,000. In fiscal year 2005 other income
consisted entirely of net interest income of $175,000.

Recent Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin 108 (SAB
108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors
using both a balance sheet and an income statement approach and evaluate
whether either approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material. The
provisions of SAB No. 108 are effective for the Company for the
fiscal year ended January 31, 2007. The adoption of SAB No. 108
did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.

In the first quarter of 2006, the Company adopted SFAS No. 154 (SFAS
154), Accounting Changes and Error Correctionsa replacement of APB Opinion
No. 20 and FASB Statement No. 3. SFAS 154 changed the requirements for the
accounting for and reporting of a voluntary change in accounting principle. The
adoption of this Statement did not affect the Companys Consolidated Financial
Statements in the period of adoption. Its effects on future periods will depend
on the nature and significance of any future accounting changes subject to this
statement.

In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements
in accordance with Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. It prescribes that a company should use a
more-likely-than-not recognition threshold based on the technical merits of the
income tax position taken. Income tax positions that meet the
more-likely-than-not recognition threshold should be measured in order to
determine the tax benefit to be recognized in the financial statements. FIN 48
is effective in fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48 on its consolidated results of
operations and financial condition.

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. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is in the process of determining what
effect, if any, the adoption of SFAS 157 will have on its consolidated results
of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The
Fair Value Option for Financial Assets and
Financial Liabilities  including an Amendment of SFAS No. 115,
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. The
Statement 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. The Company is in the process of determining what effect, if any, the
adoption of SFAS 159 will have on its consolidated results of operations and
financial condition.

F-13

(3)
IMPAIRMENT OF LONG-LIVED ASSETSDuring the quarter ended October 31, 2006, management 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 its web hosting
product, Excalibur, may be impaired. The Companys asset group includes
capitalized software development costs and computer equipment used to host
Excalibur as well as prepaid royalties and prepaid maintenance contracts
supporting Excalibur.

The Company analyzed the recoverability of the capitalized software
development as required by SFAS No. 86 Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed, This analysis
concluded that the estimated future gross revenues, as reduced by the costs
associated with generating such revenues, were insufficient to recover the
capitalized cost and, accordingly the Company recognized an impairment charge
on those capitalized costs of $4.1 million in the third quarter of the current
fiscal year.

The Company then analyzed the recoverability of the remaining asset
group, as required by SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. This analysis concluded an impairment existed as the
carrying value of the asset group directly associated with the Excalibur web
product was no longer fully recoverable when compared to the estimated
remaining future cash flows. The estimated fair value of the computer
equipment, primarily servers and network routers, was derived using a
third-party appraisal, adjusted for certain factors deemed appropriate by
management, such as the marketability of certain brands of equipment on the
open market and projected discounts that would be provided in the course of any
ordinary sale of the assets to a third party. As a result, an impairment charge
of $1.9 million, to write down the computer equipment to its estimated fair
value, was recorded in the third quarter of the current fiscal year. The
remainder of the asset group, prepaid royalties and prepaid maintenance
contracts, have no alternative use and were, therefore, deemed to have no
value. Accordingly, an additional $0.4 million impairment charge was taken in
the third quarter of fiscal 2007 to write off those remaining assets.

In conjunction with the fair value determination, the Company extended
the estimate of the useful life of the computer hardware used to support
Excalibur, (which is depreciated on a straight-line basis) from three to four
years. This change in estimate resulted from an evaluation of the life cycle of
the computer hardware used to support Excalibur and the Companys conclusion
that these assets will have a longer life than previously estimated. The
Company believes the change in estimate more accurately reflects the productive
life of these assets. In accordance with SFAS No. 154, the change in life has
been accounted for as a change in accounting estimate on a prospective basis
from November 1, 2006. The impact of this change in estimate on future periods
is expected to result in depreciation expense of $1 million for the year ended
January 31, 2008, $1 million for the year ended January 31, 2009 and $789,000
for the year ended January 31, 2010 for this computer hardware used to support
Excalibur.

The Company has recorded the aggregate impairment loss of $6.4 million
for the capitalized software development cost, computer equipment and the
remaining asset group within the line item, Impairment of capitalized software
development cost, equipment and prepaid expenses, in the three and nine months
ended October 31, 2006 Condensed Consolidated Statements of Operations and
Comprehensive Loss.

(4)
RESTRUCTURING CHARGESIn fiscal year 2005, the Company completed a re-alignment of its operational
infrastructure started in fiscal year 2004, with a
restructuring plan composed entirely of workforce reductions. As a result of
these restructuring programs, in conformity with SEC Staff Accounting Bulletin
(SAB) No. 100, Restructuring and Impairment Charges, and EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity Including Certain Costs incurred in a Restructuring, the
Company recorded restructuring charges during the year ended January 31, 2005.

