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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended January 31, 2003

Commission File Number 000-31989

CONVERACORPORATION
(Exact name of registrant as specified in its charter)

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 __

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

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes __ No |X|

The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 31, 2002 (based on the closing sales price as reported on the NASDAQ National Market System) was $22,159,993.

The number of shares outstanding of the registrant’s Class A common stock as of April 4, 2003 was 29,032,697.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.

The Index to Exhibits begins on Page 30

Table of Contents

PART I

Item 1.  Business

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

OVERVIEW

Convera designs, develops, markets, implements and supports enterprise search, retrieval and categorization solutions to power a broad range of mission critical applications including enterprise portals, knowledge management, intelligence gathering, profiling, corporate policy compliance, regulatory compliance, customer service and more. Convera believes its RetrievalWare® solutions offer customers a way to maximize their return on investment in vast stores of unstructured information by providing highly scalable, fast, accurate and secure search across more than 200 forms of text, video, image and audio information, in more than 45 languages. Convera also offers professional implementation services to ensure Convera products integrate seamlessly into customer environments, as well as training, consulting and maintenance services to facilitate full implementation and optimal use of its technologies.

Convera maintains an extensive portfolio of patented and proprietary technologies. Its core technologies include: advanced computational linguistics and semantic networking that leverage lexical knowledge using built-in knowledge bases to search not only for specific word meanings, but also for related terms and concepts; Adaptive Pattern Recognition Processing (“APRP”) that identifies patterns in digital data, providing the capability to build content-based analysis and retrieval applications for any type of digital information; and intelligent real-time video analysis that detects scene changes as they occur. In combination, these core technologies form the foundation on which Convera builds its products.

Convera was established through the combination of the former Excalibur Technologies Corporation (“Excalibur”) and Intel Corporation’s (“Intel”) Interactive Media Services (“IMS”) division. On December 21, 2000, Excalibur and Intel consummated a business combination transaction (the “Combination”) pursuant to an Agreement and Plan of Contribution and Merger, dated as of April 30, 2000, as amended, by and among Excalibur, Intel, the Company and Excalibur Transitory, Inc., a wholly owned subsidiary of the Company. All references in this Form 10-K to financial results for the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.

As of January 31, 2003 and 2002, Allen Holding, Inc., together with Allen & Company Incorporated and Herbert A. Allen (collectively “Allen & Company”) beneficially owns more than 50% of the voting power of Convera.

The Company can be contacted via email at invest@convera.com and visited at its web site, www.convera.com. Information on the Convera web site is not part of this Form 10-K.

Business Strategy

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 through license agreements with systems integrators, OEMs, value-added resellers, and other strategic partners. The Company’s technology may also be customized to meet specific needs of its customers. Convera conducts international sales activities through Convera Technologies International, Limited (“CTIL”), its wholly owned subsidiary in the United Kingdom, and CTIL offices in Germany and France.

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CONVERA PRODUCTS

PRODUCTS

Convera develops, markets, licenses, services and supports the Convera RetrievalWare product line of mission critical search and categorization products which form the basis for information retrieval and knowledge management solutions for corporate intranets, Internet e-commerce, online publishing and the OEM market. The RetrievalWare product line includes:

RetrievalWare® Search;
RetrievalWare® Categorization and Dynamic Classification;
RetrievalWare® Profiling;
Language Cartridges;
Domain Cartridges;
Taxonomy Cartridges;
RetrievalWare® Synchronizers;
Internet Spider;
RetrievalWare® FileRoom;
Screening Room®;
Screening Room® Capture;
RetrievalWare® SDK;
Screening Room® API's; and
Visual RetrievalWare®.

RetrievalWare®

             RetrievalWare® Search

RetrievalWare provides a secure, scalable information retrieval and knowledge discovery infrastructure utilizing advanced indexing, search and categorization technology. Offering what the Company believes to be unsurpassed scalability and accuracy, RetrievalWare’s distributed process architecture powers comprehensive software solutions that enable government agencies, commercial enterprises and any information-driven organization to integrate all information assets into a single point of access, to intuitively interact with and navigate that information to retrieve needed answers, and to effectively collaborate on retrieved information as the basis for achieving mission-critical objectives. By utilizing multi-mode searching built around Convera’s proprietary semantic network technologies, pattern matching (APRP) and Boolean search, RetrievalWare empowers users to securely access and retrieve mission critical information assets across multiple data types from a common user interface.

With Convera’s semantic networks and natural language processing, users easily find needed information. RetrievalWare incorporates syntax, morphology and the actual meaning of words. The baseline semantic network in the English language version was created from dictionary, thesauri and other reference sources, giving users a built-in knowledge base of approximately 500,000 word meanings, 50,000 language idioms and 1.6 million word associations. Users submit plain English queries that are automatically expanded to include related terms and concepts, thereby increasing the likelihood that highly relevant content will be returned. The software recognizes words at the root level, idioms and the multiple meanings of words. This approach eliminates the costs associated with defining keywords, building topic trees, establishing expert rules and sorting and labeling information in database fields. RetrievalWare also supports domain specific semantic networks to further enhance precision and recall in specific fields of interest, including: Biology, Chemistry, Computers, Electronics, Finance, Food Science, Geography, Geology, Health Sciences, Information Science, Law, Mathematics, MeSH, Military, Petroleum, Natural Gas & Petrochemicals, Pharmaceutical, Pharmacology, Physics, Plastics, Rubber and Telecommunications, as well as other disciplines which can be supported through standard development tools.

