SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended October 31, 1998

                                       OR

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

           For the transition period from ____________ to ____________

                          Commission File Number 0-9747


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



                    Delaware                            85-0278207
         (State or other jurisdiction of            (I.R.S. Employer
         incorporation or organization)             Identification No.)

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

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



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 __

As of December 7, 1998,  13,689,216 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.



<PAGE>





                       EXCALIBUR TECHNOLOGIES CORPORATION

                          QUARTERLY REPORT ON FORM 10-Q
                     FOR THE QUARTER ENDED OCTOBER 31, 1998

                                TABLE OF CONTENTS


                         PART I . FINANCIAL INFORMATION


Item 1.  Financial Statements:                                      Page

         Consolidated Balance Sheets
         October 31, 1998 (unaudited) and January 31, 1998..........  3

         Consolidated  Statements of Operations  and  
         Comprehensive Income (unaudited)
         Three and nine months ended October 31, 1998 and 1997......  4

         Consolidated  Statements  of Cash Flows  (unaudited)  
         Nine months ended October 31, 1998 and 1997................  5

         Notes to Consolidated Financial Statements.................  6

Item 2.  Management's   Discussion   and   Analysis  of   Financial
         Condition and Results of Operations.......................  11



                           PART II. OTHER INFORMATION

Items 1. - 6.......................................................  22


Signatures.........................................................  23









                                     - 2 -
<PAGE>
                                      
                       EXCALIBUR TECHNOLOGIES CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)

                  ASSETS                               October 31,   January 31,
                                                          1998           1998
                                                       (unaudited)
                                                         --------      --------
Current Assets:
   Cash and cash equivalents .......................     $  5,684      $  4,939
   U.S. government securities, at cost .............          999         1,496
   Accounts receivable, net of allowance for  
      doubtful accounts of $628 and $527, 
      respectively .................................        7,135         9,189
   Prepaid expenses and other ......................        2,611         1,071
                                                         --------      --------
       Total current assets ........................       16,429        16,695

Equipment and leasehold improvements,
   net of accumulated depreciation of 
   $6,634 and $5,614,respectively ..................        2,192         2,267
Other assets .......................................          917         1,083
                                                         --------      --------
                                                         $ 19,538      $ 20,045
                                                         ========      ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable ................................     $  2,631      $  2,106
   Accrued expenses ................................        1,395         1,886
   Deferred revenues ...............................        2,913         2,708
   Deferred compensation ...........................           86           247
                                                         --------      --------
       Total current liabilities ...................        7,025         6,947
                                                         --------      --------

Shareholders' Equity:
   5% Cumulative convertible preferred stock,
      $0.01 par value,preference in liquidation
      $10 per share, 1,000 shares authorized;
      27 shares issued and outstanding ............          324           271
   Common stock, par value $0.01, 40,000 shares 
      authorized; 13,680 and 13,179 shares issued
      and outstanding, respectively ................          137           132
   Additional paid-in capital ......................       68,583        64,714
   Accumulated deficit .............................      (56,405)      (51,945)
   Accumulated other comprehensive income ..........         (126)          (74)
                                                         --------      --------
       Total shareholders' equity ..................       12,513        13,098
                                                         --------      --------
       Total liabilities and shareholders' equity ..     $ 19,538      $ 20,045
                                                         ========      ========

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                     - 3 -
<PAGE>
                       EXCALIBUR TECHNOLOGIES CORPORATION

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                                   (unaudited)
                      (in thousands, except per share data)

                                    Three Months Ended       Nine Months Ended
                                        October 31,             October 31,
                                     1998        1997        1998        1997
                                   --------    --------    --------    --------
REVENUES:
  Software ......................  $  5,998    $  4,976    $ 14,563    $ 11,100
  Maintenance ...................     1,264       1,452       3,910       3,966
                                   --------    --------    --------    --------
                                      7,262       6,428      18,473      15,066
                                   --------    --------    --------    --------
EXPENSES:
  Cost of software revenues .....     1,192         859       2,712       2,310
  Cost of maintenance revenues ..       326         316         978         930
  Sales and Marketing ...........     3,367       3,035      10,025      10,002
  Research and product            
    development .................     2,072       1,544       5,752       4,814
  General and administrative ....     1,067       1,241       3,309       3,449
  Restructuring costs ...........      --          --          --           577
  Acquired in-process research 
    & development ...............      --          --          --         1,284
                                   --------    --------    --------    --------
                                      8,024       6,995      22,776      23,366
                                   --------    --------    --------    --------
Operating loss ..................      (762)       (567)     (4,303)     (8,300)

OTHER INCOME/ (EXPENSES):
  Interest income, net ..........        52          89         194         306
  Equity in net loss of affiliate       (83)       (150)       (299)       (412)
                                   --------    --------    --------    --------
Net loss ........................      (793)       (628)     (4,408)     (8,406)
Dividends on preferred stock ....         3           3          10          10
                                   ========    ========    ========    ========
Net loss applicable to common     
  stock .........................  $   (796)   $   (631)   $ (4,418)   $ (8,416)
                                   ========    ========    ========    ========
Net loss ........................      (793)       (628)     (4,408)     (8,406)
Other comprehensive expense:
  Foreign currency translation
    adjustment ..................       (52)        (51)        (52)        (85)
                                   --------    --------    --------    --------
Comprehensive loss ..............  $   (845)   $   (679)   $ (4,460)   $ (8,491)
                                   ========    ========    ========    ========
Basic and diluted net loss per
  common share ..................  $  (0.06)   $  (0.05)   $  (0.33)   $  (0.65)
                                   ========    ========    ========    ========
Weighted-average number of
  common shares outstanding .....    13,641      13,069      13,471      12,873
                                   ========    ========    ========    ========

              The accompanying notes are an integral part of these
                        consolidated financial statements

                                     - 4 -
<PAGE>


                       EXCALIBUR TECHNOLOGIES CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)

                                                   Nine Months Ended October 31,
                                                           1998          1997
                                                         --------      --------
Cash Flows from Operating Activities:
   Net loss ........................................     $ (4,408)     $ (8,406)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
       Depreciation and amortization ...............        1,099         1,173
       Acquired in-process research and development            --         1,284
       Equity in net loss of affiliate .............          299           412
   Changes in operating assets and liabilities:
       Accounts receivable, net ....................        2,162         2,627
       Prepaid expenses and other ..................       (1,514)          743
       Accounts payable and accrued expenses .......          (52)         (946)
       Deferred revenues ...........................          169           (95)
                                                         --------      --------
   Net cash used in operating activities ...........       (2,245)       (3,208)
                                                         --------      --------