Workforce Reductions

F-14

In connection with the restructuring programs in
fiscal year 2005, the Company reduced its workforce by 77 employees worldwide,
including 17 individuals from the professional services group, 23 from
engineering, 22 from sales, 8 from marketing and 7 from the general and
administrative group. During the fiscal year ended January 31, 2005, the
Company recorded restructuring charges related to terminated employee severance
costs of $1.1 million offset by the reversal of previous restructuring programs
of $137,000. During the year ended January 31, 2006, the Company recorded a
credit adjustment to previous restructuring programs of $57,000.

Restructuring costs and adjustments recorded are
summarized as follows (in thousands):

Year Ended
  January 31,2006

2005Employee termination costs

$


$
1,081Change in estimates and
  assumptions


(57
)

(137
)Total

$
(57
)
$
944The Company paid an aggregate of approximately $776
and $1,616 against the restructuring reserve in the fiscal years ended January
31, 2006 and 2005, respectively. As of January 31, 2006 all restructuring
obligations were fully settled.

(5)
ACCOUNTS
  RECEIVABLEAccounts receivable, net of allowances, consist of the
following as of January 31, (in thousands):

2007

2006Billed

$
3,219

$
4,215Unbilled


171


3673,390


4,582Less: allowance for doubtful accounts


(367
)

(218
)$
3,023

$
4,364The unbilled total represents the recognized sales
value of performance and such amounts that had not been billed and were not
billable to customers as of the balance sheet date. The billing is customarily
determined by the delivery of milestones as set forth in the contract. The
unbilled total at January 31, 2007 is expected to be billed and collected
within a year.

(6)
EQUIPMENT
  AND LEASEHOLD IMPROVEMENTSEquipment and leasehold improvements at January 31,
2007 and 2006 consisted of the following (in thousands):

2007

2006Computer equipment

$
15,229

$
21,407Office furniture


2,949


2,831Leasehold improvements


597


59718,775


24,835Less accumulated depreciation


(14,847
)

(15,683
)$
3,928

$
9,152Equipment 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 2007, 2006 and 2005 was
$3.7 million, $2.9 million, and $1.6 million, respectively.

F-15

(7)
CAPITALIZED
  SOFTWARE DEVELOPMENT COSTSThe following table summarizes activity related to
capitalized software development costs for the fiscal years ended January 31,
2007 and 2006 (in thousands):

2007

2006Beginning balance

$
7,102

$
Capitalized





8,114Amortized


(3,045
)

(1,012
)Impairment charge


(4,057
)

Ending balance

$


$
7,102(8)
GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill and other acquisition-related intangibles at
fiscal year ends were as follows (in thousands):

2007

2006Goodwill

$
2,275

$
2,275Developed technologies

$
1,346

$
1,346Less accumulated amortization


(1,318
)

(1,049
)$
28

$
297Amortization expense for
fiscal years 2007, 2006 and 2005 was $269, $269 and $269, respectively. The
intangible assets subject to amortization will be fully amortized in fiscal year
2008.

(9)
ACCRUED
  EXPENSESAccrued expenses at January 31, 2007 and 2006
consisted of the following (in thousands):

2007

2006Accrued payroll and bonuses

$
1,630

$
1,325Accrued audit and accounting fees


556


207Other


494


1,148$
2,680

$
2,680(10)
INCOME
  TAXESThe 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 31,2007

2006

2005Federal benefit at statutory
rate

$
(15,013
)

(35
)%
$
(4,300
)

(35
)%
$
(6,937
)

(35
)%Effect of:State benefits, net of federal
benefits


(1,287
)

(2
)

(369
)

(3
)

(595
)

(3
)Expiration of
  NOL carryforward


1,871


4


1,168


10


621


3Effect of stock
options


438


1


(4,582
)

(37
)

(12
)

0Other


(1,139
)

(3
)

(569
)

(5
)

657


3Valuation allowance


15,130


35


8,652


70


6,266


32Net deferred tax
assets

$



0
%
$



0
%
$



0
%F-16

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

The Companys net deferred tax assets at January 31,
2007 and 2006 were as follows:

2007

2006Deferred tax
  assets:Net operating
  loss carryforwards, not yet utilized

$
78,382

$
70,720Capitalized
  research & development costs


20,866


14,576Stock
  Compensation


2,101


813Deferred revenue


1,173


1,262Other


191


214Total deferred
  tax assets


102,714


87,585Valuation
  allowance


(102,714
)

(87,585
)Net deferred tax
  assets

$


$
At January 31, 2007, the Company had net operating
loss carryforwards (NOLs) of approximately $205 million that are expiring now
and continue at various dates through fiscal year 2026. 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 $28.1 million of the
NOLs relate to stock option exercises, and $18.8 million and $1.9 million
relate to UK and Canada operations, respectively. The tax benefit associated
with the stock option exercises will be credited to equity when and if
realized.

