This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements, the accuracy of which involves risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "estimates," "projects," and similar expressions to identify forward-looking statements. This management's discussion and analysis of financial condition and results of operations also contains forward-looking statements attributed to certain third-parties relating to their estimates regarding the growth of the Internet, Internet advertising, and online commercial markets and spending. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled "Risk Factors" included within this report.

Vertro, Inc., together with its wholly-owned subsidiaries, collectively, the "Company", "we", "us" or "Vertro", is a software and technology company.

We offer a range of products and services through our ALOT division. ALOT offers toolbar homepage and desktop applications, which are marketed under the ALOT brand. Our customizable ALOT Homepage, Desktop and Toolbar products are designed to 'Make the Internet Easy' for consumers by providing direct access to affinity content and search results. These products generate approximately 2.4 million Internet searches per day.

On March 12, 2009, we sold certain assets relating to our Media division. Following the sale, we no longer operate the Media business (see NOTE C - Sale of MIVA Media Division), and as a result these operations are presented as discontinued for all periods presented. Our Media division was an auction based pay-per-click advertising and publishing network that operated across North America and Europe.

Organization of Information

Management's discussion and analysis of financial condition and results of operations provides a narrative on our financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:

· Results of continuing operations

· Liquidity and capital resources

· Use of estimates and critical accounting policies

· Special note regarding forward-looking statements

RESULTS OF CONTINUING OPERATIONS

Revenue

During the three months ended September 30, 2009, we recorded revenue from continuing operations of $7.4 million, a decrease of approximately 29% from the $10.4 million recorded in the same period in 2008, and approximately a 23% increase from the $6.0 million recorded in the three months ended June 30, 2009. For the nine months ended September 30, 2009, we recorded revenue of $19.6 million compared with $32.7 million for the nine months ended September 30, 2008, a decline of 40%. The increase in our revenue from the three months ending June 30, 2009 to the three months ending September 30, 2009 was primarily due to increased number of live users, increased clicks on sponsored listings, a marginal increase in revenue per click, and higher non-search revenue.

The decrease in our revenue for the three and nine months ending September 30, 2009 compared to the the same periods in 2008 is due to a combination of a decline in our active installed product base and a decrease in revenue rates generated per live user year over year.

We believe our decline in revenue rates per live user was primarily due to the following reasons: (i) reductions beginning in Q1 2009 in revenue sharing rates and available services from certain advertising partners; (ii) reductions in the number of revenue generating events on our installed product base; (iii) reductions in search volume in Q1 and Q2 triggering lower revenue sharing rates in a tiered rate structure; and (iv) general adverse economic conditions broadly affecting the value of search advertising. We believe the foregoing factors will have a dampening effect on the level of ALOT's revenue in 2009.

We believe the year over year decline in live users of our products is due primarily to reductions in advertising spend. Advertising spend for the first nine months of 2009 was $16.1 million, approximately 24% less than the $21.3 million spent on advertising in the nine months of 2008. This reduction in advertising spend resulted in the total number of live users of our toolbar products to decrease from 5.6 million on September 30, 2008 to 5.3 million on September 30, 2009.

Our advertising spend is focused exclusively on promoting our ALOT toolbar brand. The ALOT brand was launched in 2007 to replace our legacy toolbar brand and we have experienced steady growth in ALOT users since the launch. ALOT toolbar live users have increased from 3.3 million on September, 30, 2008 to 4.8 million on September 30, 2009. This growth in ALOT toolbar users was offset by a decline in the number of users of our legacy toolbar brand as a result of us lowering and then completely eliminating the amount of advertising we were using to promote this legacy brand. Users of our legacy toolbar brand decreased from 2.3 million on September 30, 2008, to 0.5 million on September 30, 2009.

The third quarter of 2009 was the second consecutive quarter in which growth in ALOT toolbar users was greater than the attrition of our legacy toolbar users. This resulted in our total number of live toolbar users to increase from 4.7 million at June 30, 2009 to 5.3 million users at September 30, 2009.

We are continuing to focus on cost effective distribution of our ALOT branded products. Examples of on-going initiatives to expand distribution of ALOT products include: (i) diversifying our product line to include new platforms like Desktop, (ii) adding widget content to our products to expand the number of marketable verticals, (iii) optimizing landing pages for our advertisements, and
(iv) seeking new distribution relationships. If our efforts to improve our live active toolbars installed base is not successful, it will have a material adverse impact on our business, financial condition, and results of operations.