Cash Flows from Investing Activities:
   Purchase of investments .........................         (984)      (14,830)
   Proceeds from maturities of investments .........        1,481        20,259
   Other Assets ....................................         (226)          (95)
   Acquisition, net of cash used ...................           --            55
   Purchases of equipment and leasehold 
     improvements ..................................         (939)         (605)
                                                         --------      --------
   Net cash provided by (used in) investing 
     activities ....................................         (668)        4,784
                                                         --------      --------

Cash Flows from Financing Activities:
   Proceeds from the issuance of common stock ......        3,775           436
   Repayment of notes payable ......................         --             (40)
                                                         --------      --------
   Net cash provided by financing activities .......        3,775           396
                                                         --------      --------
Effect of Exchange Rate Changes on Cash ............         (117)         (189)
                                                         --------      --------
Net Increase in Cash and Cash Equivalents ..........          745         1,783

Cash and Cash Equivalents, beginning of period .....        4,939         2,685
                                                         --------      --------
Cash and Cash Equivalents, end of period ...........     $  5,684      $  4,468
                                                         ========      ========


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     - 5 -
<PAGE>


                       EXCALIBUR TECHNOLOGIES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                October 31, 1998


(1)   THE COMPANY

The  consolidated   financial  statements  include  the  accounts  of  Excalibur
Technologies Corporation ("Excalibur") and its wholly-owned subsidiaries.  These
entities  are  collectively  referred  to  hereinafter  as  the  "Company."  All
significant intercompany transactions and accounts have been eliminated.

The Company designs,  develops and markets knowledge retrieval software products
capable of supporting  paper,  text,  image and video data.  The Company  offers
consulting, training, product maintenance and systems implementation services in
support of its software  products.  The Company  licenses its software  products
directly to commercial  businesses  and  government  agencies  throughout  North
America,  Europe and other parts of the world and also  distributes its software
products to end users through  license  agreements with  value-added  resellers,
system  integrators,   original  equipment  manufacturers  and  other  strategic
partners.

The Company incurred net losses of $793,000 and $4,408,000 in the three and nine
month  periods  ended  October 31,  1998,  and  incurred net losses that totaled
$16,383,000 over the last three complete fiscal years.  The accumulated  deficit
of the Company at October 31, 1998 was $56,405,000. The Company's operations are
subject  to  certain  risks  and  uncertainties  including,  among  others,  the
dependence upon the timing of the closing of large software licenses; actual and
potential  competition by entities with greater financial resources,  experience
and market presence than the Company;  rapid technological  changes; the success
of the Company's  product  marketing and product  distribution  strategies;  the
risks associated with  acquisitions  and  international  expansion;  the need to
manage  growth;  the need to  retain  key  personnel  and  protect  intellectual
property;  and  the  availability  of  additional  capital  financing  on  terms
acceptable to the Company.


(2)   SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

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.

These consolidated  financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission  regarding  interim  financial  reporting.  Accordingly,  they do not
include all of the  information  and  footnotes  required by generally  accepted


                                     - 6 -
<PAGE>
accounting  principles for complete  financial  statements,  and it is suggested
that these  consolidated  financial  statements be read in conjunction  with the
consolidated  financial  statements,  and the  notes  thereto,  included  in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
In the  opinion  of  management,  the  comparative  and  consolidated  financial
statements for the fiscal periods  presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods.  The results of operations for the three and nine month
periods ended October 31, 1998 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1999.


Revenue Recognition

Revenues  from  the sale of  computer  software  licenses  are  recognized  upon
shipment of product provided that the fee is fixed and determinable,  persuasive
evidence of an agreement  exists and  collection of the resulting  receivable is
considered probable.  Revenues related to agreements with customers that contain
future performance requirements are recognized when the performance requirements
are satisfied.  Revenues related to customer support agreements are deferred and
recognized  ratably  over the  terms of the  respective  agreements,  which  are
usually one year in length.

The American  Institute of Certified Public  Accountants has issued Statement of
Position 97-2,  "Software  Revenue  Recognition,"  ("SOP 97-2") that  supersedes
Statement of Position 91-1. The Company has  implemented SOP 97-2 and it has not
had a material financial impact on the Company.

Customization is sometimes involved in the development of a software solution by
the Company. 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  to be  incurred  over the  duration of the
contract.


Research and Development Costs

No product  development  costs were  capitalized,  and there were no capitalized
costs not yet  amortized,  during the nine month  periods ended October 31, 1998
and 1997.


Cash, Cash Equivalents and Marketable Securities

For purposes of the consolidated  balance sheets and consolidated  statements of
cash flows, 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. U.S. government
securities are  considered  investments  and are excluded from cash  equivalents
regardless of their maturities.  The Company considers its marketable securities
as held-to-maturity securities.  Accordingly,  marketable securities, consisting
entirely  of U.S.  government  securities,  are  carried at cost,  adjusted  for
premium and discount amortization. At October 31, 1998 and January 31, 1998, the
aggregate  fair value of the  securities  based upon  quoted  market  prices was
$1,000,000 and $1,497,000, respectively.


                                     - 7 -
<PAGE>

Net Loss Per Common Share

In February 1997, the Financial Accounting Standards Board, ("FASB") issued SFAS
No.  128,  "Earnings  Per  Share."  SFAS  No.  128 is  effective  for  financial
statements  issued for periods  ending after  December  15,  1997.  SFAS No. 128
requires  dual  presentation  of basic and diluted  earnings per share  ("EPS").
Basic EPS includes no dilution and 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 share  includes the  potential  dilution  that
would  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or converted into common stock.  Stock  options,  warrants to purchase
common stock and cumulative  convertible  preferred stock were excluded from the
computation of diluted loss per share as their effect would be anti-dilutive. As
a result, the basic and diluted loss per share amounts are identical.