As of January 31, 2007, the Companys deferred tax
assets exceeded the deferred tax liabilities. As the Company has not generated
earnings and no assurance can be made of future earnings needed to utilize
these assets, a valuation allowance in the amount of the net deferred tax
assets has been recorded.

(11)
CAPITALIZATIONThe authorized capital stock of Convera consists of
100 million shares of Class A voting common stock, par value $0.01 per share,
40 million shares of Class B non-voting common stock, par value $0.01 per
share, and five million shares of cumulative convertible preferred stock, par
value $0.01 per share.

On February 28, 2006, the Company 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 the Company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, the Company 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, including the Excalibur Web product.

In the second quarter of fiscal year 2006, the Company completed a
private placement of 6,555,556 newly issued shares of its Class A common stock
to two investors. The Company 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 director of the Company, at a purchase price of
$4.84 per share. Net proceeds to the Company of approximately $28.8 million
were and will continue to be used for the continued funding of activities
related to the Excalibur Web product and 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.

F-17

In the third
quarter of fiscal year 2005, the Company completed a private placement of
3,433,333 newly-issued shares of Class A common stock to several investors,
including affiliates of Allen & Company Incorporated, a significant
stockholder of the Company, and certain directors.  The shares were priced on September 7, 2004 at $3.00 per share,
representing a premium to the $2.80 closing market price on such date.  Net proceeds to the Company of approximately
$10.3 million were used to finance ongoing operations and for general corporate
purposes, including potential acquisitions.

No shares of
the Companys Class B common stock are issued or outstanding at January 31,
2007.

(12)
NET LOSS PER COMMON SHAREThe following
table sets forth the computation of basic and diluted net loss per common share
(in thousands except per share data):

For the Fiscal Years Ended January 31,2007

2006

2005Numerator:Net loss

$
(44,827
)
$
(14,261
)
$
(19,820
)Denominator:Weighted average number of
  common shares outstanding  basic and diluted


52,221,644


43,088,677


35,432,754Basic and diluted net loss per common share

$
(0.86
)
$
(0.33
)
$
(0.56
)Using the treasury
stock method the following equity instruments were not included in the
computation of diluted net loss per common share because their effect would be
anti-dilutive:

For the Fiscal Years Ended January 31,2007

2006

2005Stock options


463,564


3,761,226


712,682Deferred stock


731,525


616,613


182,597(13)
EMPLOYEE BENEFIT PLANSThe Convera
2000 Stock Option Plan authorizes the granting of stock options and other forms
of incentive compensation to purchase up to 14.25 million shares of the
Companys Class A common stock in order to attract, retain and reward key
employees.  In addition, at the closing
of the Combination, Convera assumed Excaliburs existing stock option
plans.  The various plans are
administered by a Committee appointed by the Board of Directors, which has the
authority to determine which officers, directors and key employees are awarded
options and other stock based compensation pursuant to the plans and the terms
and option exercise prices of the stock options.  Of the total number of shares authorized for stock based
compensation, options or warrants to purchase 9,222,546 shares and 890,000
deferred shares were outstanding as of January 31, 2007. The Company had a
total of 1,919,244 shares of Class A common stock reserved for the issuance of
warrants, deferred shares and options under the plans as of January 31, 2007.

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

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

F-18

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

Number of Options

Weighted-Average
  Exercise Price

Weighted-Average
  Remaining 
  Contractual Term

Aggregate Intrinsic
  Value
  (In thousands)Outstanding, January 31,
2006


8,495,022

$
5.25Granted


2,107,500


5.29Exercised


(461,455
)

3.58Forfeited


(792,839
)

5.32Expired


(125,682
)

13.48Outstanding, January 31,
2007


9,222,546

$
5.23


6.96

$
1,221Vested or expected to
vest


8,905,937

$
5.22


.65

$
1,183Exercisable, January 31,
2007


4,892,098

$
5.03


5.39

$
483The total
intrinsic value of options exercised during the years ended January 31, 2007,
2006, and 2005 was $1.7 million, $11.8 million, and $226,000,
respectively.

Cash received
from option exercises under all share-based arrangements for the years ended
January 31, 2007, 2006, and 2005 was $1.7 million, $9.7 million, and $1.8
million, respectively.  The Company has
a policy of issuing new shares to satisfy share option exercises.

