Forward Looking Statements

The statements contained in the following discussion that are not purely historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements about the expectations, beliefs, intentions or strategies regarding the future of our business. Words such as "expects," "intends," "plans," "projects," "believes," "estimates," and similar expressions are used to identify these forward-looking statements. These include, among others, statements regarding our future expectations, performance, plans and prospects as well as assumptions about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. The forward-looking statements contained herein involve risks and uncertainties discussed in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008, as updated in this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of such factors, including those set forth in our Annual Report and Quarterly Report.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2008, this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto as filed with the Securities and Exchange Commission.

We provide vertical search services to trade publishers. Our technology and services help publishers to build a loyal online community and increase their internet advertising revenues. With the use of our vertical search services, our customers can create search engines customized to meet the specialized information needs of their audience by combining publisher proprietary content with an authoritative subset of the Web. On March 31, 2007, we agreed to sell the assets of our Enterprise Search business for $23.0 million in cash to FAST. This transaction closed on August 9, 2007 with FAST assuming certain obligations of the business and retaining certain employees serving its Enterprise Search customers. Accordingly, revenues and expenses and cash flows related to the Enterprise Search business have been reflected as discontinued operations in the accompanying Consolidated Statements of Operations and of Cash Flows for the nine months ended October 31, 2007. See further discussion in Note 3, "Discontinued Operations" in the Notes to Consolidated Financial Statements.

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

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

Trends

As of October 31, 2008, Convera has 82 vertical search websites with 28 separate publishers under contract, with 45 of these vertical search sites in production and 37 of the websites in development awaiting launch. At October 31, 2007, Convera had 48 vertical search websites from 17 publishers under contract, of which 25 were in production and 23 were in development awaiting launch.

Our strategy for fiscal 2009 is to continue to target the top 50 B2B publishers in the United States and United Kingdom, which have an estimated 2,000 plus relevant trade magazine titles that have the economic attributes necessary to support search-based websites. For both newly signed and current customers, our expectation is that the publishers will launch vertical search-based websites in a much shorter period of time than was typical in fiscal 2008 due to the release of version 2 of our Publisher Control Panel. The tools included in this version of the Publisher Control Panel shortens the time required to launch a site from nine months to less than a month, which should translate into our receiving advertising based revenues sooner than in prior periods.

The majority of the revenues earned for fiscal year 2008 represented contract minimum amounts for hosted services. We expect continued growth in hosted service fee revenues, as our new and renewal contracts with publishers will typically contain a minimum service fee for our vertical search services. We also expect advertising share based revenue growth as new and existing websites build traffic and subsequently increase their advertising sales. We may experience slower advertising share growth during the coming quarters due to the economic slowdown that has been generally experienced in 2008, which is expected to continue into 2009. Industry analysts and several of our customers are expecting lower ad revenues and slower online ad growth which we believe could consequently result in lower revenues in the coming quarters from our revenue sharing contracts with publishers.

We also have launched the Convera Ad Service ("CAS") as an integral part of our vertical search services, which should result in additional advertising share revenues for us. CAS will enable publishers to better manage the monetization of their professional communities' search experiences and increase the effectiveness of search-based revenues on their websites. CAS can also connect the publisher websites directly with the providers of advertising inventory, increasing the opportunities for the websites to grow their advertising revenues.

In July 2008, we signed a contract with Microsoft to offer and distribute its FAST ESP360 product as a hosted service to the Company's and to Microsoft's customers. This site search product is being integrated with our Publisher Control Panel; we expect to commercially launch this service in January 2009. After site search is integrated with our vertical search capabilities, our customers will be able to serve advertisements against both web search and searches through the content on their websites and thereby expand their revenue base. Software license-based site search does not allow the owners an easy way to put advertisements against the site search results.

In November 2008, as a result of our continued movement to a self service sales model and streamlining of our sales process, we took action to reduce the cost structure of our sales, marketing and customer service functions. This streamlining action has resulted in reducing our sales, marketing and customer service headcount by nine and will lead to the shut down our UK sales office by fiscal year end. As a result of these actions, the Company will record severance expense of approximately $400,000 in the quarter ending January 31, 2009. We believe that this stream lining action will allow us to continue to serve our customers effectively while substantially reducing our operating costs.