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APRP identifies patterns in digital information. In text applications, it provides fuzzy searching with a high degree of precision and recall, giving end users the ability to retrieve even approximations of search queries with a high degree of confidence that all of the requested information will be returned regardless of errors in spelling or the existence of inconsistencies in the data which may be caused by poor quality of optical character recognition processes. The software works at high speed and supports the rapid development of multi-language text-retrieval systems.

RetrievalWare supports more than 200 document formats stored on file servers, in groupware systems, relational databases, document management systems, intranets and the Internet. RetrievalWare provides real time profiling which enables users to create and save Real Time Agent Queries (Profiles) that will automatically collect incoming documents of interest. The RetrievalWare Profiling Server filters, stores and distributes incoming data from many sources including real-time news feeds, relational databases, paper repositories and the RetrievalWare Internet Spider.

RetrievalWare 7.0, released in March of 2002, provided what the Company believes was the industry’s first enterprise search product to offer multimedia and cross-lingual search as off-the-shelf product features. By providing users with a single product that simultaneously searches and organizes all data types (such as text, video, image and audio files) in multiple languages from a single user interface, customers do not have to buy and piece together several disparate systems to manage multiple data types and languages.

RetrievalWare provides access to both unstructured and structured information across enterprise networks, workgroup LANs, and intranets. The software may be deployed on a single server or across any number of distributed physical servers. RetrievalWare server solutions can be run on multiple platforms including leading UNIX and Windows NT platforms.

The RetrievalWare product line includes the following optional components:

             Categorization and Dynamic Classification

RetrievalWare’s innovative and highly scalable Categorization and Dynamic Classification solution enables the enterprise to bring consistency and scalability to the organizational structure of its information assets through the use of stable, industry standard taxonomy hierarchies. RetrievalWare uses one or more taxonomies to extract concepts and context from information assets. These assets can then be organized dynamically into specific views that reflect the unique information needs of the organization, as well as the personalized knowledge requirements of each individual. This powerful and flexible approach to organizing information facilitates knowledge discovery and collaboration among knowledge workers.

             Profiling

The RetrievalWare profiling capability automatically detects, routes and stores relevant documents in one or more user defined profiles, thus accelerating the proactive discovery of relevant information as it enters the RetrievalWare environment.

             Language, Domain and Taxonomy Cartridges

RetrievalWare provides highly accurate and relevant search and categorization results based upon its powerful and unparalleled linguistic processing capability. Through the use of robust semantic networks and taxonomies, covering many languages and domain specific fields of interest, RetrievalWare recognizes and processes words, phrases and concepts intelligently in the context within which they exist. The result is a comprehensive information search and retrieval solution enabling basic keyword search, advanced natural language and conceptual search, as well as information categorization in many languages and specified fields of interest. RetrievalWare’s scalable and robust linguistic processing methodology ensures complete, precise results and discovery of knowledge with the highest possible relevance. Language, Domain and Taxonomy Cartridges are provided as pre-packaged optional components to RetrievalWare. Convera also provides development tools that allow customers, partners or integrators to develop, edit and customize cartridge content to accommodate implementation specific needs and requirements.

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             Synchronizers

RetrievalWare Synchronizers provide document-level security for users to search the contents of multiple native repositories from a single point of access including Lotus Notes, Microsoft Exchange, Documentum, FileNET Panagon, native file systems and major relational database management systems and interfaces including MS SQL, Oracle, Sybase, Informix, Teradata and ODBC.

             Internet Spider

Internet Spider is a multimedia, high-performance Web spider/crawler for augmenting the retrieval capabilities of RetrievalWare, for stand-alone use, or for integration with other applications. In addition to HTML-based Web pages, Internet Spider also retrieves word processing, PDF and multimedia assets including audio, video and images. It is highly configurable and multi-threaded and can provide deep, broad and repetitive crawling. Users who want immediate notification when items of interest arrive can post Agent Profiles to pull links to related documents to their desktops. Components can be deployed on multiple machines for optimum performance and bandwidth.

             FileRoom

RetrievalWare FileRoom is built on RetrievalWare technology and is an optional component to allow loading, indexing, viewing and managing scanned documents, images and text. Users access the FileRoom through a hierarchy consisting of FileRoom documents, where each tier in the hierarchy is a container for storing documents. Users can directly view the scanned image of a retrieved document from the FileRoom. Graphs, diagrams, handwritten notations and signatures in the retrieved document are immediately accessible. “Fuzzy” searching capabilities provided by APRP give users a high level of confidence that their queries will return all of the requested information regardless of the quality of Optical Character Recognition (“OCR”) data. Document-level security lets organizations control user access at the FileRoom (library), cabinet, drawer, folder and document level.