The following
table summarizes additional information about stock options outstanding at
January 31, 2007:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number of
  Options

Weighted-
  Average
  Remaining
  Contractual 
  Life

Weighted-
  Average
  Exercise Price

Number
  Exercisable

Weighted-
  Average
  Exercise Price$
1.70 to  $  4.25


1,625,416


6.92 years

$
3.00


943,814

$
3.32$
4.38 to  $  4.38


2,259,663


3.86


4.38


2,258,847


4.38$
4.40 to  $  4.70


2,284,378


8.98


4.66


458,463


4.69$
4.71 to  $  6.24


2,024,599


8.31


5.07


742,481


4.81$
6.25 to  $46.06


1,028,490


6.68


12.20


488,493


12.049,222,546


6.96 years

$
5.23


4,892,098

$
5.03SFAS No.
123(R) requires the use of a valuation model to calculate the fair value of
stock-based awards. The Company has 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 a combination of selected historical volatility
and implied volatility of the Companys common stock, comparable peer companies
and selected industry indices.  The
expected life of an award is computed as the average of the vesting term and
the term of the option.

As FAS 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, 2007
has been reduced for estimated forfeitures. When estimating forfeiture rates,
the Company considers voluntary termination behaviors as well as trends of
actual option forfeitures across two employee classes.  Class 1 was comprised of senior management;
Class 2 included all other employees.
As such, the forfeiture rate used in the computation of stock option
expense for the year ended January 31, 2007 was 1.2% for Class 1 and 10% for
Class 2.  For awards with graded
vesting, compensation cost is recognized on a straight-line basis over the
requisite service period for the entire award.
Compensation expense is recognized net of awards expected to be
forfeited.

F-19

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

For the
  year ended January 31,

2007

2006

2005Expected term of stock
options


6.14 years


5 years


5 yearsExpected volatility


62%


80%


90%Risk free interest
rates


4.6% to 5.0%


3.9% to 4.4%


3.1% to 3.8%Dividend yield


None


None


NoneWeighted average grant date
fair value of
  options granted during the period

$
3.29

$
4.40

$
3.20The impact on
the Companys results of operations of recording stock-based compensation
related to stock options and the ESPP for the fiscal year ended January 31,
2007 was as follows (in thousands):

Fiscal
  Year 
  Ended
  January 31, 2007Cost of
  revenues


$
343Sales and
  marketing



643Research and
  product development



1,510General and
  administrative



2,436$
4,932Deferred Stock Compensation Plan

Beginning in
fiscal year 2004, pursuant to the Companys 2000 Stock Option Plan, several
senior officers of the Company have been awarded shares of deferred stock with
varying vesting provisions. Pursuant to a May 2003 deferred stock agreement as
amended in May 2004, Mr. Condo was awarded 600,000 deferred shares of the
Companys common stock. Under the amended agreement, 150,000 shares of common
stock vest on each consecutive one-year anniversary of the date of grant as
long as Mr. Condo remains continuously employed with the Company through such
vesting date. Notwithstanding such vesting schedule, all of the deferred shares
will vest on the earlier occurrence of Mr. Condos termination of employment without
cause, death or disability or a change of control of the Company. In accordance
with the terms of the amended deferred stock agreement, tranches totaling
150,000 shares each have vested in each of the past three fiscal years. On each
of these vest dates the Company withheld 48,675 of the shares at a cost of
approximately $121,000, $225,000, and $365,000 respectively, to fulfill Mr.
Condos tax obligation with respect to the award. Compensation cost for Mr.
Condos stock award is expensed on a straight-line basis over the four-year
vesting period. Deferred stock granted in January 2004, which is held by
several senior officers, has a five-year cliff vesting provision, or vests
immediately upon a change in control. Compensation cost for the awards granted
in January 2004 is expensed on a straight-line basis over the five-year vesting
period. In November 2005 an additional 200,000 shares of deferred stock were
awarded to another senior officer. This grant also carries a five-year cliff
vesting provision, or vest immediately upon a change in control followed (a) by
the officers continuous employment for a period of 12 months or (b) within 12
months by a termination of employment without cause, or a substantial
diminution of the officers duties and responsibilities compared to that
immediately prior to the change of control. In January 2007, upon the
termination of this officer and in accordance with his separation agreement,
160,000 shares of deferred stock were cancelled. Compensation expense, net of
reversals for terminated employees, recorded by the Company in fiscal year 2007
was $1.9 million. Compensation expense of $1.4 million and $440,000 is included
in general and administrative costs and research and development costs,
respectively, in the accompanying consolidated statements of operations and
comprehensive loss. As of January 31, 2007, an aggregate of 890,000 shares of
deferred stock were outstanding. The following table summarized the deferred
stock compensation plans as of January 31, 2007.