The combined reduction in expenses and potential increase in revenues should result in a decrease in the loss from continuing operations in fiscal 2009. During the quarter ended October 31, 2008 we evaluated the carrying value of the long-lived assets related to our web hosting facility for impairment in accordance with SFAS No. 144. Current revenue projections indicate that the future cash flows utilized for impairment analysis exceed the carrying value of the long-lived assets related to web hosting and as such we have not recorded an impairment charge. However, if anticipated revenues do not materialize to a level where expected future cash flows from these assets are greater than their carrying value an impairment charge may be recorded to our results of operations in the future.

Recently Issued Accounting Standards

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. ("FSP No. 142-3") FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The objective of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(revised 2007), Business Combinations, ("SFAS No. 141(R)") and other U.S. GAAP. FSP No. 142-3 applies to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. We are in the process of evaluating FSP No. 142-3 and do not expect its adoption to have a significant impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141 (R) establishes principles and requirements for how the acquirer in a business combination should recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase and determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141(R) shall be applied prospectively to business combinations with acquisition dates on or after the beginning of the first annual reporting period in which it is initially applied. SFAS No. 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect SFAS No. 141(R) to have a significant impact on our consolidated financial statements upon adoption.

Recently Adopted Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), Fair Value Measurements. SFAS 157 provides guidance for measuring the fair value of assets and liabilities. It requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. It does not require any new fair value measurements. SFAS 157 became effective for us beginning February 1, 2008 and did not have a material impact on our consolidated results of operations and financial condition.

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

For the three months ended October 31, 2008, total revenues from continuing operations were $0.2 million, as compared to revenues of $0.3 million for the three months ended October 31, 2007. The loss from continuing operations for the three months ended October 31, 2008 was $6.0 million, or $(0.11) per common share, compared to a loss from continuing operations of $5.9 million, or $(0.11) per common share for the three months ended October 31, 2007. The net loss for the three months ended October 31, 2008 was $6.0 million, or $(0.11) per common share, as compared to a net income of $11.7 million or $0.22 per common share for the three months ended October 31, 2007. The results for the three months ended October 31, 2007 include $17.5 million of income from the completion of the sale of the discontinued RetrievalWare Enterprise Search business to FAST in August 2007.

For the nine months ended October 31, 2008, total revenues from continuing operations were $1.1 million, as compared to revenues of $0.8 million for the nine months ended October 31, 2007. The loss from continuing operations for the nine months ended October 31, 2008 was $15.0 million, or $(0.28) per common share, compared to a loss from continuing operations of $19.6 million, or $(0.37) per common share for the nine months ended October 31, 2007. The net loss for the nine months ended October 31, 2008 was $15.0 million, or $(0.28) per common share, as compared to a net loss of $2.1 million or $(0.04) per common share for the nine months ended October 31, 2007. The results for the nine months ended October 31, 2007 include $17.5 million of income from the completion of the sale of the discontinued RetrievalWare Enterprise Search business to FAST in August 2007.

Three Months Ended October 31, 2008 as Compared to Three Months Ended October 31, 2007

The following chart summarizes the components of revenues and the categories of expenses, including the amounts expressed as a percentage of total revenues, for the three months ended October 31, 2008 and 2007, respectively.

                                                Components of Revenue and Expense                Increase
                                                  Three Months Ended October 31,                (Decrease)
                                         2008            %           2007             %              %
Continuing Operations:

Revenue                               $      239           100 %   $     259           100 %            -8 %

Expenses:
Cost of revenues                           1,892           792 %       2,457           949 %           -23 %
Sales and marketing                          911           381 %         772           298 %            18 %
Research and product development           1,216           509 %       1,140           440 %             7 %
General and administrative                 2,288           957 %       2,239           864 %             2 %
Total operating expenses                   6,307          2639 %       6,608          2551 %            -5 %

Operating loss                            (6,068 )                    (6,349 )                          -4 %

Other income, net                             98                         482

Loss before taxes                         (5,970 )                    (5,867 )