             Screening Room®

Screening Room is an optional product to RetrievalWare Search that enables a comprehensive solution for video asset management providing scalable access, search and retrieval of video assets, both analog and digital, from any desktop. Used in conjunction with RetrievalWare Search, it provides for real-time capturing, encoding, analyzing, cataloging, browsing, searching and retrieving of video, as well as related captured text (closed captions or speech-to-text conversions) and metadata, over corporate intranets/extranets. Designed to manage video content in Internet portal and corporate intranet environments, Screening Room also supports media, broadcast and entertainment video asset management solutions. It enables users to easily capture analog or digital video, automatically create an intelligent video storyboard, and play it back in any of the industry’s standard video file formats. Screening Room users then can automatically browse, search and retrieve precisely what video clips they are looking for without having to play or watch the video in its entirety.

Screening Room consists of four components: Screening Room Capture, Screening Room Metadata Edit, Screening Room Explorer and Screening Room Video Asset Server. Screening Room Capture ingests, analyzes and storyboards analog or digital video assets, including live feeds, and extracts, indexes and searches associated metadata such as captured text (both closed-caption text and spoken audio content converted to text), keyframe images of significant scenes and annotations. Screening Room Metadata Edit enables users to browse, search, edit and annotate storyboards. In addition, users can select and compile clips from multiple video assets to create new derivative works, export files and metadata in industry-standard XML format, or output rough-cut edit segments to Edit Decision Lists (“EDLs”) for import into high-end offline editing systems. Screening Room Explorer allows user access to catalogs of video assets through any standard Web browser. The Video Asset Server indexes and stores captured video assets for instantaneous browsing, or search and retrieval via RetrievalWare.

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             Screening Room Capture (Stand-alone)

Screening Room Capture (Stand-alone) can be deployed as a stand-alone product. It provides the ability to log, analyze and encode video, and save the data and video assets in a non-proprietary (XML) format. Screening Room Capture does not require purchase of the entire RetrievalWare or Screening Room system, enabling loading of video assets and metadata into a third party database or content management system, or otherwise repurposing the asset. Screening Room Capture is also a suitable component for sale to OEM customers.

             RetrievalWare SDK

The RetrievalWare SDK (Software Developer’s Kit) is a comprehensive set of tools for building advanced search-based solutions. At its core is highly scalable, distributed client/server architecture. Independent server processes maximize the efficiency and reliability of document loading, indexing and query handling, and support security and encryption/decryption features. Dedicated server processes enable integration of text search and relational database storage capabilities through an open database management system (“DBMS”) gateway. The client environment is optimized for the development of graphical interfaces using industry standard tools such as Java and Visual Basic. RetrievalWare delivers Visual Basic custom controls, remote procedure calls and open server capabilities, as well as engine-level, high-level and client/server application program interfaces (“APIs”). These features speed the development of systems that can support thousands of users and contain custom functionality.

             Screening Room and Screening Room Capture API's

The Screening Room and Screening Room Capture API’s (Application Programming Interface) enable developers to integrate and control the Screening Room components from other programs and applications.

             Visual RetrievalWare

Leveraging the APRP technology, Visual RetrievalWare is a visual retrieval engine and a comprehensive image processing library and programmer’s toolkit that enables the development of client/server systems that automatically index and retrieve digital images. Users can search for visual information directly from their intranet, a corporate database, the Internet, or other sources using images or video clips as clues. Visual data is reduced to a searchable index that is typically less than 10% of the size of the original image and is automatically recognized based on its shape, color and texture. Users submit queries using examples of visual data or by authoring a visual clue with a graphical product. Based on the shape, color and texture of the visual clue, a list of similar or exact matches is returned. The product delivers its advanced retrieval capabilities in an open, flexible, scalable and secure architecture designed for ease of implementation, integration or extension.

TECHNICAL SUPPORT, IMPLEMENTATION SERVICES AND EDUCATION

Convera provides technical support, or maintenance, to customers through its technical support personnel located in the Company’s Columbia, Maryland, Carlsbad, California and Bracknell, United Kingdom facilities and through certain product distributors. Technical support consists of bug fixes, telephone support and upgrades or enhancements of particular software product releases when and if they become generally available. Technical support typically is provided to customers under a renewable annual contract. All Convera service plan customers have access to the Convera Online Technical Support Web site that provides the latest product information, general service updates and Web forums for technical discussions. The Web site also provides electronic forms for opening technical support cases and suggesting product, service and Company enhancements.

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

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MARKETING AND DISTRIBUTION

The Company’s sales and marketing strategy focuses on the licensing of Convera products to customers both through a direct sales force and through strategic partners and OEMs. Members of the North American sales team are primarily located throughout the United States, and the majority of the international sales team is located in the United Kingdom. The Company typically licenses its products to end-users as either an enterprise-wide or work-group level solution.

Convera focuses its sales and marketing efforts on enterprises that have large, rapidly changing content collections in diverse formats and have large numbers of knowledge workers. In that regard, the Company concentrates a significant amount of sales and marketing resources on vertical markets such as government, financial services, life sciences and technology.