F-20

Deferred Stock Plan Shares

Shares

Weighted-
  Average Grant-
  Date Fair ValueNonvested at
  February 1, 2006


1,200,000

$
6.43Granted





Vested


(150,000
)

4.37Forfeited


(160,000
)

12.76Nonvested at
  January 31, 2007


890,000

$
5.64As of January
31, 2007, there was $1.7 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 1.8 years. The total fair value of shares vested
during the years ended January 31, 2007, 2006, and 2005, was $656,000,
$656,000, and $656,000, respectively.

Employee Stock
Purchase Plan

The Companys
employee stock purchase plan (ESPP) was established for all active employees
and provided participating employees the right to purchase common stock each
plan quarter at a purchase price equal to the lesser of 85% of the closing
price on the date of purchase or 85% of the closing price on the date of grant.
Payment for the shares was facilitated through authorized payroll deductions of
up to 10% of eligible annual compensation. As of July 1, 2006 the employee
stock purchase plan was discontinued.

During the fourth
quarter of the fiscal year ended January 31, 2002, the Convera shareholders
approved an amendment to the ESPP authorizing an additional 1,000,000 shares to
be reserved for issuance under the plan. These shares were included as treasury
stock as of January 31, 2002 and are released from the treasury as employees
purchase the shares through the ESPP. During the fiscal years 2007, 2006 and
2005 there were 17,798, 52,055 and 86,849 shares purchased by the employees,
respectively, leaving 656,555 shares in treasury as of January 31, 2007.

Employee Savings Plan

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

For the fiscal
years ended January 31, 2007, 2006 and 2005, the Company contributed
approximately $421, $424 and $483, respectively, to the employee savings plan.

In accordance
with a separation agreement with a former senior officer of the Company the
vesting of 62,500 stock options, originally scheduled to vest at various dates
in the current fiscal year, were accelerated to September 11, 2006. FAS 123(R)
stipulates that a modification to the terms of an award should be treated as an
exchange of the original award for a new award with total compensation cost
equal to the grant-date fair value of the original award plus the incremental
value (if any) of the modification of the award. Under statement 123(R), the
calculation of the incremental value is based on the excess of the fair value
of the new (modified) award based on current circumstances over the fair value
of the original option measured immediately before its terms are modified based
on current circumstances. This incremental cost, plus the measured but
unrecognized cost remaining from the original award is to be recognized over
the service period of the modified award, or immediately, if the modified award
vests as of the date of the modification.

The modified
award was valued using the Black-Scholes model using current year valuation
assumptions with the exception of the expected term. In this case, because the
vesting and exercise date of September 11, 2006 was known, an expected term of
45 days or 0.12 years was used. Based on these valuation inputs the valuation
of the modified option grants was $155,000 compared to a valuation of $163,000
for the valuation of the original grants. As a result there is no incremental
cost to the valuation of the modified shares. However, because the term of the

F-21

modified award
expired in the third quarter of the current fiscal year, the entire remaining
expense related to the modified options was taken in fiscal year 2007.

(14)
COMMITMENTS AND CONTINGENCIESLease Commitments

The Company
conducts its 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 obligate the Company to pay shared
portions of the operating expenses such as taxes, maintenance and repair costs.
The Company also has operating leases for equipment that is included in the
figures below. Future minimum rental payments under non-cancelable operating
leases as of January 31, 2007 are as follows (in thousands):

Year Ending January 31,2008

$
1,4992009


9072010


7422011


562012 and
beyond


$
3,204Total rental
expense under operating leases was approximately $1.6 million, $1.8 million,
and $2.7 million for fiscal years 2007, 2006 and 2005, respectively.

Contingencies

On November 1,
2001, DSMC, Incorporated (DSMCi) filed a complaint against the Company in the
U.S. District Court for the District of Columbia in which it alleged that the
Company misappropriated DSMCis trade secrets, and engaged in civil conspiracy
with the NGT Library, Inc. (NGTL), an affiliate of the National Geographic
Society, to obtain access to DSMCis trade secrets, and was unjustly enriched
by the Companys alleged access to and use of such trade secrets. In its
complaint, DSMCi seeks $5 million in actual damages and $10 million in punitive
damages from the Company. DSMCi subsequently amended its complaint to add
copyright infringement-related claims. NGTL intervened in the
litigation as a co-defendant with Convera, and filed counterclaims against
DSMCi. Convera moved to compel arbitration of DSMCis claims; the District
Court denied the motion, and Convera filed an interlocutory appeal. The D.C.
Circuit, in November 2003, ruled that it did not have jurisdiction to consider
the appeal. During December 2005, DSMCi and NGTL entered into a
Settlement Agreement and Release. The U.S. District Court dismissed claims
against NGTL on December 23, 2005.