Income Taxes

The Company accounts for income taxes under the asset and liability method.  The
Company  has not  recorded a provision  for income  taxes for the three and nine
months  ended  October  31, 1998 and 1997 based on the fact that the Company has
incurred net operating  losses during those periods.  The Company has provided a
full  valuation  allowance  against its net deferred tax asset as of October 31,
1998.


Translation of Foreign Financial Statements

Assets and  liabilities  of foreign  operations are translated at the period-end
rate of exchange.  Statements of operations  are translated at the average rates
of exchange during the period. Gains or losses from translating foreign currency
financial  statements are accumulated in a separate  component of  shareholders'
equity.


(3)   INVESTMENT IN AFFILIATE

In  July  1996,  the  Company  authorized  the  use of  its  name  by  Excalibur
Technologies N.V. ("ETNV"),  a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the  Company's  products and services  within a
large territory including most of Northern Europe and Italy. The Company granted
to ETNV an exclusive license to distribute  certain of the Company's products to
other authorized resellers and customers in the territory for approximately five
(5) years.  The Company  contributed  approximately  $488,000 in cash to ETNV in
order to purchase 13.2% of ETNV's voting capital stock.  In connection  with the
organization  of ETNV,  the  Company  also issued  warrants to purchase  148,500
shares of the  Company's  common  stock to  certain  shareholders  of ETNV.  The
warrants are  exercisable  at a price of $22.00 per share for seven  years,  but
only if ETNV achieves certain financial objectives.

The Company's  investment in ETNV is accounted for using the equity method.  The
investment  exceeded the Company's share of the underlying net assets of ETNV by
approximately  $827,000,  including  $758,000  attributable  to the value of the
warrants discussed in the preceding paragraph.  The excess is being amortized on
a straight-line basis over a five-year period.


                                     - 8 -
<PAGE>

The  amortization  of the excess,  as well as the Company's  share of ETNV's net
loss for the period and the  elimination of the Company's  share of gross profit
included  in ETNV's  prepaid  license  fees at  October  31,  1998 and 1997,  is
included in equity in net loss of  affiliate  in the  accompanying  consolidated
statements of operations  for the three and nine month periods ended October 31,
1998 and 1997.  The net  balances of the  investment  in and advances to ETNV is
included in other assets in the  accompanying  consolidated  balance sheets.  At
October  31, 1998 and January 31,  1998,  the balance of the  investment  in and
advances to ETNV was $472,000  and  $544,000,  respectively,  and is included in
other assets on the balance sheet.

For the three and nine  month  periods  ended  October  31,  1998,  the  Company
recorded total revenues of $269,000 and $929,000,  respectively,  related to the
software  license  with ETNV.  The Company  recorded  $690,000  and  $1,261,000,
respectively for the comparable three and nine month periods in the prior fiscal
year.


(4)   ISSUANCES OF COMMON STOCK

During the first nine  months of the current  fiscal  year,  the Company  issued
approximately  166,000  shares of common  stock  upon the  exercise  of  options
ranging  in price  from  $1.04 to $10.38  per  share,  resulting  in total  cash
proceeds to the Company of approximately $431,000 and the utilization of $99,000
in deferred  compensation.  In addition, the Company issued approximately 10,000
shares of common stock to  participants  of the  employee  stock  purchase  plan
resulting  in total cash  proceeds of $94,000.  In the first nine months of last
fiscal year,  the exercise of stock  options  resulted in total cash proceeds of
approximately $188,000 and the utilization of $344,000 in deferred compensation.

On May 15, 1998,  the Company  completed a private  placement of 325,000  shares
(the "Shares") of its common stock to an unaffiliated financial institution. The
Company  sold the Shares at a purchase  price of $10.00 per share,  resulting in
proceeds to the Company of $3,250,000.  The  transaction  was placed directly by
the Company. The Company plans to use the proceeds to finance ongoing operations
and for general corporate purposes.  Subsequent to May 15, 1999, the investor in
the private  placement has the right to cause the Company to file a registration
statement under the Securities Act of 1933 covering the Shares.  The Shares were
sold  pursuant  to an  exemption  from  the  registration  requirements  of  the
Securities Act of 1933.


(5)   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Company adopted  Statement of Financial  Accounting  Standards  ("SFAS") No.
130, "Reporting  Comprehensive Income," during the first quarter of fiscal 1999.
SFAS 130 requires  additional  disclosures  with  respect to certain  changes in
assets and  liabilities  that  previously  were not  required  to be reported as
results of operations  for the period.  In addition,  SFAS No. 131,  "Disclosure
about  Segments of an  Enterprise  and Related  Information"  was issued,  which
establishes   standards  for  the  manner  in  which  public   companies  report
information about operating  segments,  products and services,  geographic areas
and major  customers in annual and interim  financial  statements.  SFAS will be
effective  for the  Company's  filing on Form 10-K for the  fiscal  year  ending
January 31, 1999.


                                     - 9 -
<PAGE>

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative  Instruments and Hedging Activities," which will
be effective  for the Company's  fiscal year 2001.  This  statement  establishes
accounting and reporting standards  requiring that every derivative  instrument,
including  certain  derivative  instruments  embedded  in  other  contracts,  be
recorded in the balance  sheet as either an asset or  liability  measured at its
fair value.  The statement also requires that changes in the  derivative's  fair
value be recognized in earnings  unless specific hedge  accounting  criteria are
met. The Company  believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.















































                                     - 10 -
<PAGE>

Item 2.    Management's   Discussion   and  Analysis  of  Financial
           Condition and Results of Operations

Overview

The  statements  contained  in this  report that are not purely  historical  are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,  including
without  limitation  statements  about  the  Company's  expectations,   beliefs,
intentions or strategies  regarding the future. All  forward-looking  statements
included in this report are based on information available to the Company on the
date  hereof  and  the  Company   assumes  no  obligation  to  update  any  such
forward-looking  statements.  The  forward-looking  statements  contained herein
involve  risks and  uncertainties.  The  Company's  actual  results could differ
materially  from those  anticipated  in these  forward-looking  statements  as a
result of certain factors, including those set forth in this report.

The Company  principally  earns  revenues  from the  licensing  of its  software
products to commercial  businesses  and  government  agencies  throughout  North
America,  Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added  resellers,  system integrators,  original equipment
manufacturers and other strategic partners. Revenues are provided under software
licenses with new  customers  and from the related sale of product  maintenance,
training  and  implementation  support  services.  Additions  to the  number  of
authorized users,  upgrades to newer product versions and the renewal of product
maintenance arrangements by customers pursuant to existing licenses also provide
revenues  to  the  Company.  Under  software  maintenance  contracts,   end-user
customers  are typically  entitled to receive  telephone  support,  software bug
fixes and new releases of particular software products.

