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 July 31, 1999

                                       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 September 10, 1999,  14,361,498  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 JULY 31, 1999

                                TABLE OF CONTENTS


                         PART I . FINANCIAL INFORMATION

<TABLE>
<CAPTION>

Item 1.        Financial Statements:                                                             Page
-------        ---------------------                                                             ----
<S>            <C>                                                                                 <C>
               Consolidated Balance Sheets
               July 31, 1999 (unaudited) and January 31, 1999......................................3

               Consolidated Statements of Operations and Comprehensive Income (Loss)
               (unaudited) Three and six month periods ended July 31, 1999 and 1998................4

               Consolidated Statements of Cash Flows (unaudited)
               Six month periods ended July 31, 1999 and 1998......................................5

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

Item 2.        Management's Discussion and Analysis of Financial Condition
               and Results of Operations..........................................................10



                           PART II. OTHER INFORMATION

Items 1. - 6.  ...................................................................................19

Signatures     ...................................................................................20
</TABLE>


                                        2
<PAGE>


                       EXCALIBUR TECHNOLOGIES CORPORATION
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                ASSETS                                                 July 31, 1999    January 31, 1999
                                                                                        (unaudited)
                                                                                       -------------    ----------------
<S>                                                                                      <C>                <C>
Current Assets:
     Cash and cash equivalents ........................................................  $  7,703           $  5,851
     Short term investments ...........................................................       178                 --
     Accounts receivable, net of allowance for doubtful
         accounts of $594 and $660, respectively ......................................     9,062              6,402
     Prepaid expenses and other .......................................................     2,667              2,291
                                                                                         --------           --------
           Total current assets .......................................................    19,610             14,544

Equipment and leasehold improvements, net of accumulated depreciation
     of $7,684 and $6,986, respectively ...............................................     1,875              2,034
Other assets ..........................................................................     2,065              3,134
                                                                                         --------           --------
           Total assets ...............................................................  $ 23,550           $ 19,712
                                                                                         ========           ========

                 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
     Current portion of capital lease obligations .....................................  $     16           $     --
     Accounts payable .................................................................     2,252              1,933
     Accrued expenses .................................................................     1,278              1,829
     Deferred revenues ................................................................     2,918              2,690
     Deferred compensation ............................................................        80                 86
                                                                                         --------           --------
           Total current liabilities ..................................................     6,544              6,538

     Capital lease obligations, net of current portion ................................        15                 --
                                                                                         --------           --------

           Total liabilities ..........................................................     6,559              6,538
                                                                                         --------           --------

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 .............................................       271                271
     Common stock, $0.01 par value, 40,000
         Shares authorized; 14,352 and 13,689
         Shares issued and outstanding, respectively ..................................       144                137
     Additional paid-in capital .......................................................    74,463             68,631
     Accumulated deficit ..............................................................   (57,891)           (55,798)
     Other comprehensive income (loss) ................................................         4                (67)
                                                                                         --------           --------
           Total shareholders' equity .................................................    16,991             13,174
                                                                                         --------           --------
           Total liabilities and shareholders' equity .................................  $ 23,550           $ 19,712
                                                                                         ========           ========
</TABLE>

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


                                       3
<PAGE>


                       EXCALIBUR TECHNOLOGIES CORPORATION
                                AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS AND
                        OTHER COMPREHENSIVE INCOME (LOSS)
                                   (unaudited)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                         Three Months Ended                   Six Months Ended
                                                                              July 31,                             July 31,
                                                                       1999              1998              1999              1998
                                                                     --------          --------          --------          --------
<S>                                                                  <C>               <C>               <C>               <C>
REVENUES:
    Software ...............................................         $  7,883          $  4,834          $ 14,411          $  8,565
    Maintenance ............................................            1,187             1,322             2,419             2,646
                                                                     --------          --------          --------          --------
                                                                        9,070             6,156            16,830            11,211
                                                                     --------          --------          --------          --------

EXPENSES:
    Cost of software revenues ..............................            1,258               839             2,281             1,520
    Cost of maintenance revenues ...........................              533               338             1,077               652
    Sales and marketing ....................................            3,749             3,430             7,643             6,658
    Research and product development .......................            2,372             1,782             4,862             3,680
    General and administrative .............................            1,434             1,019             2,712             2,242
                                                                     --------          --------          --------          --------
                                                                        9,346             7,408            18,575            14,752
                                                                     --------          --------          --------          --------
Operating loss .............................................             (276)           (1,252)           (1,745)           (3,541)

OTHER INCOME/ (EXPENSES):
     Interest income, net ..................................               66                81               124               143
     Equity in net loss of affiliate .......................               --              (101)              (41)             (218)
     Write-off of investment in affiliate ..................               --                --              (430)               --
                                                                     --------          --------          --------          --------
Net loss ...................................................             (210)           (1,272)           (2,092)           (3,616)
Dividends on preferred stock ...............................                3                 3                 7                 7
                                                                     --------          --------          --------          --------
Net loss applicable to common stock ........................         $   (213)         $ (1,275)         $ (2,099)         $ (3,623)
                                                                     ========          ========          ========          ========