In July 2006,
the Company filed a motion for summary judgment, seeking dismissal of all
claims made by DSMCi in the U.S. District Court.

On March 27,
2007, the U.S. District Court partially granted the Companys motion for
summary judgment. The Companys motion for dismissal of the claims of
misappropriation of DSMCi trade secrets and copyright infringement were both
denied, however, the motions for dismissal of all claims of civil conspiracy
leveled against the Company by DSMCi, were granted. The Court also affirmed
that Convera is entitled to set off the full amount of DSMCis settlement of
the NTGL claim against any damages awarded in trial.

The U.S.
District Court issued a pretrial order directing the parties to file a joint
pre trial statement by May 15, 2007, in preparation for trial, which is
presently expected to be scheduled to commence in the fall of 2007.

In connection with this litigation, the
Company brought an arbitration claim against NGTL on September 13, 2005,
seeking indemnification for its defense costs and potential liability pursuant
to an indemnity provision in a service agreement between NGTL and the Company.
In response, NGTL brought a cross claim against the Company under the same
contract provision for indemnification of NGTLs respective costs and
liability. On June 5, 2006, the

F-22

parties entered a joint stipulation to stay
the arbitration pending completion of summary judgment briefing in the
underlying litigation between the Company and DSMCi to avoid duplication of
efforts. The resolution of the issues in that underlying litigation may also
resolve some or all of the matters at issue in the arbitration.

In addition, from time to time,
the Company is a party to various legal proceedings, claims, disputes and
litigation arising in the ordinary course of business, including that noted
above. The Company believes that the ultimate outcome of these matters,
individually and in the aggregate, will not have a material adverse affect on
its financial position, operations or cash flow. However, because of the nature
and inherent uncertainties of litigation, should the outcome of these actions
or future actions be unfavorable, Converas financial position, operations and
cash flows could be materially adversely affected.

(15)
SEGMENT REPORTINGThe Company is engaged in the design, development, marketing and
support of search, retrieval and categorization solutions. All of the Companys
revenues result from the sale of the Companys software products and related
services for all fiscal years presented. In fiscal year 2005, the Company commenced
this development effort that resulted in the Excalibur product which became
commercially available product during fiscal year 2006. Accordingly the Company
considered itself to have two reportable segments beginning as of and for the
period ended January 31, 2005. These segments are the license, implementation
and support of its enterprise search business (e.g., RetrievalWare) and its Web
indexing segment (e.g. Excalibur). The Company continued to report segmented
information throughout fiscal 2006 for these two segments. Beginning in fiscal
year 2007, the Company consolidated the resources of both product offerings and
considered itself to have one reportable segment. The consolidation of these
two segments resulted from the majority of the customer products for Excalibur
being the existing federal and commercial customer base for RetrievalWare.
After the launch of the first Excalibur B2B publisher site in November 2006,
the customer prospects and sales pipeline for Excalibur became increasingly diverted
from the federal and commercial customer base of RetrievalWare to B2B
publishers. Accordingly the Company reevaluated its single segment presentation
and reinstated the segmentation of the enterprise search and web indexing
segment.

The Companys chief operating decision-making group currently reviews
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues, expenses and relevant balance sheet
items for both product segments and by geographic region for purposes of making
operating decisions and assessing financial performance.

The accounting
policies of the segments are generally the same as those described in Note 2. Summary Of Significant Accounting
Policiesabove. Our chief
operating decision-making group evaluates the performance of our operating
segments based on a measure of their contribution to operations, which consists
of net revenue less the cost of revenue and directly identifiable research and
development costs. The Web Indexing segment also includes amortization of
capitalized research and development costs and impairment charges related to
the Excalibur Web product. Beginning in Fiscal 2007, in connection with the
consolidation of resources and view of the business as a single segment the
sales and marketing groups and general and administrative costs were no longer
available for the chief operating decision group to evaluate on a segmented
basis, Accordingly, the comparative selected financial information by
reportable segment shown below has been adjusted to include these cost with
Corporate and Other costs.

