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.

Trends

As of July 31, 2009, Convera has 64 vertical search websites with 24 separate publishers under contract, with 54 of these vertical search sites in production and 10 of the websites in development awaiting launch. At July 31, 2008, Convera had 75 vertical search websites from 26 publishers under contract, of which 46 were in production and 29 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 July 31, 2009 and 2008.

                           Three months ended July 31,
                           2009                   2008          Decrease       % Decrease
Cost of Revenues                  6                     20            (14 )            -70 %
Sales and Marketing               3                      8             (5 )            -63 %
Research and
Development                       8                     20            (12 )            -60 %
General and
Administrative                   10                     16             (6 )            -38 %
Total                            27                     64            (37 )            -58 %

The following table compares the average headcount by reporting group for the six months ending July 31, 2009 and 2008.

                               Six months ended July 31,
                                 2009                2008       Decrease       % Decrease
Cost of Revenues                        6                20           (14 )            -70 %
Sales and Marketing                     3                 8            (5 )            -63 %
Research and Development                9                21           (12 )            -57 %
General and Administrative             11                18            (6 )            -38 %
Total                                  29                67           (38 )            -57 %

We incurred approximately $322,000 in severance expense in the second quarter of fiscal 2010 and approximately $581,000 for the six months ended July 31, 2009 related to the reduction in staff.. As of July 31, 2009 there was an unpaid balance of approximately $170,000 in severance related expenses outstanding. Our expenses during the three and six-month periods ended July 31, 2009 were lower as a consequence of these actions.

Results of Operations

For the three months ended July 31, 2009, total revenues were $0.2 million, as compared to revenues of $0.5 million in the comparable period of the prior year. The net loss for the six months ended July 31, 2009 was $3.1 million, or $(0.06) per common share, compared to a net loss of $3.6 million, or $(0.07) per common share for the three months ended July 31, 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 July 31, 2009 and 2008.

                                         Components of Revenue and Expense              Increase
                                             Three Months Ended July 31,               (Decrease)
                                      2009            %         2008          %             %

Revenue                            $      190         100 %   $    469        100 %           -59 %

Expenses:
Cost of revenues                          634         334 %      1,854        395 %           -66 %
Sales and marketing                       230         121 %        772        165 %           -70 %
Research and product development          742         391 %      1,059        226 %           -30 %
General and administrative              1,701         895 %      1,355        289 %            26 %
Total operating expenses                3,307        1741 %      5,040       1075 %           -34 %

Operating loss                         (3,117 )                 (4,571 )                      -32 %

Other income, net                          13                      945                        -99 %

Loss before taxes                      (3,104 )                 (3,626 )                      -14 %

Income tax                                  -                        -                          0 %

Net loss                           $   (3,104 )               $ (3,626 )                      -14 %

Revenues

Hosted services revenue from our vertical search services offering for the three months ended July 31, 2009 decreased 59% to $0.2 from $0.5 million in the same period of the prior fiscal year. As of July 31, 2009, there were a total of 54 Convera supported websites in production compared to 46 at the end of the first fiscal quarter last year. Along with the decline of sites in production from the first quarter, several factors contributed to the revenue decline in the quarter ended July 31, 2009. As previously discussed, 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 $37,000 during the quarter ended July 31, 2009 from $0.4 million in the quarter ended July 31, 2008.

Three customers accounted for a total of 27% of the revenues for the quarter ended July 31, 2009. One customer, CMP Information LTD., accounted for a total of 65% of the revenues for the quarter ended July 31, 2008.

Operating Expenses:

Cost of Revenues

Our hosted services cost of revenue decreased 66% to $0.6 million for the three months ended July 31, 2009 from $1.9 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 $0.5 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 second quarter of fiscal 2010 from an average of 20 in the comparable period of the prior year.