Basic and Diluted net loss per common share ................         $  (0.01)         $  (0.09)         $  (0.15)         $  (0.27)
Weighted-average number of common shares
outstanding ................................................           14,347            13,546            14,141            13,385
Other comprehensive income (loss):
Net loss ...................................................         $   (210)         $ (1,272)         $ (2,092)         $ (3,616)
    Foreign currency translation adjustment ................                8                40                71                --
                                                                     --------          --------          --------          --------
Comprehensive loss .........................................         $   (202)         $ (1,232)         $ (2,021)         $ (3,616)
                                                                     ========          ========          ========          ========
</TABLE>

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


                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                        For the Six Months Ended July 31,
                                                                                             1999             1998
                                                                                        ---------------------------------
<S>                                                                                         <C>              <C>
Cash Flows from Operating Activities:
     Net loss ............................................................................  $(2,092)         $(3,616)
     Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization .................................................      789              731
           Bad debt expense ..............................................................      190              126
           Equity in net loss of affiliate ...............................................       41              218
           Write-off of investment in affiliate ..........................................      430               --
     Changes in operating assets and liabilities:
           Accounts receivable ...........................................................   (2,877)           1,490
           Prepaid expenses and other ....................................................      158             (581)
           Accounts payable and accrued expenses .........................................     (219)            (306)
           Deferred revenues .............................................................      242              (64)
                                                                                            -------          -------
     Net cash used in operating activities ...............................................   (3,338)          (2,002)
                                                                                            -------          -------

Cash Flows from Investing Activities:
     Purchase of investments .............................................................     (178)            (984)
     Proceeds from maturities of investments .............................................       --            1,493
     Other assets ........................................................................       --              (96)
     Purchases of equipment and leasehold improvements ...................................     (525)            (579)
                                                                                            -------          -------
     Net cash used in investing activities ...............................................     (703)            (166)
                                                                                            -------          -------

Cash Flows from Financing Activities:
     Proceeds from the exercise of stock options .........................................    1,079              414
     Gross proceeds from the issuance of common stock ....................................    5,094            3,300
     Offering costs in connection with issuance of common stock ..........................     (341)              --
     Repayment of capital lease obligations ..............................................      (15)              --
                                                                                            -------          -------
     Net cash provided by financing activities ...........................................    5,817            3,714
                                                                                            -------          -------

The Effect of Exchange Rate Changes on Cash ..............................................       76               (9)
                                                                                            -------          -------
Net Increase in Cash and Cash Equivalents ................................................    1,852            1,537

Cash and Cash Equivalents, beginning of period ...........................................    5,851            4,939
                                                                                            -------          -------

Cash and Cash Equivalents, end of period .................................................  $ 7,703          $ 6,476
                                                                                            =======          =======
</TABLE>


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


                                       5
<PAGE>


                       EXCALIBUR TECHNOLOGIES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  July 31, 1999


(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 enterprise-wide accurate, scalable and
secure  knowledge  retrieval and digital  asset  management  software  solutions
capable of supporting  paper,  text,  image and video data.  The Company  offers
consulting,  training, product maintenance and system 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 a net loss of $0.2 million in the three month period ended
July 31, 1999 and has incurred  cumulative losses of approximately $19.4 million
over the last three fiscal years.  The accumulated  deficit at July 31, 1999 was
$57.9  million.  The  Company's  operations  are  subject to  certain  risks and
uncertainties  including,  among others,  the dependence  upon the timing of the
closing on sales 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
development,  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
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, 1999.
In the opinion of  management,  the  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 six month periods
ended July 31, 1999 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2000.

Revenue Recognition

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 in fiscal year
1999 and it has not had a material financial impact on the Company.


                                       6
<PAGE>


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 term of the respective agreements, which are usually
one year in length.

Customization is sometimes involved in the development of a software solution by
the  Company.  Under  these  circumstances,   the  Company's  revenues,  derived
primarily   from   fixed   price    contracts,    are   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.

Cash, Cash Equivalents and Short Term Investments

The Company considers all highly liquid  investments  purchased with an original
maturity  of  three  months  or less to be cash  equivalents.  Cash  equivalents
consist of funds deposited in money market accounts.  Consequently, the carrying
amount of cash and cash  equivalents  approximates  fair  value.  The balance of
short term  investments  at July 31, 1999  consisted of a certificate of deposit
pledged to collateralize a letter of credit required for a leased facility.

Net Loss Per Common Share

Basic loss per common share includes no dilution and is computed by dividing net
loss available to common  shareholders by the weighted  average number of common
shares  outstanding  for the period.  Diluted loss per common share includes the
potential  dilution that would occur if  securities or other  contracts to issue
common stock were exercised or converted into common stock.  Options to purchase
2,470,515 shares of common stock and cumulative convertible preferred stock that
were  outstanding  at July 31,  1999 were not  included  in the  computation  of
diluted  loss per common  share as their  effect  would be  anti-dilutive.  As a
result, the basic and diluted loss per common share amounts are identical.