F-23

The following table contains selected financial information for our
operations by reportable segments and a reconciliation of the information by
segment to our consolidated totals for the years ended January 31, 2007, 2006
and 2005 (in thousands):

Enterprise 
  Search
  (RetrievalWare)

Web 
  Indexing
  (Excalibur)

Corporate and Other

ConsolidatedFiscal
2007Revenues

$
16,402

$
269

$


$
16,671Depreciation


178


3,143


409


3,730Amortization
of capitalized
  research and development costs





3,045





3,045Impairment of
capitalized
  research and development costs, equipment and prepaid expenses





6,407





6,407Total
expenses


8,742


28,350


26,673


63,765Net operating
gain (loss)


7,660


(28,081
)

(26,673
)

(47,094
)Other income,
net








2,267


2,267Net gain
(loss) before income
  taxes


7,660


(28,081
)

(24,406
)

(44,827
)Income tax
benefit











Net gain
(loss)

$
7,660

$
(28,081
)
$
(24,406
)
$
(44,827
)Fiscal
2006Revenues

$
20,988

$
20

$


$
21,008Depreciation1


333


863


312


1,508Amortization
of capitalized
  research and development costs





1,012





1,012Restructuring











Total
expenses


11,037


5,531


19,303


35,871Net operating
gain (loss)


9,951


(5,511
)

(19,303
)

(14,863
)Other income,
net








602


602Net gain
(loss) before income
  taxes


9,951


(5,511
)

(18,701
)

(14,261
)Income tax
benefit











Net gain
(loss)

$
9,951

$
(5,511
)
$
(18,701
)
$
(14,261
)Fiscal
2005Revenues

$
25,698

$


$


$
25,698Depreciation


654


400


530


1,584Restructuring


944








944Total
expenses


17,289


4,164


24,240


45,693Net operating
gain (loss)


8,409


(4,164
)

(24,240
)

(19,995
)Other income,
net








175


175Net gain
(loss) before income
  taxes


8,409


(4,164
)

(24,065
)

(19,820
)Income tax
benefit











Net gain
(loss)

$
8,409

$
(4,164
)
$
(24,065
)
$
(19,820
)(1)
Additional depreciation expense of $1,396 for the Web Indexing segment is
included with capitalized research and product development cost on the
accompanying balance sheet.

F-24

Operating
segment assets are those directly used in, or allocable to, that segments
operations. For the Enterprise Search segment, operating assets consist
primarily of trade receivables; prepaid expenses; goodwill and other intangible
assets. For the Web Indexing segment, operating assets consist primarily of
computer equipment for the Web hosting facility and prepaid expenses directly
associated with the Web Indexing product. For the year ended January 31, 2006
the Web Indexing segment also included capitalized research and product
development costs. Corporate and Other assets include corporate cash and cash
equivalents; the net book value of corporate equipment and leasehold
improvements; and other corporate and marketing shared prepaid expanses and other
assets.

The following table reconciles each segments total assets to the
Companys consolidated total assets for the years ended January 31, 2007 and
2006 (in thousands):

Fiscal Years Ended January 31,2007

2006Enterprise Search
Products (RetrievalWare)Equipment and leasehold
  improvements, net of accumulated depreciation

$
141

$
247Goodwill


2,275


2,275All other assets


3,833


6,094Total assets for
segment

$
6,249

$
8,616Web Indexing
(Excalibur)Equipment and leasehold
  improvements, net of accumulated depreciation

$
3,344

$
8,234Capitalized research and
  product development costs





7,102All other assets


172


761Total assets for
segment

$
3,516

$
16,097Reconciliation to
Consolidated total assetsTotal assets  both
reporting
  segments

$
9,765

$
24,713Cash 
unallocated


47,433


37,741Equipment and leasehold
  improvements, net of accumulated depreciation  unallocated


443


671All other assets 
unallocated


1,640


1,092Total assets 
consolidated

$
59,281

$
64,217Operations by Geographic Area

The following
table presents information about the Companys operations by geographical area
(in thousands):

Fiscal Years Ended January 31,2007

2006

2005Sales to
  customers:United
States

$
11,299

$
15,767

$
18,171United
Kingdom


5,357


4,472


6,608All
Other


15


769


919$
16,671

$
21,008

$
25,698Long-lived
  assets:United
States

$
6,846

$
18,983

$
9,350All
Other


146


661


187$
6,992

$
19,644

$
9,537F-25

Major Customers

Revenues
derived from contracts and orders issued by agencies of the U.S. Government
were approximately $9.5 million, $11.3 million and $11.6 million, respectively,
in the fiscal years ended January 31, 2007, 2006 and 2005.  These revenues, expressed as a percentage of
total revenues for each such fiscal year, were approximately 57%, 54% and 45%,
respectively.  For the fiscal year ended
January 31, 2007 there were no individual customers that accounted for more
than 10% of the Companys total revenues.
For the fiscal year ended January 31, 2006 one customer accounted for
approximately $3.0 million or 14% of the Companys total revenues.  One reseller customer accounted for
approximately $4.3 million or 17% of the Companys total revenues for the
fiscal year ended January 31, 2005.  In
both years the revenue was part of the Enterprise Search (RetrievalWare)
segment.