Income tax expense ( benefit)                  -                           -

Loss from continuing operations           (5,970 )                    (5,867 )

Discontinued Operations:
Income from discontinued operations            -                      17,519

Net( loss) income                     $   (5,970 )                 $  11,652

Continuing Operations:

Revenues

Hosted services revenue from our vertical search services offering for the three months ended October 31, 2008 declined 8% to $0.2 million from $0.3 million for the three months ended October 31, 2007. This decrease is primarily due to the expiration of a minimum revenue commitment from a customer in August 2008. Revenue for three months ended October 31, 2007 included $0.2 million in minimum revenue recognized from servicing this customer. As a result of a contractual dispute, the $50,000 in revenue share due from this customer under its contract for the third quarter have been recorded as deferred revenue at October 31, 2008 and will not be recognized as revenue until collectibility is probable.

As of October 31, 2008, there were a total of 45 Convera supported websites in production compared to 25 at the end of the third fiscal quarter last year.

Revenue from international operations is generated from publishers located primarily in the United Kingdom. Our international sales operation, Convera Technologies International, Ltd. ("CTIL"), is headquartered in the United Kingdom. International revenues were $0.1 million and $0.2 million for the three months ended October 31, 2008 and 2007, respectively.

Two customers accounted for a total of 53% of the revenues generated in the three months ended October 31, 2008, accounting for 32% and 21%, respectively. A single customer accounted for 90% of the revenues generated during the three months ended October 31, 2007.

Operating Expenses:

Cost of Revenues

Our hosted services cost of revenue decreased 23% to $1.9 million for the three months ended October 31, 2008 from $2.5 million for the three months ended October 31, 2007. This decrease is principally attributable to a $0.2 million decrease in hosting costs due to the termination of the agreement with AT&T for the San Diego hosting center in January 2008 and a $0.3 million decrease compensation expenses resulting from lower headcount. Headcount decreased to an average of 18 for the three months ended October 31, 2008 from an average of 26 for the three months ended October 31, 2007.

Sales & Marketing

Sales and marketing expense increased 18% to $0.9 million for the three months ended October 31, 2008 from $0.8 million for the three months ended October 31, 2007. The increase in sales and marketing expense is primarily attributable to a $0.3 million increase in non-cash stock compensation expense resulting from a cumulative catch-up adjustment due to a change in estimate. Excluding stock compensation expense from both periods, sales and marketing expense decreased 20% for the three months ended October 31, 2008 compared to the three months ended October 31, 2007. This decrease is attributable to reduced marketing program costs and lower personnel costs. Sales and marketing headcount decreased to an average of 10 for the three months ended October 31, 2008 from an average of 13 for the three months ended October 31, 2007.

Research and Development

Research and product development costs increased 7% to $1.2 million for the three months ended October 31, 2008 from $1.1 million for the three months ended October 31, 2007. The increase in research and development costs is also primarily due to increased stock compensation expense from the cumulative catch up adjustment resulting from a change in estimate. Excluding stock compensation expense from both periods, research and product development expense decreased 5% for the three months ended October 31, 2008 compared to the three months ended October 31, 2007. Research and development headcount decreased to an average of 24 for the third quarter of fiscal 2009 from an average of 25 for the three months ended October 31, 2007.

General and Administrative

General and administrative expense increased 2% to $2.3 million for the three months ended October 31, 2008 from $2.2 million for the three months ended October 31, 2007. This increase is primarily due to a $0.2 million increase in stock compensation expense resulting from the cumulative catch up adjustment. Excluding stock compensation expense from both periods, general and administrative expense decreased 10% for the three months ended October 31, 2008 compared to the three months ended October 31, 2007. Personnel costs were reduced in the current quarter due to lower headcount. General and administrative headcount decreased to an average of 15 in the third quarter of fiscal 2009 from an average of 22 for the three months ended October 31, 2007.

Other income

Other income decreased to $0.1 million for the three months ended October 31, 2008 from $0.5 million for the three months ended October 31, 2007. The decrease in other income was due to lower interest income as a result of the combined effects of a lower average cash balance, declining interest rates and the movement of our cash investments to more conservative government security backed funds from those invested in more risk sensitive commercial paper investments.