Income Taxes

Deferred taxes are provided utilizing the liability method, whereby deferred tax
assets are recognized for deductible  temporary  differences  and operating loss
and tax credit  carryforwards  and deferred tax  liabilities  are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and  liabilities  are adjusted for the effects of changes in tax laws and
rates on the date of  enactment.  Deferred tax assets are reduced by a valuation
allowance  when, in the opinion of  management,  it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has provided a full valuation allowance against its net deferred tax asset as of
July 31, 1999 and January 31, 1999, respectively.

(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
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its  voting  capital  stock.  In May  1999,  the  Company  terminated  its  1996
distribution  agreement  with ETNV because  ETNV failed to pay to Excalibur  the
minimum  required  license  fees  for the  quarter  ended  January  31,  1999 of
approximately $900,000 as well as an additional amount of approximately $400,000
that  was  due  on  April  20,  1999.  Promptly  after  giving  notice  of  such
termination,  Excalibur  commenced a lawsuit in the United States District Court
for the  Eastern  District of Virginia  seeking as damages  such unpaid  minimum
license fees and other amounts due and owing from ETNV.  The lawsuit was settled
during  this  fiscal  quarter.  No  payment  was  made  by  ETNV  as part of the
settlement.

In  connection  with the  original  organization  of ETNV,  the  Company  issued
warrants to purchase  148,500  shares of the  Company's  common stock to certain
shareholders  of ETNV.  The warrants were  exercisable  at a price of $22.00 per
share for a term of seven  years  but only if ETNV  achieved  certain  financial
objectives.  The value of the warrants on the date of grant was  estimated to be
$758,000 and had been included, net of amortization, in other


                                       7
<PAGE>


assets in the consolidated  balance sheet. As a result of the termination of the
Company's  distribution  agreement  with  ETNV,  the  unamortized  value  of the
warrants and investment  costs totaling  $430,000 was written off during the six
months ended July 31, 1999.

Prior to termination of the distribution agreement,  the Company's investment in
ETNV was accounted for using the equity method. The original investment exceeded
the  Company's  share of the  underlying  net  assets  of ETNV by  approximately
$827,000.   The  excess  was  being  amortized  over  a  five-year  period.  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 is included in equity in net loss of
affiliate in the accompanying  consolidated statements of operations for the six
months ended July 31, 1999 and 1998.  The net balance of the  investment  in and
advances to ETNV of $471,000 was  included in other  assets in the  accompanying
consolidated  balance sheet at January 31, 1999.  That account had a net balance
of $430,000  when it was written off during the six months  ended July 31, 1999.
No  revenue  related  to the  agreement  was  recorded  in the first half of the
current  year.  For the three and six month  periods  ended July 31,  1998,  the
Company recorded revenues of $255,000 and $585,000, respectively.

(4)  CAPITALIZATION

Stock Offerings

In March 1999 the Company  completed a private  placement of 500,000 shares (the
"Shares") of its common stock to unaffiliated accredited investors, most of whom
are institutional  investors. The Shares were sold at a purchase price of $10.00
per share,  resulting  in net  proceeds  to the  Company of  approximately  $4.7
million. Net proceeds from the placement will be used to fund ongoing operations
and general corporate  purposes of the Company.  A registration  statement under
the Securities Act of 1933 covering resale of the Shares was declared  effective
by the Securities and Exchange Commission on July 14, 1999. The Shares were sold
pursuant to an exemption from the  registration  requirements  of the Securities
Act of 1933.

During the first six months of the  current  fiscal  year,  the  Company  issued
154,000  shares of common stock upon the exercise of options  resulting in total
cash  proceeds  of  $1,079,000  and  the   utilization  of  $6,000  of  deferred
compensation.  Additionally  the Company  issued 8,300 shares of common stock to
participants  of the employee  stock purchase plan resulting in cash proceeds of
$94,000.

(5)  SEGMENT REPORTING

The  Company  has  two  operating  segments.   The  Text  segment  includes  the
RetrievalWare family of text products.  The market for text products consists of
electronic  publishing,  Internet  online content  providers,  global  corporate
intranets,  paper  archival  systems as well as market,  business and government
intelligence.  The Visual Segment  product line includes  visual  RetrievalWare,
Video Analysis  Engine (VAE) and Screening  Room. The market for visual products
includes application and website developers, certain government agencies as well
as commercial  media,  entertainment and broadcasting  companies.  Prior to this
fiscal quarter,  the Company  operated as a single  segment.  During this fiscal
quarter, the revenue model for the Visual Segment has become differentiated from
the Text segment. Visual segment revenues are generated primarily from large OEM
transactions involving significant development and customization by the Company.
While  OEM deals are a  significant  component  of Text  segment  revenues,  the
majority  of revenue is  generated  from  licensing  RetrievalWare  directly  to
Internet web portals and to corporations building intranets. Until this quarter,
the Visual Segment was not forecast to meet any of the 10% significance tests as
outlined  in  Financial  Accounting  Standards  Board  ("FASB")  SFAS  No.  131,
"Disclosures about Segments of an Enterprise and Related Information."