(16)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in
thousands):For the Fiscal Years Ended January 31,2007

2006

2005Supplemental Disclosures of
Non-cash
  Investing and Financing Activities:Stock options
exercised under deferred
  compensation arrangements

$
365

$
225

$
121Cash paid for
interest

$
154

$
306

$
(17)
SELECTED QUARTERLY INFORMATION (UNAUDITED)(Amounts in thousands
except per share data.)1st
  Quarter

2nd
  Quarter

3rd
  Quarter

4th
  Quarter2007:Revenues

$
4,668

$
3,312

$
5,935

$
2,756Amortization of capitalized
  research and product development costs


(1,014
)

(1,016
)

(1,016
)

Impairment of capitalized
  research & development costs, equipment and prepaid expenses








(6,407
)

Operating loss


(10,389
)

(11,711
)

(14,655
)

(10,339
)Other income


373


649


643


602Net loss


(10,016
)

(11,062
)

(14,012
)

(9,737
)Basic and diluted loss per
  common share

$
(0.20
)
$
(0.21
)
$
(0.27
)
$
(0.18
)2006:Revenues

$
5,078

$
7,804

$
4,512

$
3,613Operating loss


(2,495
)

(100
)

(2,732
)

(9,536
)Restructuring charges


(56
)




(1
)

Other income











Net loss


(2,469
)

(25
)

(2,491
)

(9,276
)Basic and diluted loss per
common share

$
(0.06
)
$
(0.00
)
$
(0.05
)
$
(0.20
)F-26

(18)
LONG-TERM DEBTOn March 23,
2005 the Company secured a $5 million term loan from Silicon Valley Bank
(SVB), the primary subsidiary of Silicon Valley Bancshares (NASDAQ: SIVB).
The four-year, term facility was secured to provide financing for capital
purchases including those for the Excalibur Web product. The loan incurred interest at 7%
per annum and was secured by a first lien on all corporate assets, excluding
intellectual property. During the fiscal years ended January 31, 2007 and 2006
the Company recorded interest expense of approximately $154,000 and $306,000,
respectively. The Company retired this facility on February 28, 2006.

(19)
SUBSEQUENT EVENTSOn March 31, 2007, the
Company entered into an Asset Purchase Agreement (the Purchase Agreement)
with FAST Search & Transfer, Inc (FAST), to sell the assets used
exclusively in the Companys RetrievalWare enterprise search business and
provide a perpetual royalty free license to certain RetrievalWare intellectual
property for a total of $23 million in cash, subject to adjustment for changes
to working capital, FAST will also assume certain liabilities and obligations
of the RetrievalWare business. The Company executed the sale of the
RetrievalWare business to focus its attention and resources on the development
and growth of its Excalibur vertical search business. The sale of the
RetrievalWare business is expected to close during the second quarter of fiscal
2008.

The Company determined that
the plan of sale criterion set forth in FAS No. 144 Accounting for Impairment or Disposal
of Long-Lived Assets were met on this transaction date and the
assets and liabilities of the RetrievalWare business to be disposed will
commence to be classified as held for sale at this date and until the transaction
closes.

The assets and liability pool
sold to FAST in this transaction is a components of the Enterprise Search
segment as discussed in Note 15, Segment Reporting., the balances of these
assets are as follows (amounts in 000s):

January 31,2007

2006AssetsCash and cash equivalents

$


$
Accounts receivable, net of
  allowance


2,694


4,364Prepaid expenses and other


740


609Current
assets


3,434


4,973Equipment


214


269Goodwill


2,275


2,275Other assets


199


751Assets

$
6,122

$
8,267Liabilities
  & enterprise equityAccounts payable

$


$
Accrued expenses


490


834Deferred revenue


3,265


4,177Current
liabilities


3,754


5,011Net
  enterprise equity

$
2,368

$
3,256All RetrievalWare assets and
liabilities listed above are stated at fair value less the costs to sell these
components of the asset pool. Equipment reflects a $22,000 charge to write the
assets down from carrying value to fair value less costs to sell.

F-27

The revenues and pre-tax
profits generated by the RetrievalWare business being sold to FAST for the
years ended January 31, 2007, 2006 and 2005 are as follows (in thousands):

Year Ended January 31,2007

2006

2005Revenues

$
16,402

$
20,988

$
25,698Pre tax profit

$
696

$
5,403

$
540The Transaction is subject to a
number of customary closing conditions, including the Companys receipt of a
fairness opinion from its independent financial advisor that the consideration
to be received by the Company in connection with the Transaction is fair to the
Company from a financial point of view.

F-28