For the three and nine months ended September 30, 2009, one customer of our ALOT division, Google, accounted for approximately 89% and 90% of our consolidated revenue, respectively. In the three and nine months ended September 30, 2008 Google accounted for 95% and 93% of our total consolidated revenue, respectively.

We have been named in certain litigation, the outcome of which could directly or indirectly impact the results of our operations. For additional information regarding pending litigation, refer to Note L - Legal Proceedings above.

We plan to continue our efforts to invest in our business and seek additional revenue through branded toolbars and other initiatives. We cannot assure you that any of these efforts will be successful.

Cost of Services

Cost of services consists of costs associated with designing and maintaining the technical infrastructure that supports our various services and fees paid to telecommunications carriers for Internet connectivity. Costs associated with our technical infrastructure, which supports our various services, include salaries of related technical personnel, depreciation of related computer equipment, co-location charges for our network equipment, and software license fees.

Cost of services decreased to $0.5 million and $1.3 million for the three months and nine months ended September 30, 2009, compared with $0.7 million and $1.9 million in the same periods in the previous year. The decrease was primarily related to a reduction in the depreciation charge between the two periods relating to the impairment charge in the quarter ended December 31, 2008. Cost of services for the three month periods ended September 30, 2009 compared to the same period in 2008, remained the same as a percentage of revenue at 6% and decreased to 6% from 7% for the nine months ended September 30, 2009 compared to the same period in 2008. The marginal changes in the cost of services as a percentage of revenue was primarily attributed to a reduction in depreciation expense due to the impairment charge in the quarter ended December 31, 2008 mostly offset by a decrease in revenue.

Operating Expenses

Operating expenses for the three months ended September 30, 2009 and 2008, were
as follows (in millions):

                                    For the Three Months Ended           QTD-2009
                                           September 30,                   vs.
                                    2009                  2008           QTD-2008
Marketing, sales, and service            6.4                    6.9           (0.5 )
General and administrative               1.6                    3.4           (1.8 )
Product development                      0.6                    0.9           (0.3 )
Subtotal                                 8.6                   11.2           (2.6 )

Amortization                             0.1                    0.4           (0.3 )
Restructuring Charges                      -                    0.1           (0.1 )

Operating expenses, as a percent of revenue, for the three months ended September 30, 2009 and 2008, were as follows:

                                   For the Three Months Ended          QTD-2009
                                          September 30,                  vs.
                                    2009                2008           QTD-2008
Marketing, sales, and service            86.6 %              66.6 %         20.0 %
General and administrative               21.7 %              32.8 %        -11.1 %
Product development                       8.1 %               8.7 %         -0.6 %
Subtotal                                116.4 %             108.1 %          8.3 %

Amortization                              1.4 %               3.9 %         -2.5 %
Restructuring Charges                     0.0 %               1.0 %         -1.0 %
Total                                   117.8 %             113.0 %          4.8 %

Operating expenses for the nine months ended September 30, 2009 and 2008, were as follows (in millions):

                                  For the Nine Months Ended         YTD-2009
                                        September 30,                 vs.
                                    2009                2008        YTD-2008
Marketing, sales, and service   $        17.2         $   22.7           (5.5 )
General and administrative                6.9             11.7           (4.8 )
Product development                       1.9              2.7           (0.8 )
Subtotal                                 26.0             37.1          (11.1 )

Amortization                              0.1              1.4           (1.3 )
Restructuring Charges                       -              0.7           (0.7 )
Total                           $        26.1         $   39.2     $    (13.1 )

Operating expenses, as a percent of revenue, for the nine months ended September 30, 2009 and 2008, were as follows:

                                   For the Nine Months Ended         YTD-2009
                                         September 30,                 vs.
                                    2009               2008          YTD-2008
Marketing, sales, and service           87.6 %             69.3 %         18.3 %
General and administrative              35.2 %             35.7 %         -0.5 %
Product development                      9.7 %              8.2 %          1.5 %
Subtotal                               132.5 %            113.2 %         19.3 %

Amortization                             0.5 %              4.3 %         -3.8 %
Restructuring Charges                    0.0 %              2.1 %         -2.1 %
Total                                  133.0 %            119.6 %         13.4 %

Marketing, Sales, and Service

Marketing, sales, and service expense consists primarily of advertising spend for toolbar acquisitions and also includes payroll expense and benefits related to individuals within this category.