                                       8
<PAGE>


The following  charts  represent  revenues,  expenses and  operating  profit (in
thousands of dollars) attributable to the Text and Visual operating segments for
the three and six month periods ended July 31, 1999 and 1998.  Expenses for each
segment  consist of direct and  allocated  expenses.  Revenues are entirely from
external customers.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                   Text Segment                  Visual Segment                      Total
                                   ------------                  --------------                      -----

                            Three  months ended July 31,  Three months ended July 31,     Three months ended July 31,
---------------------------------------------------------------------------------------------------------------------
                                1999           1998            1999           1998           1999             1998
---------------------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>             <C>           <C>             <C>              <C>
Total Revenue                  $6,865         $5,966          $2,205        $   190         $9,070           $ 6,156

Operating
Expenses                        6,832          6,054           2,514          1,354          9,346             7,408
                               ------         ------         -------        -------         -------          -------

Operating Income
(Loss)                         $   33         $ (88)         $ (309)        $(1,164)         $(276)          $(1,252)
                               ------         ------         -------        -------         ------           -------
---------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                   Text Segment                  Visual Segment                      Total
                                   ------------                  --------------                      -----

                             Six months ended July 31,     Six months ended July 31,       Six months ended July 31,
---------------------------------------------------------------------------------------------------------------------
                                1999           1998           1999           1998            1999            1998
---------------------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>             <C>            <C>            <C>              <C>
Total Revenue                 $13,715        $10,827         $ 3,115        $   384        $16,830          $ 11,211

Operating Expenses             13,860         11,935           4,715          2,817         18,575          $ 14,752
                              -------        -------         -------        -------        -------          --------
Operating Income
(Loss)                        $  (145)       $(1,108)        $(1,600)       $(2,433)       $(1,745)         $ (3,541)
                              -------        -------         -------        -------         -------          -------
---------------------------------------------------------------------------------------------------------------------
</TABLE>

For the three months ended July 31, 1999, revenues from two individual customers
comprised  approximately 17% and 14% of total revenues,  respectively.  Revenues
derived from sales to agencies of the U.S.  Government were approximately 11% of
total revenues for the current quarter.

(6)  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities." 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.

The American  Institute of Certified Public  Accountants has issued Statement of
Position 98-9,  "Modification of SOP 97-2,  Software Revenue  Recognition,  With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the  Company's  fiscal year 2001.  The Company has evaluated SOP
98-9 and does not  believe  its  adoption  will  have a  material  effect on the
financial statements.


                                       9
<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,  customers are
typically  entitled to receive  telephone  support,  software  bug fixes and new
releases of particular software products when and if they are released.

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 through a unified
web-based  user  interface.  There  are  generally  two  markets  today  for the
Company's  products,  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.  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 fiscal year 1999.

The following chart  represents  revenues and expenses (in thousands of dollars)
attributable  to the text and visual  operating  segments  for the three and six
month periods ended July 31, 1999 and 1998. Expenses for each segment consist of
direct and allocated expenses.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            Text Segment          Visual Segment           Text Segment            Vistual Segment
                                        Three months ended      Three months ended       Six months ended         Six months ended
                                              July 31,               July 31,                 July 31,               July 31,
                                          1999       1998        1999        1998       1999         1998        1999         1998
                                        -------------------    --------------------    --------------------    ---------------------
<S>                                     <C>        <C>         <C>         <C>         <C>         <C>         <C>         <C>
Total Revenue                           $  6,865   $  5,966    $  2,205    $    190    $ 13,715    $ 10,827    $  3,115    $    384
Operating Expenses                         6,832      6,054       2,514       1,354      13,860      11,935       4,715       2,817
                                        -------------------    --------------------    --------------------    --------------------
Operating Income (Loss)                 $     33   $    (88)   $   (309)   $ (1,164)   $   (145)   $ (1,108)   $ (1,600)   $ (2,433)
                                        ===================    ====================    ====================    ====================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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, as
video becomes a more common data type, these two markets will merge.


                                       10
<PAGE>

Results of Operations

Revenues
Total revenues  increased 47% in the second quarter of the current year over the
second quarter last year. Revenues from the Company's flagship product Excalibur
RetrievalWare  increased  25% in the second  quarter of the current year to $5.7
million from $4.5 million in the second quarter of the prior year. RetrievalWare
revenues  represented 72% of software  product revenues in the second quarter of
the current year compared to 94% in the second quarter last year.  Revenues from
the Visual  Products Group rose to $2.2 million in the current quarter from $0.2
million in the second quarter last year. Revenues from the Visual Products Group
represented 28% of software product revenue compared to 4% in the second quarter
last  year.  Due to the  Company's  transition  from  the  EFS  product  line to
RetrievalWare,  there were $21,000 in sales of EFS in the second  quarter of the
current year compared to sales of $116 thousand in the second quarter last year.