Sales & Marketing

Sales and marketing expense decreased 70% to $0.2 million for the three months ended July 31, 2009 from $0.8 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 second 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 30% to $0.7 million for the three months ended July 31, 2009 from $1.1 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 there was a reduction in personnel-related costs of $0.4 million as well, offset by severance costs of $0.3 million due to the departure of an officer in the current quarter. Stock option expense also declined $0.1 million as a consequence of the lower headcount and there was a $0.1 million decrease in depreciation expense. Research and development headcount decreased to an average of 8 for the second quarter of fiscal 2010 from an average of 20 for the comparable period of the prior year.

General and Administrative

General and administrative expense increased 26% to $1.7 million for the three months ended July 31, 2009 from $1.4 million in the comparable period of the prior fiscal year. Staff reductions over the past year have resulted in a decrease in personnel-related expenses of $0.1 million. Reductions to accounting fees of $0.1 million were offset by a $0.4 million increase in legal fees incurred as a result of the pending Firstlight merger and $0.1 million in corporate expenses related to a employment settlement. General and administrative headcount decreased to an average of 10 in the second quarter of fiscal 2010 from an average of 16 in the comparable period of the prior fiscal year.

Other income

Other income, which consists almost entirely of net interest income, decreased 99% to $13,000 during the three months ended July 31, 2009 from $0.9 million in the comparable period of the prior fiscal year. The decrease in the second quarter of fiscal 2010 was primarily due to the absence of deferred income of $0.7 million that occurred in the second quarter of fiscal 2009 and the declining interest rates as well as a lower average cash balance.

Six Months Ended July 31, 2009 as compared to July 31, 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 six months ended July 31, 2009 and 2008.

                                         Components of Revenue and Expense              Increase
                                              Six Months Ended July 31,                (Decrease)
                                      2009           %         2008           %             %

Revenue                            $      390        100 %   $     871        100 %           -55 %

Expenses:
Cost of revenues                        1,402        738 %       3,682        785 %           -62 %
Sales and marketing                       472        248 %       1,648        351 %           -71 %
Research and product development        1,570        826 %       2,293        489 %           -32 %
General and administrative              3,052       1606 %       3,424        730 %           -11 %
Total operating expenses                6,496       3418 %      11,047       2355 %           -41 %

Operating loss                         (6,106 )                (10,176 )                      -40 %

Other income, net                          24                    1,124                        -98 %

Loss before taxes                      (6,082 )                 (9,052 )                      -33 %

Income tax                                  -                        -                          0 %

Net loss                           $   (6,082 )              $  (9,052 )                      -33 %

Revenues

Hosted services revenue from our vertical search services offering for the six months ended July 31, 2009 decreased 55% to $0.4 million from $0.9 million in the same period of the prior fiscal year due to a contract settlement with a major customer which 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. As of July 31, 2009, there were a total of 54 Convera supported websites in production compared to 46 such sites at July 31, 2008.

Revenue from international operations is generated from publishers located primarily in the United Kingdom. International revenues were $0.1 million in the six months ended July 31, 2009 and were $0.8 million in the six months ended July 31, 2008.

Three customers accounted for 46% of the revenues for the six months ended July 31, 2009, individually accounting for 26%, 10%, and 10% of total revenues, respectively. One customer accounted for 72% of the revenues generated in the six months ended July 31, 2008.

Operating Expenses:

Cost of Revenues

Our hosted services cost of revenue decreased 62% to $1.4 million for the six months ended July 31, 2009 from $3.7 million in the comparable period of the prior fiscal year. This decrease is primarily attributable to a $1.0 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, a $0.2 million decrease in equipment/maintenance expense, and a decrease of $0.8 million in personnel-related costs due to the reduction in headcount as a result of the reorganization in February 2009. Cost of revenue headcount decreased to an average of 6 for the first six months of fiscal 2009 from an average of 19 in the comparable period of the prior year.

Sales & Marketing

Sales and marketing expense decreased 71% to $0.5 million for the six months ended July 31, 2008 from $1.6 million in the comparable period of the prior fiscal year. The decrease in sales and marketing expense is attributable to the combination of a decrease in personnel-related costs of $0.7 million and stock option expense of $0.2 million 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 3 for the first six months of fiscal 2009 from an average of 9 for the comparable period of the prior fiscal year.