Marketing, sales, and service expense decreased approximately $0.5 million for the three months ended September 30, 2009, to $6.4 million compared to $6.9 million for the same period in 2008. Advertising spend used primarily to attract users of our Alot.com brand decreased approximately $0.5 million to $6.0 million in the three months ended September 30, 2009 compared to $6.5 million for the same period in the prior year.

Marketing, sales, and service expense decreased approximately $5.5 million for the nine months ended September 30, 2009, to $17.2 million compared to $22.7 million for the same period in 2008. Advertising spend used primarily to attract users of our Alot.com brand decreased approximately $5.2 million to $16.1 million in the nine months ended September 30, 2009 compared to $21.3 million for the same period in the prior year. Additionally, salaries and benefits expense decreased $0.2 million. The decrease in advertising spend which had a suppressing effect on subsequent revenue, was implemented primarily to conserve cash during the first quarter of 2009.

General and Administrative

General and administrative expense consists primarily of: payroll and related expenses for executive and administrative personnel; fees for professional services; costs related to leasing, maintaining, and operating our facilities; travel costs for administrative personnel; insurance; depreciation of property and equipment not related to search serving or product development activities; expenses and fees associated with the reporting and other obligations of a public company; bad debts; and other general and administrative services. Fees for professional services include amounts due to lawyers, auditors, tax advisors, and other professionals in connection with operating our business, litigation, and evaluating and pursuing new opportunities.

General and administrative expenses decreased by $1.8 million in the three months ended September 30, 2009, to $1.6 million compared to $3.4 million for the same period in the previous year. Decreases contributing to this variance include: rent and office related expense ($0.1 million); consulting services ($0.8 million); finance expenses ($0.1 million); and salaries, benefits, and other employee expenses, including share-based compensation ($0.9 million).

General and administrative expenses decreased by $4.8 million in the nine months ended September 30, 2009, to $6.9 million compared to $11.7 million for the same period in the previous year. Decreases contributing to this variance include:
rent and office related expense ($0.2 million); consulting services ($2.1 million); finance expenses ($0.7 million); and salaries, benefits, and other employee expenses, including share-based compensation ($1.8 million). Included in salaries expense ($0.6 million) and share based compensation expense ($1.2 million) were amounts related to severance expenses of former executives upon termination.

Product development

Product development expense consists primarily of: payroll and related expenses for personnel responsible for the development and maintenance of features, enhancements, and functionality for our proprietary services; and depreciation for related equipment used in product development.

Product development expenses decreased by $0.3 million in the three months ended September 30, 2009, to $0.6 million compared to $0.9 million for the same period in the previous year.

Product development expenses decreased by $0.8 million in the nine months ended September 30, 2009, to $1.9 million compared to $2.7 million for the same period in the previous year.

Amortization

Amortization expense is primarily related to the amortization of capitalized software costs. Amortization expense recorded for the three months and nine months ended September 30, 2009 respectively, was $0.10 million and $0.15 million compared to $0.4 million and $1.4 million in the same period in the prior year. These decreases were attributed to an overall reduction in our intangible asset base eligible for amortization, primarily as a result of the recorded impairment losses in prior periods.

Interest Income (expense), net

We had interest expense of approximately $0.002 million and $0.08 million, respectively, for the three months and nine months ended September 30, 2009 compared to net interest income of approximately $0.03 million and $0.2 million, respectively, in the same periods in the prior year. The current year net expense relates to interest incurred related to our capital lease obligations and interest expense incurred through our secured line of credit arrangement with Bridge Bank. In the prior year we earned net interest income through our cash and cash equivalent balances and as of September 30, 2008, had not yet entered our capital lease obligations or secured line of credit with Bridge Bank.