Total  software  revenues  increased 63% in the second quarter this year to $7.9
million  from $4.8  million in the second  quarter  last  year.  North  American
software  revenues  grew 92% in the  second  quarter to $6.4  million  from $3.3
million in the second quarter last year.  International software revenues in the
second quarter were flat compared to the comparable period last year.

For the six months ended July 31, 1999,  total revenues were $16.8  million,  an
increase  of  50%  over  total  revenues  of  $11.2  million  reported  for  the
corresponding  period last year.  Revenues from  RetrievalWare for the first six
months of the fiscal year increased 42% to $11.3 million from $8 million for the
first six months of last year. Revenues from the Visual Products Group were $3.1
million for the first half of this  fiscal  year  compared to $.4 million in the
first half of last  year.  Revenues  from EFS were  $21,000 in the first half of
this fiscal year compared to $0.2 million for the same period last year.

Total  software  revenues  for the six  months  ended  July 31,  1999 were $14.4
million,  an  increase  of 68% over  software  revenues  of $8.6  million in the
comparable  period  last  year.  Software  revenues  from North  American  sales
increased   91%  from  the   corresponding   six  month  period  of  last  year.
International  software  revenues  increased 24% in the first six months of this
fiscal year from the same period last year.

The charts below  summarize the  components of revenues and expenses,  including
the amounts  expressed as a percentage of total revenues,  for the three and six
month periods  ended July 31, 1999 and 1998,  and the  percentage  change in the
amounts between fiscal periods (dollars in thousands).

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                     Components of Revenue and Expenses                Increase/
                                                         Three Months Ended July 31,                   (Decrease)

                                                    1999                            1998
                                              $                 %             $                %            %
                                            ----------------------         ----------------------       -------

Revenues:
<S>                                         <C>               <C>          <C>               <C>          <C>
  RetrievalWare                             $5,685             63%         $4,543             74%           25%
  EFS                                           21              0             116              2           (82)
  Visual Products Group                      2,177             24             175              3          1141
                                            ---------------------          ---------------------        -------
Total Software                               7,883             87           4,834             79            63

Maintenance                                  1,187             13           1,322             21           (10)
                                            ---------------------          ---------------------        -------
  Total revenues                            $9,070            100%         $6,156            100%           47%
                                            ---------------------          ---------------------       --------
Expenses:
  Costs of sales                            $1,791             20%         $1,177             19%           52%
  Sales and marketing                        3,749             41           3,430             56             9
  Research and product development           2,372             26           1,782             29            33
  General and administrative                 1,434             16           1,019             16            41
                                            ---------------------          ----------------------       -------
     Total expenses                         $9,346            103%         $7,408            120%           26%
                                            =====================          ======================       =======
---------------------------------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                  Components of Revenue and Expenses                   Increase/
                                                       Six Months Ended July 31,                       Decrease
                                                     1999                            1998
                                              $                %              $                %            %
                                           -----------------------        -----------------------       -------
<S>                                        <C>                 <C>        <C>                 <C>           <C>
Revenues:
  RetrievalWare                            $11,329             68%        $ 7,977             71%           42%
  EFS                                           21              0             228              2           (91)
  Visual Products Group                      3,061             18             360              3           750
                                           -----------------------        -----------------------        -------
Total Software                              14,411             86           8,565             76            68
Maintenance                                  2,419             14           2,646             24            (9)
                                           -----------------------        -----------------------        -------
     Total revenues                        $16,830            100%        $11,211            100%           50%
                                           -----------------------        -----------------------        -------

Expenses:
  Costs of sales                           $ 3,358             20%        $ 2,172             20%           55%
  Sales and marketing                        7,643             45           6,658             59            15
  Research and product development           4,862             29           3,680             33            32
  General and administrative                 2,712             16           2,242             20            21
                                           -----------------------        -----------------------        -------
     Total expenses                        $18,575            110%        $14,752            132%           26%
                                           -----------------------        -----------------------        -------
---------------------------------------------------------------------------------------------------------------
</TABLE>


Revenue  increases  continue to be driven by growth in sales from three  primary
areas.  These areas  include  organizations  with major  intranets and corporate
portal installations,  Internet businesses and web content providers,  and major
integration and distribution partnerships.

The  first  area  of  revenue  growth  came  from  sales  of   RetrievalWare  to
organizations  with large intranets seeking to implement high performance search
and retrieval  software or replace existing search  technology.  Typically these
are maturing  corporate intranet sites dealing with expanding amounts of content
and multimedia  datatypes  that need to be effectively  accessed and utilized by
the  organization.  In the  first  half  of this  year,  intranet  or  knowledge
management market sales were 40% of all license revenues.