The Company  believes that it is the  technology  leader in providing  accurate,
scalable, secure,  knowledge-retrieval  software solutions capable of supporting
knowledge assets of most media types including paper documents, text, images and
video.  Excalibur's  products enable users to search and retrieve these types of
data through  intranets,  local-area and wide-area  networks,  extranets and the
Internet.  It believes that these qualities  differentiate its software products
from other search engines,  toolkits and text retrieval products.  The Company's
Excalibur  RetrievalWare and Excalibur Visual  RetrievalWare  products deliver a
unified software solution for text and visual knowledge  retrieval.  The Company
is  committed  to  empowering  organizations  by  enabling  people to  transform
information  into  knowledge  and is focused on the  high-end  of the market for
knowledge retrieval.

The Company's  software  products are designed to enable  individuals to quickly
search and  retrieve  relevant  information  residing  on a  LAN/WAN,  intranet,
paper-based archive,  extranet,  video archive or the Internet. The market today
for the Company's products  generally  consists of two segments,  text knowledge
retrieval  and video  indexing  and  retrieval.  The market  for text  knowledge
retrieval  products  consists  of  electronic  publishing,   online  information
services, global corporate intranets,  paper archival systems as well as market,
business  and  government  intelligence.  The  market  for  video  indexing  and
retrieval  solutions  includes  application  and  website  developers,   certain
government agencies as well as commercial media,  entertainment and broadcasting
companies.


                                     - 11 -
<PAGE>

The Company  analyzes its business  based on these two business  segments.  Text
knowledge  retrieval  products include the RetrievalWare  family of products and
EFS. Visual products  include Visual  RetrievalWare,  VAE and Screening Room, an
advanced end-to-end solution for real-time  capturing,  analyzing,  cataloguing,
browsing,  searching and retrieving  video over  intranets and  extranets,  that
began shipping in the second quarter of this fiscal year.

The following chart  represents  revenues and expenses (in thousands of dollars)
attributable  to the text and  visual  businesses  for the three and nine  month
periods ending October 31, 1998 and 1997.  Expenses for each business consist of
expenses directly  attributable to the business unit and allocated  expenses and
exclude  restructuring  costs, merger costs and acquired in-process research and
development costs.
 
                                      Text Business           Visual Business
                                      -------------           ---------------
                                    Three months ended      Three months ended
                                        October 31,             October 31,
                                     1998        1997        1998         1997
                                   --------    --------    --------    --------
Total Revenue ..................   $  6,752    $  6,212    $    510    $    216
Operating Expenses .............      6,184       5,902       1,840       1,093
                                   --------    --------    --------    --------
Operating Income (Loss) ........   $    568    $    310    $ (1,330)   $   (877)
                                   ========    ========    ========    ========


                                      Text Business           Visual Business
                                      -------------           ---------------
                                    Nine months ended        Nine months ended
                                        October 31,             October 31,
                                     1998        1997        1998         1997
                                   --------    --------    --------    --------

Total Revenue ..................   $ 17,579    $ 14,650    $    894    $    416
Operating Expenses .............     18,119      18,005       4,657       3,500
                                   --------    --------    --------    --------
Operating Income (Loss) ........   $   (540)   $ (3,355)   $ (3,763)   $ (3,084)
                                   ========    ========    ========    ========


The Company believes that in addition to other competitive advantages,  it holds
a competitive  advantage in that the Company's products accommodate the indexing
and  retrieval of multiple  data types.  The Company  expects that over time, if
video becomes a more common data type, these two markets may merge.


Results of Operations

Total  revenues  for the  third  fiscal  quarter  ended  October  31,  1998 were
$7,262,000,  a 13% increase over total  revenues of $6,428,000  reported for the
same quarter last fiscal year.  The Company  incurred a net loss for the quarter
ended October 31, 1998 of $793,000, or $0.06 per common share, compared to a net
loss of $628,000,  or $0.05 per common share,  for the third quarter last fiscal
year.


                                     - 12 -
<PAGE>

For the nine months ended October 31, 1998, total revenues were $18,473,000,  an
increase  of  23%  over  total   revenues  of   $15,066,000   reported  for  the
corresponding  period last year. The Company  incurred a net loss of $4,408,000,
or $0.33 per common share, in the first nine months of the current year compared
to a net loss of $8,406,000,  or $0.65 per common share, in the same period last
year.  Excluding  a charge in the  second  quarter of the prior  fiscal  year of
$1,284,000 for acquired in-process research and development costs related to the
acquisition of Interpix  Software  Corporation  ("Interpix") and a restructuring
charge of $577,000  recorded in the first quarter of the prior fiscal year,  the
net loss for the nine months ended October 31, 1997 was $6,545,000.

Total  expenses in the third quarter were  $8,024,000,  which  represented a 15%
increase from total expenses of $6,995,000 in the third quarter last year. Total
expenses  for the nine months  ended  October 31,  1998 were  $22,776,000,  a 3%
decrease from total  expenses of  $23,366,000  reported for the same period last
year.  Excluding  both the  restructuring  charge and the Interpix  charge which
occurred in the prior fiscal year,  total expenses  increased  approximately  6%
from the first nine months of the prior fiscal year.

The charts that follow  summarize  the  components  of  revenues  and  expenses,
including the amounts expressed as a percentage of total revenues, for the three
and nine month  periods  ended  October  31, 1998 and 1997,  and the  percentage
change in the amounts between fiscal periods (dollars in thousands).
 

