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, 2009. 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.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 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.

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 web sites and from providing technical staff training. We offer professional services to customize publisher web sites and optimize search engines, as well as web site 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 intend to extend this hosting arrangement in accordance with the terms off our agreement. 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 and redundancy 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.

On May 29, 2009, Convera and its wholly owned subsidiary B2BNetSearch, Inc., a Delaware corporation ("B2B") entered into an Agreement and Plan of Merger with Firstlight Online Limited, a UK company ("Firstlight"). Prior to the closing of the merger, Convera will undergo an internal restructuring, whereby Convera and certain of its subsidiaries will assign all the operating business and business related assets of Convera (including, without limitation, internet-search related patents and $3 million in cash) to B2B, and B2B will assume all the liabilities of Convera and certain of its subsidiaries. When the merger becomes effective, Convera and Firstlight will each own 33.3% and 66.7% of the total outstanding common stock of the new company, respectively, subject to certain adjustments which may enable Convera to own up to 42% of the new company.

Firstlight and its subsidiaries are in the business of online advertising sales and marketing. The combined new company will bring together the vertical search technology of Convera and the advertising sales and marketing capabilities of Firstlight. It is expected to have over 60 corporate customer accounts and 120 existing websites with approximately 1500 advertisers. The new company will provide technology and advertising to the publishing market and expects to generate revenue from advertising sales and subscriptions. In addition, it plans to build a series of its own industry search engines.

Trends

As of April 30, 2009, Convera has 77 vertical search websites with 26 separate publishers under contract, with 62 of these vertical search sites in production and 15 of the websites in development awaiting launch. At April 30, 2008, Convera had 75 vertical search websites from 25 publishers under contract, of which 44 were in production and 31 were in development awaiting launch. Despite the overall increase in sites in production on a year over year basis, revenues generated by the sites have declined. This decline is due in part to the renegotiation of contract rates with a major customer as well as reduced ad rates earned. Our ad share levels have suffered as publisher's online ad revenues have declined as a result of the current economic downturn.

While revenues during the past fiscal year have declined we have continued to reduce our expense base by eliminating redundant costs and reducing staff headcount. In November 2008, we reduced operating costs by streamlining our sales process and reducing the cost structure of our sales, marketing and customer service functions. This effort resulted in the closing of our U.K. sales office in January 2009 and reduced our overall headcount by nine. In February 2009, we further reduced our operating costs by reorganizing our engineering and hosting operations group. This action reduced headcount in our Carlsbad, CA facility by 23 and reduced our expense base by approximately $2.8 million on an annual basis. The reductions in our operating expenses in the first quarter of 2009 compared to the first quarter of the prior fiscal year are primarily attributable to staff reductions throughout the Company.

The following table compares the average headcount by reporting group for the quarters ending April 30, 2009 and 2008.

                                Three months ended April 30,
                                 2009                   2008         Decrease       % Decrease
Cost of Revenues                        6                     19           (13 )         -68 %
Sales and Marketing                     3                      9            (6 )         -65 %
Research and Development                9                     22           (13 )         -59 %
General and Administrative             12                     19            (7 )         -37 %
Total                                  32                     69           (37 )         -53 %

We incurred approximately $259,000 in severance expense related to the reduction in staff which was recorded in the first quarter of the current fiscal year. As of April 30, 2009 there was an unpaid balance of approximately $9,000 in severance related expenses outstanding. Our expenses during the first quarter of fiscal 2010 were lower as a consequence of these actions.

For the three months ended April 30, 2009, total revenues were $0.2 million, as compared to revenues of $0.4 million in the comparable period of the prior year. The net loss for the three months ended April 30, 2009 was $3.0 million, or $(0.06) per common share, compared to a net loss of $5.4 million, or $(0.10) per common share for the three months ended April 30, 2008.

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 April 30, 2009 and 2008.

                                         Components of Revenue and Expense              Increase
                                            Three Months Ended April 30,               (Decrease)
                                     2009            %         2008           %             %

Revenue                            $     199         100 %   $    402         100 %           -50 %

Expenses:
Cost of revenues                         769         386 %      1,829         455 %           -58 %
Sales and marketing                      242         122 %        876         218 %           -72 %
Research and product development         828         416 %      1,234         307 %           -33 %
General and administrative             1,350         678 %      2,068         514 %           -35 %
Total operating expenses               3,189       1,602 %      6,007       1,494 %           -47 %
Operating loss                        (2,990 )                 (5,605 )                       -47 %

Other income, net                         11                      179                         -94 %

Loss before taxes                     (2,979 )                 (5,426 )                       -45 %

Income tax                                 -                        -                           0 %

Net loss                           $  (2,979 )               $ (5,426 )                       -45 %

Revenues

Hosted services revenue from our vertical search services offering for the three months ended April 30, 2009 decreased 50% to $0.2 from $0.4 million in the same period of the prior fiscal year. As of April 30, 2009, there were a total of 62 Convera supported websites in production compared to 44 at the end of the first fiscal quarter last year. Although there was an overall increase in the number of vertical search sites in production several factors contributed to the revenue decline in the quarter ended April 30, 2009. As previously discussed in this report, the current economic slowdown has resulted in reduced ad sales to publishers which have contributed to the decrease in our ad share revenues. A contract settlement with a major customer resulted in renegotiated lower ad rates and additional revenue to another customer was deferred due to an uncertainty in the collectibility of their account balance.

International revenue is generated from publishers located primarily in the United Kingdom. In a cost saving measure we closed our international sales operation headquartered in the United Kingdom in January 2009. International sales are now generated and supported from our U.S. offices. International revenues decreased to $45,000 during the quarter ended April 30, 2009 from $0.4 million in the quarter ended April 30, 2008.