Marketing efforts focus on building brand awareness and establishing demand for the Company’s products and include public relations, trade show participation, direct mail and electronic marketing campaigns, advertising and telemarketing/lead management activities. The Company’s home page on the World Wide Web, www.convera.com, is an integral part of its marketing and sales efforts, but information on the Company’s Web site is not a part of this Form 10-K. Through the Web site, prospective customers can learn about Convera’s suite of products and view online demonstrations of products. Existing customers can enroll in training courses and access password-protected areas for technical and other customer support.

PRODUCT DEVELOPMENT AND ADVANCED RESEARCH

The Company’s research and development program focuses on enhancing and expanding the capabilities of its products to address additional markets and market requirements. Over time and as the technology evolves, RetrievalWare will remain the basic building block of a modular suite of products. In addition to providing seamless access to both structured and unstructured data in the enterprise, this modular approach simplifies system administration for the customer and makes it easier for Convera to update existing features and add new components such as support for new data types and taxonomies for specific vertical markets.

In March of 2002, Convera announced the acquisition of Semantix Inc., a private Canadian software company specializing in cross-lingual processing and computational linguistics technology. The acquisition of Semantix, including its engineering personnel and intellectual property, broadens the linguistic capabilities of RetrievalWare, specifically in the areas of cross-lingual search and the continued development of language capabilities to support the needs of specialized vertical markets, such as the government intelligence community. Semantix became a wholly owned subsidiary of Convera under the name Convera Canada Inc.

Certain elements of the Company’s software products are supplied to the Company by other independent software vendors under license agreements with varying terms. Pursuant to these agreements, the Company makes periodic royalty payments generally based on either actual or anticipated revenues or units. The technologies acquired by the Company in this manner include word processing filters, optical character recognition engines, dictionaries and thesauri in electronic form, image and audio processing, and face and speech recognition technologies.

The Company has conducted research and product development of pattern recognition and natural language systems since 1980. Research and product development expenditures for the development of new products and enhancements to existing products were approximately $11.6 million, $22.5 million and $12.7 million, respectively, in the fiscal years ended January 31, 2003, 2002 and 2001.

PROTECTION OF PROPRIETARY TECHNOLOGY

The Company regards its software as proprietary and relies primarily on a combination of patents, copyright, trademark and trade secret laws of general applicability, employee confidentiality and invention assignment agreements, software distribution protection agreements and other intellectual property protection methods to safeguard its technology and software products. The Company also obtains trademark protection for its various product and corporate brand names and design logos. The Company has four patents and seven patent applications currently pending before the Patent and Trademark Office, each intended to protect technology-related assets of the Company. The Company also relies upon its efforts to design and produce new products and upon improvements to existing products to maintain a competitive position in the marketplace.

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COMPETITION

Competition in the information technology industry in general, and the software development industry in particular, is intense. Convera competes primarily in the search, retrieval and categorization market. Within this market, there are current and potential competitors who are larger and more established than Convera and have significantly greater financial, technical, marketing and other resources. Convera considers its principal competitive advantages to be an environment that is: (1) more scalable due to the distributed-processing architecture, (2) more accurate results due to the semantic network and APRP technologies, and (3) more comprehensive results due to its ability to manage and retrieve information in multiple languages and in rich media file formats.

Convera competes with numerous companies depending on the target market for its products. Most often, Convera competes directly with companies such as Verity, Inc. and Autonomy Corporation plc. to provide search solutions to the corporate intranet, Internet e-commerce, online publishing and the OEM market. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competition will not materially adversely affect the Company’s operating results and financial condition.

The Company’s activities currently are subject to no particular regulation by governmental agencies other than those routinely imposed on corporate businesses and no such regulation is now anticipated.

SEGMENT INFORMATION

The Company has one reportable segment. All of the Company’s revenues are from third party customers.

Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately $6.6 million, $4.9 million and $5.0 million, respectively, in the fiscal years ended January 31, 2003, 2002 and 2001. These revenues, expressed as a percentage of total revenues for the fiscal year, were approximately 28%, 14% and 10%, respectively. For the fiscal year ended January 31, 2003, no individual customer accounted for more than 10% of the Company’s total revenues.

Financial information is located in the consolidated financial statements beginning on page F-2. Additional information related to segment reporting can be found in Note 15 to the consolidated financial statements contained herein.

EMPLOYEES

The Company had 241 employees at January 31, 2003, of whom 94 were in research and development, 77 in sales and marketing, 39 in technical support, professional services and training and 31 in finance and administration. The employees are not covered by collective bargaining agreements, and the management of the Company considers relations with employees to be good. Competition for qualified personnel within the Company’s industry is intense. There can be no assurance that the Company will be able to continue to attract, hire or retain qualified personnel and the inability to do so could have a material adverse effect upon the Company’s operating results and financial condition.

RISK FACTORS

The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial also may impair the Company’s business operations. If any of the following risks actually occur, the Company’s business, results of operations and financial condition would suffer. In that event, the trading price of Convera common stock could decline, and Convera’s stockholders may lose all or part of their investment in Convera’s common stock. The discussion below and elsewhere in this report also includes forward-looking statements, and the Company’s actual results may differ substantially from those discussed in these forward-looking statements as a result of the risks discussed below.