A second area of revenue growth came from sales of Excalibur  RetrievalWare  and
WebExpress to Internet web portals looking to provide customers with an enhanced
search experience. Typically these are online businesses that place a high value
on their content and whose  customers  demand the most accurate  search  results
from the greatest amount of  information.  In the first six months of this year,
online services sales comprised 21% of total license  revenues.  Overall,  there
are now  more  than 50  companies  using  Excalibur  products  to  power  online
information services and applications.

The third  area of growth  came  from  existing  OEM  partners  such as  Storage
Technology  Corporation  ("StorageTek")  and  major  new  partnerships  with NCR
Corporation,  a recognized  world leader in data  warehousing  solutions for the
retail, financial,  communications,  airlines and insurance markets;  Parametric
Technology Corporation, a leading provider of integrated product development and
lifecycle management solutions;  and BankTec, one of the largest distributors of
document management systems in Europe.

The Company's  partnership  with StorageTek  calls for the joint  development of
advanced solutions called Network Appliances which are integrated software, tape
and disk storage solutions that enable fast, easy and intelligent  management of
large amounts of corporate  information  ranging from  electronic text to video.
Currently  there are two new  appliances  that have been  built  upon  Excalibur
RetrievalWare  and  Excalibur  Screening  Room  products.  The Media  Management
Network Appliance  utilizing Excalibur Screening Room was first shipped in April
of  1999,  while  the  MessageVault   e-mail   appliance   utilizing   Excalibur
RetrievalWare  began  shipping at the end of July 1999. In the second quarter of
the current year,  the Company  recognized  approximately  $1.6 million from the
StorageTek  agreement.  The Company has now  completed  delivery of the products
under  the  terms of the  contract  and has  recognized  the last  payment  from
StorageTek for development. Revenues of approximately $5.1 million have been


                                       12
<PAGE>


recognized  from the  StorageTek  agreement  since its  inception.  The  Company
expects to earn additional  revenues from StorageTek after prepaid royalties are
sold through by earning royalties on the sales of the network appliances.

The licensing,  development and distribution  agreement with NCR, the largest in
the history of Excalibur,  gives NCR rights to use  Excalibur's  products in NCR
Teradata  warehouse  solutions  that NCR will announce this fall.  NCR will also
resell the full  Excalibur  product  line and offer the  Company's  applications
through its worldwide services and solutions group. NCR's initial  multi-million
dollar  investment is for licensing,  integration  and support which the Company
will  recognize as  development  milestones  are met. In addition,  NCR will pay
Excalibur  ongoing  royalties for data  warehouse  products it develops that use
Excalibur technology.  In the second quarter, the Company recognized revenues of
approximately  $1.3 million from the NCR agreement  which is being accounted for
on a percentage of completion basis.

According   to   the   agreement   with   Parametric   Technology    Corporation
("Parametrics"),  Parametrics  will integrate  RetrievalWare  into  Parametric's
Windchill release 3.0 which features  Enterprise  Product Modeling solutions for
connecting engineering  workgroups to the extended enterprise.  Parametrics will
sell the combined solution to customers worldwide and will pay Excalibur ongoing
royalties for each unit sold.

In addition,  Excalibur signed an agreement with INTERVU Corporation,  a leading
provider of Internet audio and video delivery solutions,  that calls for INTERVU
to use Excalibur  Screening Room to create a turnkey  service for the management
of video content over the Internet.  INTERVU will sell the service worldwide and
pay Excalibur a monthly fee for use of the software.

Overall,  the Company's  indirect sales strategy continues to focus on strategic
OEM agreements that provide significant revenue  opportunity.  OEM relationships
provided 39% of license revenues for the first half of the current year.

Maintenance revenues dropped 10% in the second quarter this year to $1.2 million
from $1.3 million in the second quarter last year. Maintenance revenues declined
9% compared to the first half of last year. The decrease is due to the continued
transition of the business from EFS to  RetrievalWare as well as the increase in
revenues  from  OEM  agreements  that  do  not  have   significant   maintenance
components.  While  the EFS  customer  base in  general  is not  renewing  their
maintenance contracts, the RetrievalWare base of maintenance contracts continues
to grow as RetrievalWare license sales grow, but the overall effect is a decline
in maintenance revenues in the current fiscal year.

Costs of Sales

Costs of sales  increased  52% to $1.8  million  in the  second  quarter  of the
current  year from $1.2 million in the second  quarter last year.  For the first
six months of the current  fiscal  year,  costs of sales  increased  55% to $3.4
million from $2.2 million in the first six months of last year.  The increase is
attributable to the sales volume  increase,  greater royalty expense  associated
with new  features  included in the  products,  and the  addition  of  technical
support  personnel for the StorageTek  products.  Costs of sales  expressed as a
percentage of total sales were 20% for both the second quarter and first half of
the current year  compared to 19% and 20% for the second  quarter and first half
of last year, respectively.