                                 
                                 Components of Revenue and Expenses    Increase/
                                   Three Months Ended October 31,    ( Decrease)
                                     1998                1997
                                   $       %           $       %           %
                                --------------      --------------      ------
  Revenues:
   RetrievalWare ............   $5,482    75 %      $4,391    68 %        25 %
   EFS ......................       37     1           397     6         (91)
   Visual Products Group ....      479     7           188     3         155
                                --------------      --------------      ------
  Total Software ............    5,998    83         4,976    77          21
  Maintenance ...............    1,264    17         1,452    23         (13)
                                --------------      --------------      ------
     Total revenues .........   $7,262   100 %      $6,428   100 %        13 %
                                --------------      --------------      ------

  Expenses:
   Costs of sales ...........   $1,518    20 %      $1,175    18 %        29 %
   Sales and marketing ......    3,367    46         3,035    47          11 
   Research and product
     development ............    2,072    29         1,544    24          34
   General and administrative    1,067    15         1,241    19         (14)
                                --------------      --------------      ------
     Total expenses .........   $8,024   110 %      $6,995   108 %        15 %
                                --------------      --------------      ------






                                     - 13 -
<PAGE>


                                 
                                 Components of Revenue and Expenses    Increase/
                                    Nine Months Ended October 31,    ( Decrease)
                                      1998               1997
                                   $       %           $       %           %
                               ---------------     ---------------      ------
  Revenues:                  
   RetrievalWare ............  $13,459    73 %      $9,581    64 %        40 %
   EFS ......................      265     1         1,176     8         (77)
   Visual Products Group ....      839     5           343     2         145
                               ---------------     ---------------      ------
  Total Software ............   14,563    79        11,100    74          31
  Maintenance ...............    3,910    21         3,966    26          (1)
                               ---------------     ---------------      ------
     Total revenues .........  $18,473   100 %     $15,066   100 %        23 %
                               ---------------     ---------------      ------
Expenses:    
   Costs of sales ...........  $ 3,690    20 %      $3,240    22 %        14 %
   Sales and marketing ......   10,025    54        10,002    66          --  
   Research and product        
     development ............    5,752    31         4,814    32          19
   General and administrative    3,309    18         3,449    23          (4)
   Acquired in-process
     research and development       --    --         1,284     8          --
   Restructure Costs ........       --    --           577     4          --
                               ---------------     ---------------      ------
     Total expenses .........  $22,776   123 %     $23,366   155 %        (3)%
                               ---------------     ---------------      ------



Overall revenues increased 13% in the third quarter of the current year over the
third quarter last year,  including a 21% increase in software  product revenue.
For the nine months ended October 31, 1998,  overall revenues  increased 23% and
software revenues  increased 31% over the same period last year. Overall revenue
increases  are  attributable  to three  primary  areas of  growth.  The first is
increasing  sales via  major  integration  and  distribution  partnerships.  The
Company is  beginning  to generate  revenue  from major  corporate  partners and
continues to expand relationships with others. In July 1998, the Company entered
into an agreement with Storage Technology Corporation ("StorageTek") which calls
for the joint development of advanced solutions called Network Appliances, which
are based on RetrievalWare and Screening Room products. StorageTek has committed
to a prepaid  license in the moderate seven figure range for licensing fees over
18 months and will also pay  royalties on resale of current  Excalibur  products
and future  products  to be  jointly  developed.  In the  quarter,  the  Company
recognized  $695,000 from this  agreement.  To date,  the Company has recognized
$976,000 related to the agreement; the remainder of the prepaid license payments
will be recognized over the next twelve months.  Other  significant  partnership
activity in the third quarter  included new and expanded  agreements with OCS of
Madrid,  Excalibur's  main  distributor  in Spain  and South  America;  Informix
Software,  who extended  their license for  Excalibur's  text  retrieval  search
engine; and Thermo Info France.




                                     - 14 -
<PAGE>

A second  area of  growth  is  coming  from  online  services  and  sales of the
Company's new product  Excalibur  WebExpress,  which is  RetrievalWare  designed
specifically  for  this  market.  Online  services  with  paid  subscribers  are
demanding  more  accurate and  comprehensive  access to large volumes of diverse
information  ranging from scanned paper to  electronic  text to images to video.
WebExpress provides optimum retrieval  capabilities for online service users. In
the  third  quarter,   new  customers  choosing  Excalibur  WebExpress  included
Encyclopedia Britannica, Copley News Services and Knowledge Link.

The third area is the continued growth of RetrievalWare sales into corporate and
government   accounts,   both  in  the  U.S.  and  abroad.  Sales  of  Excalibur
RetrievalWare,  the  Company's  flagship  product,  increased 25% in the current
quarter to  $5,482,000  from  $4,391,000  in the  comparable  quarter last year.
RetrievalWare revenue increased 40% in the first nine months of the current year
to $13,459,000 from $9,581,000 in the comparable period last year. RetrievalWare
sales were 92% of software  revenue in the first nine months of the current year
compared to 86% in the first nine  months of the prior  year.  Included in third
quarter  revenue  was a  $1,149,000  RetrievalWare  license  sold to the  United
Kingdom  Ministry of Defense.  The  agreement  grants the agency an internal use
license  for  indexing  and  retrieving   complex  text  based  data.  With  the
availability of RetrievalWare  FileRoom,  EFS software revenue is now negligible
and represented  only 1% of total software revenue in the current quarter and 2%
for the first nine months of the current year.  Software revenue from the Visual
Products  Group  increased  155% in the quarter to $479,000 from $188,000 in the
comparable  quarter  last year.  In the first nine months of the  current  year,
software  revenue  from the Visual  Products  Group  increased  145% to $839,000
compared to $343,000 in the first nine months of the prior year. Visual Products
revenue represented 8% and 6% respectively of software revenue for the three and
nine  month  periods  ended  October  31,  1998,  compared  to 4% and 3% for the
comparable periods last fiscal year.

Maintenance  revenue  dropped 13% in the third  quarter this year to  $1,264,000
from $1,452,000 in the third quarter last year. For the first nine months of the
current year, maintenance revenue dropped 1% to $3,910,000 from $3,966,000.  The
decrease is due to the  combination of two factors.  In the third quarter of the
prior  fiscal  year,  the Company made a  non-recurring  adjustment,  increasing
international maintenance revenue. Excluding that adjustment,  total maintenance
revenue in the current  fiscal year was basically  flat with last year.  This is
due to the  transition  of the  business  from  EFS to  RetrievalWare.  The  EFS
customer  base in general  is not  renewing  their  maintenance  contracts.  The
RetrievalWare base of maintenance  contracts is growing as RetrievalWare license
sales grow, but the overall effect is a flattening of maintenance revenue in the
current fiscal year.