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        The Company has had a history of operating losses and may incur future losses

The Company believes that its future profitability will depend on its ability to effectively market existing and newly-developed software products through a balanced multi-channel distribution network. Convera cannot assure that its costs to develop, introduce and promote enhanced or new products will not exceed its expectations, or that these products will generate revenues sufficient to offset these expenses. The Company has operated at a loss for each of the past three fiscal years. These losses reflect the Company’s expenditures associated with selling software products and further developing software products during these years. Convera plans to continue to invest in the development, sales and marketing of its products and, accordingly, the Company cannot assure that its operating losses will not continue in the future.

        The Company experiences quarterly fluctuations in its operating results, which may adversely affect the Company’s stock price

Convera’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 including the following:

• the downturn in capital spending by customers as a result of the current economic slowdown;
• the delay or deferral of customer implementations;
• the budget cycles of the Company’s customers;
• seasonality of individual customer buying patterns;
• an increase in competition in the software industry;
• the size and timing of individual transactions;
• the timing of new software introductions and software enhancements by the Company and its competitors;
• changes in operating expenses and personnel;
• changes in accounting principles, such as a requirement that stock options be included in compensation, as is currently being considered by Congress and, which, if adopted, would increase the Company’s compensation expense and have a negative effect on earnings;
• the overall trend towards industry consolidation; and
• changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries.

In particular, Convera’s period-to-period operating results have historically been significantly dependent upon the timing of the closing of significant license agreements. Because purchasing the Company’s products often requires significant capital investment, Convera’s customers may defer or decide not to make their purchases. This means sales can involve long sales cycles of six months or more. The Company has generally recorded a significant portion of its total quarterly license revenues in the third month of a quarter, with a concentration of these revenues occurring in the last half of that third month. This is in part because customers tend to make significant capital expenditures at the end of a fiscal quarter. The Company expects these revenue patterns to continue. Despite these uncertainties in Convera’s revenue patterns, its operating expenses are based upon anticipated revenue levels and 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.

        A portion of the Company’s revenues is derived from sales to federal government agencies, which are subject to budget cuts. The ability to complete contracts with the federal government, and size and timing of those contracts may materially affect the Company’s operating results

Revenues derived from sales to federal government agencies were approximately 28%, 14% and 10% of total revenues in fiscal years 2003, 2002 and 2001, respectively. While the federal government has recently increased spending on defense and homeland security initiatives, many government agencies have had budget freezes or reductions which may adversely impact their purchasing decisions and timing.

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The Company is actively pursuing several opportunities for business with certain U.S. Government agencies. While the nature and timing of these opportunities, as well as the ability to complete business transactions related to these opportunities, is subject to certain risks and uncertainties, successful completion of any of these transactions could have a material impact on the future operating results and financial position of the Company. There can be no assurance that the Company will complete any of these potential transactions.

        The Company is dependent on international sales, which expose it to foreign political and economic risks

A material portion of Convera’s revenues is derived from international sales. The Company’s international operations expose it to a variety of risks that could impede the Company’s financial condition and growth. These risks include the following:

• difficulties in complying with regulatory requirements and standards;
• political, social and economic instability;
• longer accounts receivable and payment cycles;
• trade restrictions and changes in tariffs;
• potentially adverse tax consequences;
• import and export license requirements and restrictions;
• fluctuations in currency exchange rates; and
• uncertainty of the effective protection of the Company’s intellectual property rights in certain foreign countries.

If any of these risks described above materialize, the Company’s international sales could decrease and its foreign operations could suffer.

        Convera is in a competitive market, and if the Company fails to compete effectively or respond to rapid technological change, its revenues and market share will be adversely affected

The Company’s business environment and the software industry in general are characterized by intense competition, rapid technological changes, changes in customer requirements and emerging new market segments. Convera’s competitors include many companies which are larger and more established and have substantially more resources than it does. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the markets served by Convera. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company’s business, financial condition or results of operations.

In order for Convera’s strategy to succeed and to remain competitive, it must leverage its core technology to develop new product offerings. These development efforts are expensive. If these products do not generate substantial revenues, the Company’s business and results of operations will be adversely affected. The Company cannot assure that any of these products will be successfully developed, completed on a timely basis or at all, achieve market acceptance or generate significant revenues.

        Convera designs its products to work with certain systems and changes to such systems may render Convera’s products incompatible with these systems

Convera’s ability to sell its products depends on the compatibility of its products with other software and hardware products. These products may change or new products may appear that are incompatible with the Company’s products. If the Company fails to adapt its products to remain compatible with other vendors’ software and hardware products or fails to adapt its products as quickly as its competitors, Convera may be unable to sell its products.

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        The Company’s software products are complex and may contain errors that could damage its reputation and decrease sales

Convera’s complex software products may contain errors that may be detected at any point in the products’ life cycles. The Company cannot assure that, despite Convera’s testing and quality assurance efforts and similar efforts by current and potential customers, errors will not be found. The discovery of an error may result in loss of or delay in market acceptance and sales.