Discontinued operations:

Discontinued operations for the three months ended October 31, 2007 included income of $17.5 million from the net gain on the sale of the RetrievalWare enterprise search business. The sale of RetrievalWare was completed in August 2007, there was no business activity or operating results from discontinued operations during the three months ended October 31, 2008

Nine Months Ended October 31, 2008 as Compared to Nine Months Ended October 31, 2007

The following chart summarizes the components of revenues and the categories of expenses, including the amounts expressed as a percentage of total revenues, for the nine months ended October 31, 2008 and 2007, respectively.

                                                Components of Revenue and Expense               Increase
                                                  Nine Months Ended October 31,                (Decrease)
                                        2008            %           2007             %              %
Continuing Operations:

Revenue                               $   1,110           100 %   $     838           100 %            32 %

Expenses:
Cost of revenues                          5,573           502 %       6,461           771 %           -14 %
Sales and marketing                       2,560           231 %       2,984           356 %           -14 %
Research and product development          3,509           316 %       3,335           398 %             5 %
General and administrative                5,712           515 %       9,153          1092 %           -38 %
Total operating expenses                 17,354          1563 %      21,933          2617 %           -21 %

Operating loss                          (16,244 )                   (21,095 )                         -23 %

Other income, net                         1,222                       1,451

Loss before taxes                       (15,022 )                   (19,644 )

Income tax expense ( benefit)                 -                           -

Loss from continuing operations         (15,022 )                   (19,644 )

Discontinued Operations:
Income from discontinued operations           -                      17,538

Net loss                              $ (15,022 )                 $  (2,106 )

Continuing Operations:

Revenues

Hosted services revenue from our vertical search services offering for the nine months ended October 31, 2008 increased by 32% to $1.1 million from $0.8 million for the nine months ended October 31, 2007. This increase is due to an overall increase the number of customers served and the vertical search sites in production.

Revenue for nine months ended October 31, 2007 included $0.2 million in minimum revenue recognized from servicing this customers as a result of a contractual dispute. The $50,000 in revenue share due from this customer under its contract for the third quarter has been recorded as deferred revenue at October 31, 2008 and will not be recognized as revenue until collectibility is probable.

As of October 31, 2008, there were a total of 45 Convera supported websites in production compared to 25 such sites at October 31, 2007.

Revenue from international operations is generated from publishers located primarily in the United Kingdom. Our international sales operation, CTIL, is headquartered in the United Kingdom. International revenues were $0.9 million in the nine months ended October 31, 2008 and were $0.7 million in the nine months ended October 31, 2007.

Two customers accounted for a total of 74 % of the revenues generated in the nine months ended October 31, 2008, accounting for 57% and 17%, respectively. A single customer accounted for 90% of the revenues generated during the three months ended October 31, 2007.

Operating Expenses:

Cost of Revenues

Our hosted services cost of revenue decreased 14% to $5.6 million for the nine months ended October 31, 2008 from $6.5 million for the nine months ended October 31, 2007. This decrease is attributable to a $0.8 million decrease in hosting costs due to the termination of the agreement with AT&T for the San Diego hosting center in January 2008 and a $0.5 million decrease in facilities costs and compensation expenses resulting from the restructuring actions undertaken in fiscal 2008. These decreases were offset, in part, by a $0.4 million increase in depreciation and equipment costs resulting from assets acquired and placed into service after October 31, 2007. Cost of revenue headcount decreased to an average of 19 for the nine months ended October 31, 2008 from an average of 23 for the nine months ended October 31, 2007.

Sales & Marketing

Sales and marketing expense decreased 14% to $2.6 million for the nine months ended October 31, 2008 from $3.0 million for the nine months ended October 31, 2007. The decrease in sales and marketing expense is attributable to the combination of a decrease in compensation from lower staffing levels resulting from the restructuring actions taken throughout fiscal 2008 and lower marketing program expenditures. Sales and marketing head count decreased to an average of 9 for the nine months ended October 31, 2008 from an average of 12 for the nine months ended October 31, 2007. The overall decrease in sales and marketing expenses were offset by a $0.4 million increase in stock compensation . . .