Software  revenue from North American  sales  increased 34% in the third quarter
and 35% in the  first  nine  months of the  current  year  compared  to the same
periods last year. While North American Federal software revenue declined by 37%
in the third quarter and 28% in the first nine months, North American Commercial
software  revenue  increased  40% in the third quarter and 56% in the first nine
months of the  current  year  compared  to last year.  North  American  software
revenue represented 58% and 63%, respectively,  of total software revenue in the
third   quarter  and  the  first  nine  months  of  the  current   fiscal  year.
International software revenues increased 6% in the third quarter and 25% in the
first nine months of the current  year  compared  with last year.  International
software revenue growth was somewhat  hindered by lingering effects of the Asian
financial crisis.

                                     - 15 -
<PAGE>


Sales and  marketing  costs  increased  11% in the  quarter to  $3,367,000  from
$3,035,000  last year but remained flat at  $10,025,000 in the first nine months
of the current  year  compared to  $10,002,000  in the first nine months of last
year. The increase  results from the Company's new product  marketing this year,
including trade show activity and direct mail programs. The restructuring in the
first quarter of fiscal year 1998 resulted in reduced salaries, benefits, travel
and other employee  related costs that have remained  relatively  constant since
and  explains  the level sales and  marketing  costs in the first nine months of
this year compared to last.

Total research and product  development costs increased 34% to $2,072,000 in the
third quarter of the current year compared with  $1,544,000 in the third quarter
last year.  For the nine months  ended  October 31,  1998,  total  research  and
development  costs increased 19% to $5,752,000 from $4,814,000 in the first nine
months of the prior year. The  establishment  of the joint  development lab with
StorageTek  accounted for the majority of the increase in the third quarter. The
lab,  staffed by full-time  Excalibur  and  StorageTek  engineers,  will closely
integrate  StorageTek products with Excalibur's  advanced products for crawling,
indexing, searching, retrieving and distributing all enterprise digital content,
to create advanced solutions that make enterprise-wide information assets easier
to archive,  access and leverage. The increase for the first nine months of this
year over the same  period  last  year was due to  increased  investment  in the
Company's  RetrievalWare  and visual product  lines,  as well as the addition of
StorageTek Joint Development Lab. The Company continued to enhance RetrievalWare
products and its new visual product,  Screening Room, and accelerated efforts to
complete  development  of  StorageTek  network  appliance  products.  In  total,
headcount in the Research and Development  departments increased to 66 employees
at the end of the current quarter compared to 53 at the end of the third quarter
of the prior year.  Additionally,  as part of the increased R&D investment  this
year,  the  Company  utilized  a  greater  number  of  third-party   development
contractors. The Company believes that the investment in the acceleration of the
delivery of the network appliances will provide a positive return next year.

General  and  administrative  expenses  decreased  14% in the third  quarter  to
$1,067,000  from  $1,241,000 in the third quarter last year.  For the first nine
months of the current year, general and administrative  expenses decreased 4% to
$3,309,000  from $3,449,000 in the same period last year. The decrease is due to
a reduction in corporate expenses this year, including insurance and shareholder
expenses.

Costs of sales  increased  29% to $1,518,000 in the third quarter of the current
year from  $1,175,000 in the third quarter last year.  Costs of sales  increased
14% to $3,690,000  in the first nine months of the current year from  $3,240,000
in the same period last year. The variance is mostly due to the increased  sales
volume.  Increased third-party royalty costs due to the addition of new language
versions of  RetrievalWare  have also  contributed  to the  increase in costs of
sales from the third  quarter of the prior year.  Costs of sales  expressed as a
percentage  of total  sales was 21% in the third  quarter  of the  current  year
compared to 18% in the third  quarter  last year,  and  decreased  to 20% in the
first nine months of the  current  year from 22% in the  comparable  period last
year.





                                     - 16 -
<PAGE>

Net interest income declined to $52,000 and $194,000, respectively, in the three
and nine month  periods  ended  October  31,  1998 from  $89,000  and  $306,000,
respectively, in the comparable periods last year due to a decrease in the level
of  investment  securities  held.  The  Company's  equity  in  the  loss  of its
affiliate,  ETNV,  was $83,000 in the third  quarter,  and $299,000 for the nine
months  ended  October  31,  1998.  For the three and nine month  periods  ended
October 31, 1997,  the equity in the net loss of ETNV was $150,000 and $412,000,
respectively.


Liquidity and Capital Resources

In the nine months ended  October 31, 1998,  the Company's  combined  balance of
cash, cash  equivalents and  investments in marketable  securities  increased by
$248,000 to $6,683,000 as summarized  below (in thousands).  At October 31, 1998
and January 31, 1998,  investments  in marketable  securities  consisted of U.S.
Treasury Bills with maturities of less than one year.

                          October 31,  January 31, 
                             1998         1998       Change
                          ----------  -----------  ----------
          Cash and cash
            equivalents   $   5,684   $   4,939    $    745
          Investments           999       1,496        (497)
                          ----------  -----------  ----------
            Total         $   6,683   $   6,435    $    248
                          ==========  ===========  ==========


Cash of $2,245,000 used to fund operating  activities was less than the net loss
of  $4,408,000  for the nine months  ended  October  31,  1998.  A reduction  of
$2,162,000  in the  balance of  accounts  receivable  was offset  somewhat by an
increase in prepaid and other  expenses of  $1,514,000.  Reductions  in accounts
payable and accrued  expenses used $52,000,  while increased  deferred  revenues
contributed  $169,000.  The non-cash charges  offsetting cash used in operations
were depreciation and amortization of $1,099,000, and the Company's share of the
net loss of ETNV and the amortization of the excess of the Company's  investment
over the underlying net book value of ETNV totaling $299,000.

During the first nine months of the current year, the maturity of Treasury bills
provided  net  cash  of  $1,481,000.  Treasury  bill  purchases  used  $984,000.
Purchases of equipment and leasehold improvements used $939,000 and loans to and
investments in the Company's affiliate, ETNV, used $226,000.

Proceeds of $3,250,000 were provided by a private placement of 325,000 shares of
common stock to an  unaffiliated  financial  institution  at a purchase price of
$10.00 per share.  Cash of $525,000 was  provided  from the exercise of employee
stock options and issuances of stock under the employee stock purchase plan.