Three customers accounted for a total of 47% of the revenues for the quarter ended April 30, 2009, individually accounting for 25%, 11% and 11% of total revenues, respectively. One customer, CMP Information LTD., accounted for a total of 80% of the revenues for the quarter ended April 30, 2008.

Operating Expenses:

Cost of Revenues

Our hosted services cost of revenue decreased 58% to $0.8 million for the three months ended April 30, 2009 from $1.8 million in the comparable period of the prior fiscal year. This decrease is primarily attributable to a $0.5 million decrease in depreciation expense as a result of the impairment of hosting-related equipment and purchased software in the fourth quarter of fiscal year 2009. Personnel-related costs were reduced by $0.4 million as a result of the headcount reduction stemming from reorganization of our hosting operations group in February 2009. Cost of revenue headcount decreased to an average of 6 for the first quarter of fiscal 2010 from an average of 19 in the comparable period of the prior year.

Sales & Marketing

Sales and marketing expense decreased 72% to $0.2 million for the three months ended April 30, 2009 from $0.9 million in the comparable period of the prior fiscal year. The decrease in sales and marketing expense is attributable to the reorganization of our sales and marketing operations in the fourth quarter of fiscal year 2009. As a result of this effort we closed our UK office and reduced our headcount by five. Personnel-related costs, as well as rent, office expenses, travel and corporate marketing expenses have all been reduced. Sales and marketing headcount decreased to an average of three for the first quarter of fiscal 2010 from an average of nine for the comparable period of the prior fiscal year.

Research and Development

Research and product development costs decreased 33% to $0.8 million for the three months ended April 30, 2009 from $1.2 million in the comparable period of the prior fiscal year. The decrease in research and development costs is primarily due to the reorganization of the engineering group in February 2009. As a result of this reorganization headcount in the engineering group was reduced by 16 leading to a reduction in personnel-related costs of $0.2 million as well as a $0.1 million reduction in bonus expense. Stock option expense also declined $0.1 million as a consequence of the lower headcount. Research and development headcount decreased to an average of 9 for the first quarter of fiscal 2010 from an average of 22 for the comparable period of the prior year.

General and Administrative

General and administrative expense decreased 35% to $1.4 million for the three months ended April 30, 2009 from $2.1 million in the comparable period of the prior fiscal year. Stock option expense declined by $0.4 million as the vesting and expense amortization periods for stock options held by the majority of the G&A group have been completed. Staff reductions over the past year have resulted in a decrease in personnel-related expenses of $0.2 million. Reductions to accounting and consulting fees of $0.2 million were offset by a $0.2 million increase in legal fees incurred as a result of the Firstlight merger. General and administrative headcount decreased to an average of 12 in the first quarter of fiscal 2010 from an average of 19 in the comparable period of the prior fiscal year.

Other income

Other income, which consists almost entirely of net interest income, decreased 94% to $11,000 during the three months ended April 30, 2009 from $0.2 million in the same period of prior fiscal year. This decrease was primarily due to the declining interest rates as well as a lower average cash balance.

Liquidity and Capital Resources

Our combined balance of cash and cash equivalents at April 30, 2009 as compared to January 31, 2009 is summarized below (in thousands).

April 30, 2009 January 31, 2009 Change Cash and cash equivalents $ 19,889 $ 22,754 $ (2,865 )

At April 30, 2009, our principal source of liquidity was cash and cash equivalents of $19.9 million.

Operating activities used $2.9 million in cash during the quarter ended April 30, 2009. The principal use of cash from operating activities was the net loss of $3.0 million. Non-cash expenses consisting of depreciation of $142,000, the provision for doubtful accounts of $48,000 and stock-based compensation of $149,000 offset the net loss. Increases to accounts receivable used $47,000 while decreases to prepaid expenses and other assets provided $109,000. Decreases to accounts payable and accrued expenses used $349,000 while increases to deferred revenues provided $60,000.

Operating activities consumed $4.3 million in cash during the quarter ended April 30, 2008. The primary use of cash from operating activities was the net loss of $5.4 million. The net loss was reduced for non-cash expenses represented by depreciation of $0.7 million and stock-based compensation of $0.9 million. Increases to accounts receivable used $0.3 million and increases to prepaid expenses and other assets used $0.1 million. Decreases to accounts payable, accrued expenses and deferred revenues used $34,000.

Investing activities consisting of equipment purchases used $9,000 in cash during the quarter ended April 30, 2009. Investing activities used $2,000 in cash during the quarter ended April 30, 2008. Purchases of equipment totaling $65,000 were partially offset by proceeds from the sale of assets of $63,000.

There were no cash flows from financing activities for the quarter ended April 30, 2009. For the quarter ended April 30, 2008 financing activities consumed approximately $1.0 million attributable to a payment to FAST to finalize the working capital adjustment stipulated in the agreement for the sale of the RetrievalWare Enterprise Search Business. The working capital adjustment had been accrued at January 31, 2008 as an offset to the $4.0 million held in escrow.

Our revenue base has grown slower than anticipated after the sale of the Enterprise Search business. The trend of operating losses and uses of cash is expected to continue until the revenue base for the vertical search business grows to sufficient levels to support its expense base. We believe that we have sufficient resources to fund our operations for at least the next twelve months, although we may dissolve and wind up our business earlier. We also have sufficient cash on hand to fund a $3 million cash funding to B2B and $1 million line of credit to the new company after the closing of the Firstlight merger pursuant to the merger agreement.