Operating Expenses

Sales and marketing  expenses increased 9% in the quarter ended July 31, 1999 to
$3.7 million from $3.4 million in the second quarter last year, representing 41%
and 56% of total  revenues,  respectively.  For the  first  half of the  current
fiscal year,  sales and marketing  expenses  increased to $7.6 million from $6.7
million  for the  corresponding  period last year,  representing  45% and 59% of
revenues,  respectively.  The  number of  employees  in the sales and  marketing
departments  has  increased  from the prior  year to  promote  and  support  the
increased  sales effort,  including the StorageTek  product line,  which did not
exist in the first half of the prior year.  The decrease in sales and  marketing
expenses as a  percentage  of total  revenues  is  attributed  to the  increased
revenues in the current fiscal year.

Total research and product  development  costs  increased 33% to $2.4 million in
the second  quarter of the current year compared with $1.8 million in the second
quarter last year, representing 26% and 29% of revenues,  respectively.  For the
six months ended July 31, 1999,  total research and development  costs increased
32% to $4.9 million from $3.7 million in the first six months of the prior year,
representing  29% and 33% of  total  revenues,  respectively.  The  increase  in
absolute  dollars is largely due to the  creation of the joint  development  lab
with StorageTek.  The lab,  established in the third quarter of fiscal 1999, has
integrated StorageTek products with


                                       13
<PAGE>


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.
Based on expected demand,  efforts were  accelerated to complete  development of
these  StorageTek  network  appliance  products.  Text and Visual  research  and
development  expenses  also  increased  in the first  half of the  current  year
compared to last year as the Company  continued to invest in the  enhancement of
its  RetrievalWare and Visual product lines. In the first quarter of the current
year, the Company released Excalibur Screening Room 2.0, a web-based, end-to-end
solution for real-time capturing, analyzing,  cataloguing,  browsing, searching,
retrieving  and publishing  video,  as well as related  closed-caption  text and
metadata,  in a range of applications.  The Company also recently  announced the
availability  of  RetrievalWare  version 6.7 and a new Power Search  Plug-in for
Lotus  Notes.   RetrievalWare  version  6.7's  new  features  include  automatic
categorization,   enhanced  XML  support,  and  experts  directories.  Automatic
categorization  eliminates  the need to build  complex  topic  trees.  The Power
Search  Plug-in for Lotus notes  allows  Lotus  customers  to power  search from
inside the Notes environment across data distributed enterprisewide.

General and administrative  expenses increased 41% in the second quarter to $1.4
million from $1.0 million in the second quarter last year,  representing 16% and
17% of total revenues,  respectively.  For the first half of this year,  general
and  administrative  expenses increased 21% to $2.7 million from $2.2 million in
the  first  half of last  year,  representing  16%  and 20% of  total  revenues,
respectively.  The increase in absolute  dollars is  attributable  to additional
corporate  expenses,  including  shareholder  and  legal  expenses,  as  well as
additions to bad debt expense associated with the increased revenues this fiscal
year.

Net interest income declined to $66,000 and $124,000, respectively, in the three
and  six  months  periods  ended  July  31,  1999  from  $81,000  and  $143,000,
respectively,  in the comparable periods last year due to a lower rate of return
on invested funds.  Prior to termination of the distribution  agreement with the
Company's  affiliate ETNV in May 1999,  the Company's  equity in the net loss of
ETNV was  $41,000 for the quarter  ended April 30,  1999.  For the three and six
month  periods  ended  July 31,  1998,  the  equity  in the net loss of ETNV was
$101,000 and $218,000,  respectively. The remaining balance of the investment in
ETNV of $430,000 was written off in the first quarter of the current fiscal year
as a result of the termination of the distribution agreement with ETNV.


                                       14
<PAGE>


Liquidity and Capital Resources

In the six months ended July 31, 1999, the Company's  combined  balance of cash,
cash  equivalents and short term  investments  increased by $2.0 million to $7.9
million  as  summarized  below (in  thousands).  At July 31,  1999,  investments
consist of a certificate of deposit pledged to collateralize a letter of credit.

                                  July 31,     January 31,
                                    1999          1999           Change
                                  --------     -----------       ------
      Cash and cash
          equivalents              $7,703         $5,851         $1,852
      Short term
          investments                 178             --            178
                                   ------         ------         ------
        Total                      $7,881         $5,851         $2,030
                                   ======         ======         ======


During the six months  ended July 31,  1999,  cash of $3.3  million used to fund
operating activities was more than the net loss of $2.1 million primarily due to
an increase in accounts  receivable of $2.9 million.  Non-cash  charges totaling
$1.5 million  included  depreciation  and  amortization  of $0.8 million and the
write off of the balance of the  investment in ETNV  totaling $0.4 million.  The
Company's  operating  activities  used $2.0 million in the six months ended July
31, 1998. The net loss of $3.6 million was partially  offset by depreciation and
amortization and a decrease in accounts receivable.