The reduction in the level of accounts  receivable  during the first nine months
of the  current  year  resulted  in a  decrease  in the  number  of  days  sales
outstanding ("DSO") at October 31, 1998.  Management believes that the allowance
for doubtful accounts of $628,000 at October 31, 1998 is adequate.




                                     - 17 -
<PAGE>


Factors That May Affect Future Results

The Company's  business  environment is  characterized  by intense  competition,
rapid technological  changes,  changes in customer requirements and emerging new
market segments.  Consequently,  to compete  effectively,  the Company must make
frequent  new  product  introductions  and  enhancements  while  protecting  its
intellectual  property,  retain its key personnel and deploy sales and marketing
resources  to take  advantage of new business  opportunities.  Future  operating
results  will be  affected  by the  ability of the Company to expand its product
distribution  channels and to manage the expected growth of the Company.  Future
results may also be impacted by the  effectiveness  of the Company in  executing
future  acquisitions  and integrating the operations of acquired  companies with
those of the Company.  Failure to meet any of these  challenges  could adversely
affect future operating results.

The Company's quarterly operating results have varied  substantially in the past
and are likely to vary  substantially  from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results  are  significantly  dependent  upon the timing of the  closing of large
license  agreements.  In this regard, the purchase of the Company's products can
require a significant  capital  investment  from a potential  customer which the
customer  generally  views  as a  discretionary  cost  that can be  deferred  or
canceled due to budgetary or other  business  reasons and can involve long sales
cycles of six  months or more.  Estimating  future  revenues  is also  difficult
because the Company  ships its  products  soon after an order is received and as
such does not have a significant  backlog.  Thus, quarterly license fee revenues
are  heavily  dependant  upon a  limited  number of  orders  for large  licenses
received  and  shipped  within  the same  quarter.  Moreover,  the  Company  has
generally  recorded a  significant  portion of its total  quarterly  license fee
revenues in the third month of a quarter, with a concentration of these revenues
occurring in the last half of that third month.  This  concentration of revenues
is influenced by customer tendencies to make significant capital expenditures at
the end of a fiscal  quarter.  The Company  expects  these  revenue  patterns to
continue for the foreseeable future.

Despite the  uncertainties  in its revenue  patterns,  the  Company's  operating
expenses  are based  upon  anticipated  revenue  levels  and such  expenses  are
incurred on an approximately ratable basis throughout a quarter. As a result, if
expected  revenues are  deferred or otherwise  not realized in a quarter for any
reason, the Company's business,  operating results and financial condition would
be materially adversely affected.

Primarily due to large operating losses incurred by the Company,  its balance of
cash, cash equivalents and investments declined substantially since the proceeds
of  approximately  $8,388,000  from a  private  placement  in  March  1996  were
received.  As a result,  during  the  second  quarter  this  year,  the  Company
completed a private placement sale of 325,000 shares of common stock for $10 per
share, resulting in proceeds of $3,250,000.

Various factors,  including those discussed above,  have somewhat  inhibited the
overall revenue growth that management had expected in the prior fiscal year. As
a result,  near the end of the first quarter of fiscal year 1998, the short-term
revenue  expectations of management were adjusted and planned  expenditures were
reduced.  As  discussed  previously,   the  Company  reduced  its  workforce  by
approximately  10% from the number of employees at April 30, 1997.  In addition,

                                     - 18 -
<PAGE>
the Company postponed certain  long-range  programs and curtailed other expenses
in order to achieve an overall reduction in expenditures. Marketing efforts were
focused on the  increase  of  current  year  revenues.  The  Company  made other
organizational  changes in order to sharpen the focus of product development and
business  development  efforts on selected video  applications  of the Excalibur
Visual RetrievalWare technology.

Management  believes that the changes and  initiatives  discussed  above and the
investments of time and money in the training of the sales force, improved sales
productivity  and  the  overall  financial  performance  of  the  Company  since
inception of such changes.  Quarterly  revenues  increased  steadily  throughout
fiscal year 1998 and  revenues  for the first nine months of the current  fiscal
year have increased 23% over the total revenue reported for the same period last
fiscal year.  Software revenue has increased 31% in the first nine months of the
current year  compared to last year.  The level of quarterly  costs and expenses
was reduced and had remained  relatively  flat over the past  several  quarters.
However, the establishment of the joint development lab with StorageTek resulted
in an  increase  in expenses  this  quarter  that is expected to continue as the
Company accelerates the delivery of the network appliances. The Company believes
that this investment will provide a positive return next fiscal year.  Including
the receipt of  $3,250,000  in proceeds  from the private  placement  on May 15,
1998, the current balance of cash, cash  equivalents and investments is expected
to be  sufficient  to fund the Company's  current  projected  cash needs for the
current fiscal year. Historically,  the Company has primarily used cash provided
by sales of its common stock to fund its operating  losses. If the actions taken
by management are not effective in achieving  profitable  operating results, the
Company may be required to pursue  additional  external  sources of financing in
the future to support its operations and capital  requirements.  There can be no
assurances that external sources of financing will be available if required,  or
that such financing will be available on terms acceptable to the Company.

As of  January  31,  1998,  the  Company  had  significant  net  operating  loss
carryforwards  ("NOLs") of  approximately  $68 million.  The deferred tax assets
representing the benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of  $4,408,000  for the nine month period ended  October 31, 1998 and
has incurred cumulative losses of approximately  $16,383,000 over the last three
fiscal  years.  The  accumulated  deficit of the Company at October 31, 1998 was
$56,405,000.  The  realization  of the  benefits  of the  NOLs is  dependent  on
sufficient taxable income in future fiscal years. Lack of future earnings,  or a
change in the  ownership of the Company,  could  adversely  affect the Company's
ability  to  utilize  the  NOLs.  Further,  because  there  was a change  in the
ownership of ConQuest in fiscal year 1996, the Company's ability to utilize NOLs
relating to ConQuest of approximately $3,233,000 may be limited. Despite the NOL
carryforwards,  the Company may have income tax liability in future years due to
the  application of the  alternative  minimum tax rules of the Internal  Revenue
Code.

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.