        The Company is dependent on proprietary technology licensed from third parties, the loss of which could delay shipments of products incorporating this technology and could be costly

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

        Because of the technical nature of Convera’s business, its intellectual property is extremely important to Convera’s business, and adverse changes to its intellectual property would harm the Company’s competitive position

Convera believes that its success depends, in part, on its ability to protect its proprietary rights and technology. Historically, Convera has relied primarily on a combination of copyright, patents, trademark and trade secret laws, employee confidentiality and invention assignment agreements, distribution and OEM software protection agreements and other methods to safeguard the Company’s technology and software products. Risks associated with the Company’s intellectual property, include the following:

• pending patent applications may not be issued;
• intellectual property laws may not protect the Company’s intellectual property rights;
• third parties may challenge, invalidate, or circumvent any patent issued to the Company;
• rights granted under patents issued to Convera may not provide competitive advantages to the Company;
• unauthorized parties may attempt to obtain and use information that Convera regards as proprietary despite Convera’s efforts to protect its proprietary rights;
• others may independently develop similar technology or design around any patents issued to Convera; and
• effective protection of intellectual property rights may be limited or unavailable in some foreign countries in which the Company operates.

        The Company's operations could infringe on the intellectual property rights of others

The Company cannot assure that a third party will not assert that the Company’s technology violates its intellectual property rights. Particular aspects of Convera’s technology could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to the Company’s business. The Company cannot predict the extent to which it may be required to seek licenses or alter its products so that they no longer infringe the rights of others. The Company cannot guarantee that the terms of any licenses it may be required to seek will be reasonable. Similarly, changing Convera’s products or processes to avoid infringing the rights of others may be costly or impractical or could detract from the value of the Company’s products.

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        If Convera is unable to manage its growth successfully, it may divert Convera’s resources and harm its operating results

The Company’s future operating results will be affected by its ability to expand its product distribution channels and to manage its expected growth. Convera’s future results may also be impacted by its ability to execute future acquisitions and integrate the operations of acquired companies with Convera’s. If Convera cannot effectively manage its expanding operations, it may not be able to grow, or the Company may grow at a slower pace. Convera’s failure to successfully manage growth and to develop financial controls and accounting and operating systems or to add and retain personnel that adequately support the Company’s growth would harm its business and financial results.

        Convera depends on its key personnel and may have difficulty attracting and retaining skilled employees

Convera’s success depends to a significant degree upon the continued contributions of its key management, marketing, technical and operational personnel. The Company generally does not utilize employment agreements for its key employees. The loss of the services of one or more key employees could have a material adverse effect on the Company’s operating results. The Company also believes its future success will depend in large part upon its ability to attract and retain additional highly skilled management, technical, marketing, product development, and operational personnel. Competition for such personnel is intense, and pay scales in the software industry have significantly increased. There can be no assurance that the Company will be successful in attracting and retaining such personnel.

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

As of January 31, 2003, the Company had net operating loss carryforwards of approximately $142 million. The deferred tax assets representing the benefits of these carryforwards have been offset completely by a valuation allowance due to the Company’s lack of an earnings history. The realization of the benefits of these carryforwards depends on sufficient taxable income in future years. Lack of future earnings could adversely affect Convera’s ability to utilize these carryforwards. Additionally, past or future changes in Convera’s ownership and control could limit the ability to utilize these carryforwards. Despite the carryforwards, the Company may have income tax liability in future years due to the application of the alternative minimum tax rules of the United States Internal Revenue Code.

        The Company may need additional capital in the future, and it may not be available on acceptable terms, or at all

The Company expects that its current cash and cash equivalents will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. However, the Company may need to raise additional funds for the following purposes:

• to fund the Company's operations;
• to fund any growth the Company experiences;
• to enhance and/or expand the range of services Convera offers;
• to increase the Company's promotional and marketing activities; or
• to respond to competitive pressures and/or perceived opportunities, such as investment, acquisition and international expansion activities.

The Company canno assure that necessary capital will be available, and if so, on terms beneficial to the Company.

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        Convera's stock price may fluctuate which may make it difficult to resell shares of Convera stock

The market price of Convera’s common stock and its trading volume have been highly volatile. This volatility may adversely affect the price of Convera’s common stock, and Convera stockholders may not be able to resell their shares of common stock following periods of volatility because of the market’s adverse reaction to this volatility. The Company anticipates that this volatility, which frequently affects the stock of software companies, will continue. Factors that could cause such volatility include:

• future announcements concerning Convera or its competitors;
• quarterly variations in the Company's operating results;
• actual or anticipated announcements of technical innovations or new product developments by Convera or its competitors;
• general conditions in the Company’s industry;
• intellectual property or other litigation; and
• worldwide economic and financial conditions.

On occasion, the equity markets, and in particular the markets for software companies, have experienced significant price and volume fluctuations. These fluctuations have affected the market price for many companies’ securities even though the fluctuations are often unrelated to the companies’ operating performance.