The high sales  volume and increase in the level of accounts  receivable  during
the first half of the current year resulted in an increase in the number of days
sales  outstanding  ("DSO")  at July 3l,  1999  compared  to January  31,  1999.
Management believes that the allowance for doubtful accounts of $594,000 at July
31, 1999 is adequate.

The Company's  investing  activities  used $0.7 million in the first half of the
current fiscal year. The purchase of a certificate of deposit used $0.2 million,
while purchases of equipment and leasehold  improvements  used $0.5 million.  In
the first half of last fiscal year, the Company's investing activities used $0.2
million  principally due to the purchase of marketable  securities and equipment
totaling $1.6 million offset by the proceeds from the maturity of certain of the
marketable securities.

Cash provided by financing  activities was $5.8 million for the six months ended
July 31, 1999. Net proceeds of $4.7 million were provided by a private placement
of  500,000  shares of common  stock  sold at $10.00  per share to  unaffiliated
accredited  investors,  most of whom are institutional  investors.  Cash of $1.1
million  was  provided  from the  exercise of  employee  stock  options and $0.1
million was provided from  issuances of stock under the employee  stock purchase
plan. For the six months ended July 31, 1998, financing activities provided $3.7
million.  Net proceeds of $3.3 million were  provided by a private  placement of
325,000  shares of  common  stock at $10.00  per  share  and  proceeds  from the
exercise  of stock  options  and  issuance  of stock  under the  employee  stock
purchase plan provided $0.5 million.

The Company  believes that its current cash and cash  equivalents  and its funds
generated  from  operations,  if any,  will be  sufficient to fund the Company's
current  projected  cash needs for the  remainder  of the current  fiscal  year.
Historically,  the  Company  has  primarily  used cash  provided by sales of its
common stock to finance its  operations.  If the actions taken by management are
not  effective in achieving  profitable  operating  results,  the Company may be
required to pursue  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.

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


                                       15
<PAGE>


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  dependent  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.

As of January  31,  1999,  the  Company  had 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
$2.1 million for the six months ended July 31, 1999. The accumulated  deficit of
the Company at July 31, 1999 was $57.9 million.  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  $3.2
million 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.


                                       16
<PAGE>


Year 2000

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 was effective for the Company's  October 31, 1998 interim
reporting.  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 are in the process of being 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 early in the fourth quarter of fiscal year 2000.

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
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 early in the  fourth  quarter of fiscal  year 2000.  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  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.


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<PAGE>


EURO Conversion

On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands,  Austria,  Italy, Spain, Finland,  Ireland,  Belgium Portugal,  and
Luxembourg)  were fixed  amongst one another  and became the  currencies  of the
EURO.  The currencies of the eleven  countries will remain in circulation  until
mid-2002.  The EURO currency will be introduced on January 1, 2002.  The Company
does not expect future  balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.

New Accounting Pronouncements

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities."  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.

The American  Institute of Certified Public  Accountants has issued Statement of
Position 98-9,  "Modification of SOP-97-2,  Software Revenue  Recognition,  With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the  Company's  fiscal year 2001.  The Company has evaluated SOP
98-9 and does not  believe  its  adoption  will  have a  material  effect on the
financial statements.

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  sales are made  mostly from ETIL,  the  Company's  foreign  sales
subsidiary,  and are  typically  denominated  in British  pounds.  The Company's
exposure to foreign exchange rate fluctuations  arises in part from intercompany
accounts in which  royalties  on ETIL sales are charged to ETIL and  recorded as
intercompany receivables on the books of the U.S. parent company. The Company is
also exposed to foreign exchange rate  fluctuations as the financial  results of
ETIL 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.


                                       18
<PAGE>


                           PART II-- OTHER INFORMATION


Item 1.  Legal Proceedings

On May 3, 1999 the Company  commenced a lawsuit against  Excalibur  Technologies
N.V.  (ETNV) in the United  States  District  Court for the Eastern  District of
Virginia  seeking as damages unpaid license fees and other amounts due and owing
from ETNV pursuant to a distribution  agreement  between the Company and ETNV of
approximately  $1.4 million.  On July 23, 1999, the Company reached an agreement
with ETNV resolving all of the issues raised by the litigation  commenced in May
and the litigation was discontinued.  No payment was made by ETNV as part of the
agreement.


Item 2.    Changes in Securities                                 None.


Item 3.    Defaults upon Senior Securities                       None.


Item 4.    Submission of Matters to Vote of Security Holders     None.


Item 5.    Other Information                                     None.


Item 6.    Exhibits and Reports on Form 8-K                      None.


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<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



September 13, 1999                  By: /s/ Patrick C. Condo
                                        ----------------------------------------
                                    Patrick C. Condo
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


September 13, 1999                  By: /s/ James H. Buchanan
                                        ----------------------------------------
                                    James H. Buchanan
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)


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