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

                                     - 19 -
<PAGE>


Other Factors

On July 29, 1998,  the  Securities  and Exchange  Commission  issued  additional
guidance on disclosures  that public  companies  should make related to the Year
2000.  The new release is effective for the  Company's  October 31, 1998 interim
reporting and the Company is providing this  disclosure in accordance  with this
guidance.  In  addition  to  historical  information,  the  disclosure  contains
forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities  Litigation Reform Act of 1995. Such statements are based
on  management's  current  expectations  and are subject to a number of factors,
risks and  uncertainties  which could cause actual results to differ  materially
from those described in the forward-looking statements.

State of Readiness
------------------
The  Company  currently  has  facilities  in six  locations,  each of  which  is
responsible for its own development information technology systems, herein known
as "Non-IT systems",  while corporate  information  technology  systems,  herein
known as "IT  systems",  are  managed by the  Company's  Management  Information
Systems  department  ("MIS").  For the  purposes  of Year 2000  compliance,  the
corporate  MIS  department  is managing the task of  verifying  that all Company
systems are date  compliant,  including  reviewing and analyzing all development
platforms,  not directly under MIS control.  This umbrella process was initiated
in order to ensure the Company would be able to continue developing its products
without  disruption  after January 1, 2000. To ensure that Non-IT and IT systems
are, or will be,  compliant;  the Company  has  undertaken  a full survey of all
systems within the Company at all locations. This survey covers all user desktop
and laptop systems; all IT systems, servers, and operating systems; all critical
applications,   including  financial,   accounting,  corporate  database,  human
resources and administrative systems; and all Non-IT systems, servers, operating
systems and third party coding products.  The majority of the Company's  efforts
regarding  Year 2000  readiness are  associated  with  internal data  processing
systems.  In all material  respects,  products  manufactured  by the Company are
already  Year 2000  compliant,  although  the  individual  platforms  upon which
product(s) are developed are still under review and analysis.  Due to the recent
upgrade of many of the  Company's IT systems,  the majority of these systems are
either currently  prepared for Year 2000 in all material  respects or are in the
process of being upgraded to standardized  systems and  applications  which will
meet this objective. Most IT systems and applications which are deemed Year 2000
compliant  by the  software  vendors are tested by the  Company to verify  these
claims.  At this time,  critical  financial,  accounting and corporate  database
systems have been tested, and Non-IT systems remain to be tested.  These testing
proportions  are  related to both the  magnitude  and  perceived  risk of system
non-compliance  and future  testing will be scheduled in  accordance  with these
criteria.  For the  remaining  IT  systems  and the Non-IT  systems,  plans with
critical dates are being developed to monitor the Company's  progress toward the
overall objective of Year 2000 compliance.  The Company's  anticipates readiness
for Year 2000 by mid-year 1999.

Costs to Address Year 2000 Issues
---------------------------------
Historical  and  estimated  costs of  remediation  to this  point  have not been
material.  The Company has resolved IT systems  compliance issues through normal
replacement  and upgrades of software.  Non-IT systems are being  addressed on a


                                     - 20 -
<PAGE>


case by case basis through the use of existing MIS resources. Most of the Non-IT
systems remedial  activity to this point has involved  applying low or zero cost
patches to operating  systems and  platforms  using  existing  MIS  resources to
achieve a date compliance  level. The Company will continue to monitor Year 2000
remediation costs and will update its estimate of future  remediation  costs, if
any, as it completes its Non-IT systems analysis.

Key Considerations and Contingency Plans
----------------------------------------
At the current time, the Company's Year 2000  readiness  plan  anticipates  that
both IT and Non-IT systems and  applications  will be Year 2000 compliant in all
material  respects  by June  1999.  This  assessment  is based on the  Company's
analysis to date and detailed  findings at its Vienna,  Virginia  and  Columbia,
Maryland locations.  There can be no assurance,  however, of complete compliance
based on the status to date.  However,  since the Company is not dependent  upon
any single IT or Non-IT  system for the majority of its revenue,  it is unlikely
that any single system will have an adverse  material effect on the Company as a
whole.  Contingency  plans will involve the  procurement of newer  platforms for
Non-IT systems and the temporary use of  standardized  commercial  off-the-shelf
replacement modules for IT applications and business functions. While at present
there are no indications  that any  contingency  plans will be necessary or that
there will be revenue  disruptions,  there can be no  assurances  that this will
necessarily be the case.


New Accounting Pronouncements

In 1997, SFAS No. 131,  "Disclosure  about Segments of an Enterprise and Related
Information"  was issued and is effective for the fiscal year ending January 31,
1999 year-end  reporting.  The Company is evaluating this statement to determine
the impact on its reporting and disclosure requirements.

The American  Institute of Certified Public  Accountants has issued Statement of
Position 97-2,  "Software  Revenue  Recognition,"  ("SOP 97-2") that  supersedes
Statement  of  Position  91-1.  SOP 97-2,  "Software  Revenue  Recognition,"  is
effective  for revenue  transactions  entered  into by the Company in its fiscal
year ending  January 31, 1999. The Company has  implemented  SOP 97-2 and it has
not had a material financial impact on the Company.

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative  Instruments and Hedging Activities," which will
be effective  for the Company's  fiscal year 2001.  This  statement  establishes
accounting and reporting standards  requiring that every derivative  instrument,
including  certain  derivative  instruments  embedded  in  other  contracts,  be
recorded in the balance  sheet as either an asset or  liability  measured at its
fair value.  The statement also requires that changes in the  derivative's  fair
value be recognized in earnings  unless specific hedge  accounting  criteria are
met. The Company  believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.







                                     - 21 -
<PAGE>


                           PART II-- OTHER INFORMATION


Item 1.    Legal Proceedings                                     None.
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Item 2.    Changes in Securities                                 None.
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Item 3.    Defaults upon Senior Securities                       None.
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Item 4.    Submission of Matters to Vote of Security Holders     None.
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Item 5.    Other Information                                     None.
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Item 6.    Exhibits and Reports on Form 8-K                      None.
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                                     - 22 -
<PAGE>




                                   SIGNATURES



Pursuant  to the  requirements  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.

                       EXCALIBUR TECHNOLOGIES CORPORATION



December 14, 1998              By: /s/ Patrick C. Condo
                               ------------------------
                               Patrick C. Condo
                               President and Chief Executive Officer
                               (Principal Executive Officer)


December 14, 1998              By: /s/ James H. Buchanan
                               -------------------------
                               James H. Buchanan
                               Chief Financial Officer
                               (Principal  Financial and Accounting Officer)























                                     - 23 -