        The Company’s amended and restated certificate of incorporation, bylaws, ownership and Delaware law contain provisions that could discourage a third party from acquiring the Company and consequently decrease the market value of an investment in Convera stock

Some provisions of the Company’s amended and restated certificate of incorporation and bylaws and of Delaware law could delay or prevent a change of control or changes in the Company’s management that a stockholder might consider favorable. Any delay or prevention of a change of control or change in management could cause the market price of the Company’s common stock to decline.

Further, Allen Holding, Inc., together with Allen & Company Incorporated and Herbert A. Allen (collectively “Allen & Company”) beneficially owns more than 50% of the voting power of Convera, and would therefore be able to control the outcome of matters requiring a stockholder vote. These matters could include offers to acquire Convera and elections of directors. Allen & Company may have interests which are different than the interests of other Convera stockholders.

Item 2.  Properties

The Company’s corporate headquarters facility is occupied under a lease agreement that expires in calendar year 2004 for a total of approximately 20,500 square feet of space in an office building located at 1921 Gallows Road, Vienna, Virginia 22182.

The Company’s principal development and customer support centers are located in Carlsbad, California and Columbia, Maryland. The Company leases additional space in San Jose, California and Montreal, Canada.

The Company also leases space in Bracknell, England and commercial office suites in Paris, France, and in Munich, Germany in support of its international sales operation.

The Company believes that its facilities are maintained in good operating condition and are adequate for its operations.

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Item 3.  Legal Proceedings

On November 1, 2001, DSMC, Incorporated (“DSMCi”) filed a complaint against the Company in the U.S. District Court for the District of Columbia in which it alleged that the Company misappropriated DSMCi’s trade secrets, engaged in civil conspiracy with the NGT Library, Inc. (“NGTL”), an affiliate of the National Geographic Society, to obtain access to DSMCi’s trade secrets, and was unjustly enriched by the Company’s alleged access to and use of such trade secrets. In its complaint, DSMCi seeks $5.0 million in actual damages and $10.0 million in punitive damages from the Company. DSMCi subsequently amended its complaint to add copyright infringement-related claims. The Company is in the process of investigating the allegations and at this time believes that they are without merit. From time to time, the Company is a party to various legal proceedings, claims, disputes and litigation arising in the ordinary course of business, including that noted above. The Company believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse affect on its financial position, operations or cash flow. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions or future actions be unfavorable, Convera’s financial position, operations and cash flows could be materially and adversely affected.

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

None.

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PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The Company’s Class A common stock is traded in the over-the-counter market and is listed on the National Market System of the NASDAQ Stock Market under the symbol “CNVR.” As a result of the Combination, the Excalibur common stock, traded under the symbol “EXCA,” ceased to be listed on the Nasdaq National Market. In the Combination, the Excalibur common stock was converted on a one-for-one basis into Convera Class A common stock. 

The following table sets forth the high and low sale prices for Convera common stock for the period from February 1, 2001 through January 31, 2003, as reported by the National Market System of NASDAQ. The number of shareholders of record as of January 31, 2003 was 990. The Company has never declared or paid dividends on its common stock and anticipates that, for the foreseeable future, it will not pay dividends on its common stock.

The following table sets forth, as of January 31, 2003, information with respect to the Company's equity compensation plans:

During our fiscal year ended January 31, 2003, the Company issued shares of Class A common stock that were not registered under the Securities Act of 1933, as amended (the “1933 Act”), at the time of issuance, as described below:

On March 7, 2002, the Company issued 900,000 shares of restricted Class A common stock and approximately $24,000 in cash for 100% of the outstanding capital stock of Semantix Inc., a private Canadian software company specializing in cross-lingual processing and computational linguistics technology. Exemption from registration for this transaction was claimed under Regulation D of the 1933 Act because this transaction did not involve a public offering within the meaning of Section 4(2) of the 1933 Act, and all of the conditions of Regulation D were met.

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Item 6.  Selected Financial Data

The selected financial data presented below have been derived from the Company’s consolidated financial statements. The balance sheet data as of January 31, 2003 and 2002, and the statement of operations data for the fiscal years ended January 31, 2003, 2002 and 2001 should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

All references in this Form 10-K to financial results of the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.

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

Overview

The Company principally earns revenues from the licensing of its software products and the provision of services in deployment of the Company’s technology to 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 system integrators, original equipment manufacturers, value-added resellers, application service providers and other strategic partners. Revenues are generated from software licenses with customers and from the related sale of product maintenance, training and implementation support services. Additions to the number of authorized users, licenses issued for additional products and the renewal of product maintenance arrangements by customers pursuant to existing licenses also provide revenues to the Company. Under software maintenance contracts, customers are typically entitled to receive telephone support, software bug fixes and upgrades or enhancements of particular software products when and if they are released.