Research and Development

Research and product development costs decreased 32% to $1.6 million for the six months ended July 31, 2009 from $2.3 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 there was a reduction in personnel-related costs of $0.6 million, stock option costs of $0.2 million and bonus expense of $0.1million, offset by severance costs of $0.3 million due to the departure of an executive in the current quarter. Research and development headcount decreased to an average of 9 for the first six months of fiscal 2009 from an average of 21 for the comparable period of the prior year.

General and Administrative

General and administrative expense decreased 11% to $3.1 million for the six months ended July 31, 2009 from $3.4 million in the comparable period of the prior fiscal year. The decrease includes a $0.3 million reduction in personnel-related costs and $0.3 million in stock option expense due to staff reductions, and a $0.2 million decrease in accounting expense offset by increased legal fees of $0.5 million incurred due to the pending Firstlight merger. General and administrative headcount decreased to an average of 11 in the first six months of fiscal 2009 from an average of 15 in the comparable period of the prior fiscal year.

Other income

Other income for the six months ended July 31, 2009 decreased 98% to $24,000 from $1.1 million in the comparable period of the prior fiscal year. The prior fiscal year includes $0.7 million of income that had been previously deferred until the Company satisfied its contractual obligations, which occurred during the quarter ended July 31, 2008, and $0.4 million of interest income. The decrease in interest income was due to the combined effects of a lower average cash balance and declining interest rates.

Liquidity and Capital Resources

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

July 31, 2009 January 31, 2009 Change Cash and cash equivalents $ 17,887 $ 22,754 $ (4,867 )

At July 31, 2009, our principal source of liquidity was cash and cash equivalents of $17.9 million.

Operating activities used $4.9 million in cash during the six months ended July 31, 2009. The principal use of cash from operating activities was the net loss of $6.1 million. Non-cash expenses consisting of depreciation of $280,000, the provision for doubtful accounts of $61,000 and stock-based compensation of $250,000 offset the net loss. Decreases to accounts receivable and prepaid expenses and other assets provided $333,000 and $190,000, respectively. Increases to accounts payable and accrued expenses provided $40,000 while decreases to deferred revenues used $7,000.

Operating activities consumed $8.2 million in cash during the six months ended July 31, 2008. The primary use of cash from operating activities was the net loss from continuing operations of $9.1 million. The net loss was reduced for non-cash expenses represented by depreciation of $1.4 million and stock-based compensation of $1.3 million. Increases to accounts receivable used $0.5 million and payments of accounts payable and accrued expenses used $0.7 million. In addition the Company recognized $0.6 million of previously deferred revenue for which cash had previously been received.

Investing activities consisting of equipment purchases used $23,000 in cash during the six months ended July 31, 2009. Investing activities used $10,000 in cash during the six months ended July 31, 2008. Purchases of equipment totaling $73,000 were partially offset by proceeds from the sale of assets of $63,000.

There were no cash flows from financing activities for the six months ended July 31, 2009. For the six months ended July 31, 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.

On June 1, 2009, we announced our plans to merge our search business with Firstlight and our expectation to adopt a plan of dissolution with orderly wind down and liquidation of Convera before the closing of the merger. The merger with Firstlight contemplates the transfer of all the business assets and obligations of the search business, including $3.0 million in cash and a $1.0 million line of credit to the merged company. The plan of dissolution contemplates a $10.0 million dividend to shareholders of record at the close of the Firstlight transaction and an orderly wind up of Convera's remaining obligations over the twelve months after closing. We believe that we have sufficient cash resources on hand to complete the merger and the plan of dissolution. We expect the conditions for the closing of the Firstlight transaction will be met in the third quarter of the current fiscal year. However, we make no assurances that either the merger or the plan of dissolution will be completed.