Convera was established through the combination of the former Excalibur Technologies Corporation and Intel Corporation’s Interactive Media Services division (the “Combination”). On December 21, 2000, Excalibur and Intel consummated the Combination pursuant to an Agreement and Plan of Contribution and Merger, dated as of April 30, 2000, as amended, by and among Excalibur, Intel, the Company and Excalibur Transitory, Inc., a wholly owned subsidiary of the Company. At the completion of the Combination, Excalibur became a wholly owned subsidiary of the Company, each outstanding share of Excalibur common stock was converted into one share of Class A common stock of the Company, and Intel contributed to the Company its IMS division, intellectual property assets and other assets used by that division, as well as $150 million in cash at closing, in exchange for 14,949,384 shares of Class A common stock of the Company and 12,207,038 shares of Class B non-voting common stock of the Company.

The Combination was accounted for using the purchase method of accounting. The purchase price for the IMS division was determined to be approximately $925.1 million, which included approximately $2 million in transaction costs, less approximately $0.6 million in costs to register and issue the shares. The shares issued to Intel as consideration for the contributed assets were valued based on the existing market price when the Combination was announced. The purchase price was allocated to the assets acquired based on their estimated fair values on the acquisition date. In connection with the Combination, the Company recorded approximately $769.8 million in goodwill and recorded a charge for acquired in-process research and development (“IPRD”) of approximately $0.8 million in the fiscal year ended January 31, 2001. The purchased IPRD represented the present value of the estimated after-tax cash flows to be generated by the purchased technology, which, at December 21, 2000, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of market size and growth factors, expected industry trends, the anticipated nature and timing of product introduction and the estimated life of the underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after tax cash flows. Projected operating expenses include cost of sales, sales and marketing and general and administrative expenses. The other intangible assets acquired from Intel included certain developed technology and an existing workforce as well as certain existing and in-process customer contracts.

In September 2000, Intel and the NBA entered into a master services agreement, which Intel contributed to Convera on December 21, 2000, for the distribution of personalized highlights, archival material, television broadcast enhancements and real time distribution of NBA games over broadband networks. In addition to the services agreement, Convera entered into a contribution agreement with the NBA, under which the NBA contributed certain intangible assets such as all of the NBA know-how related to the creation, development, distribution, marketing and deployment, over the Internet and broadband networks, of products using sports and entertainment content; a database of customer profiles of NBA fans; the right to use certain NBA personnel and a non-exclusive license to the NBA trademark. In exchange for the contribution of these assets, Convera issued 4,746,221 shares of Class A common stock to the NBA, representing 10% of the total outstanding stock of the Company on that date.

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At the time of the Combination, the IMS division had contracts in process that were being accounted for using the completed contract method, and accordingly, revenue was deferred until all remaining costs, obligations and potential risks were insignificant and the contract deliverables were agreed to and accepted by the customer. Convera continued to account for the existing contributed contracts using the completed contract method of accounting. For purposes of determining the value of these contributed contracts at the date of acquisition, management considered the total amounts to be received under each contract. When each of these contracts was completed by Convera, revenue and the related costs were recognized. During fiscal year 2002, the Company completed all obligations under the in-process contracts assigned by the IMS division, and accordingly recognized revenue during the year of about $1.7 million related to these contracts. The costs associated with these contracts recorded during fiscal year 2002 were approximately $0.9 million. Existing contracts that were completed prior to January 31, 2001 resulted in aggregate revenue recognition for fiscal year 2001 of approximately $7.6 million in services revenues and approximately $0.7 million in software revenues. The costs associated with these contracts were approximately $7.5 million included in cost of services revenues and approximately $0.4 million included in cost of software revenues.

On September 20, 2001, the Company announced that it had terminated its agreement with the NBA to provide interactive content services. On October 3, 2001, the Company announced a restructuring plan to consolidate all operations around the development, marketing, sales and support of its enterprise class information infrastructure software products, RetrievalWare and Screening Room. The Company also announced that it was eliminating operations supporting the development of the Company’s digital content security technology and interactive services offerings and closing offices in Hillsboro, Oregon and Lafayette, Colorado.

Following the termination of the NBA contract and the Company’s change in focus, the Company evaluated the recoverability of the intangible and other long-lived assets including goodwill associated with the Combination and associated with the NBA agreement. The intangible assets acquired in the Combination, including developed technology, customer contracts and assembled workforce, were primarily related to the interactive media services offerings. As a result of the evaluation, the Company recorded a charge of $754.4 million in the third quarter of fiscal year 2002 for reduction of goodwill and other long-lived assets.

On December 5, 2001, the Company reported that it purchased the 4,746,221 shares of Convera Class A common stock owned by the NBA for $11 million in a privately negotiated transaction. On January 7, 2002, the Company reported that it purchased 2,792,962 shares of Convera’s voting Class A common stock and 12,207,038 shares of Convera’s non-voting Class B common stock from Intel, which were all of the outstanding shares of Class B common stock, for a total of $42 million in a privately negotiated transaction. The Company also reported a simultaneous transaction between Allen Holding Inc. and Intel Corporation, whereby Allen Holding Inc. purchased the remaining 12,156,422 shares of Convera Class A common stock owned by Intel, resulting in Allen Holding Inc., together with its President and CEO, Herbert A. Allen, and its wholly owned subsidiary, Allen & Company Incorporated, beneficially owning 55.2% of the outstanding shares of Convera Class A common stock. Intel and the N