Gain on Sale of Discontinued Operations

On March 12, 2009, with the exception of certain retained assets and liabilities, including assets and liabilities of the MIVA Media division in France, we sold the assets, net of liabilities assumed, of our MIVA Media business for cash consideration of approximately $11.6 million and post-closing adjustments, estimated at approximately $0.7 million, which resulted in a gain on sale of approximately $6.9 million during the quarter ended March 31, 2009. We incurred approximately $1.2 million of legal and financial advisory fees in connection with the sale of the MIVA Media division, which are included in the net gain on sale. During the three months ending June 30, 2009, the Company successfully executed an agreement with Adknowledge to assign a Software license lease at a gain that was partially offset by other post-sale adjustments resulting in a net additional gain on sale of $0.2 million. Our decision to divest our MIVA Media business was due primarily to inconsistencies between the division's products and services and the Company's current and future strategic plan.

Income (loss) from discontinued operations was income of $1.2 million and a loss of $8.6 million, respectively for the three months ended September 30, 2009 and 2008, and losses of $3.5 million and $13.9 million, respectively for the nine months ended September 30, 2009, and 2008. Approximately $1.4 million of the income relates to $0.8 million of EU receivables previously reserved and subsequently collected and $0.6 million in the settlement of prepaid advertiser liabilities for less than their carrying value recognized in the three months ended September 30, 2009, which was partially offset by $0.2 million of other expenses. The loss from discontinued operations for the nine months ended September 30, 2009, includes approximately $0.7 million of stock compensation and severance expense resulting from the termination of our Senior Vice President of MIVA Media, and approximately $1.0 million of minimum royalty payment expense accrued as result of the MIVA Media Sale.

As a result of the MIVA Media sale the Company has terminated EU centered operations and all operations are now centered in the US. As a result, the US dollar subsequently became the functional currency for all operations. Effective April 1, 2009, the Company is recording all current foreign currency translation adjustments in income (loss) from continuing operations. The balance of foreign currency translation adjustments accumulated through the date of sale, will be reflected in discontinued opeartions when the retained assets of the foreign subsidiaries are substantially liquidated.

There is an estimated corresponding consolidated tax loss on this transaction, the difference in the book gain and tax loss is estimated to be approximately $10.7 million and is predominately related to basis differences in goodwill, which was impaired at December 31, 2008, for book purposes, other intangible assets also impaired at December 31, 2008, and fixed assets, all of which the Company had tax basis in excess of book basis.

Income Taxes

The income tax expense for the three months ended September 30, 2009 and 2008, of $0.00 million and ($0.02) million, respectively, and nine months ended September 30, 2009 and 2008 of $0.03 million and $0.07 million were peimarily due to interest expense, which is reported as a discrete item.

The effective tax rate is impacted by a variety of estimates, including the amount of income expected during the remainder of the fiscal year, the combination of that income between foreign and domestic sources, and expected utilization of tax losses that have a full valuation allowance.

Net Loss from Continuing Operations

As a result of the factors described above, we generated a net loss from continuing operations of $1.8 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively, which represents: a loss per weighted average outstanding share of $0.05 and $0.06 respectively. For the nine months ended September 30, 2009 and 2008 we generated a net loss from continuing operations of $8.5 million and $8.2 million, which represents: a loss per weighted average outstanding share of $0.25 and $0.25 respectively.

Weighted average common shares used in the earnings per share computation increased 0.9 million shares from 32.7 million shares outstanding as of December 31, 2008 to approximately 33.6 million shares for the nine months ended September 30, 2009. This increase was attributable to shares issued upon the vesting of restricted stock units.

LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, the Company had a total unrestricted cash of $6.3 million. This represents a $0.4 million or 6% decrease from the total cash of $6.7 million at December 31, 2008. The decrease in cash was primarily due to the sale of the Media business on March 12, 2009, offset by: payouts related to the June and August 2008 restructuring initiatives; expenses associated with Perot, our outsourcing partner; repayment to Bridge Bank of our outstanding line of credit and operating expenses in excess of revenue in the nine months ending September 30, 2009.

Operating Activities
Net cash used in operations totaled $7.0 million in the nine months ended September 30, 2009. Cash flow from operations can be understood by starting with the amount of net income or loss and adjusting that amount for non-cash items and variations in the timing between revenue recorded and revenue collected and between expenses recorded and expenses paid. The net loss from operations ($4.9 million) included non-cash items of a provision for doubtful accounts ($0.1 million), depreciation and amortization ($0.5 million), write-off the deferred finance costs ($0.6 million), compensation expense based on equity grants rather than cash ($1.6 million) and gain on sale of business ($7.1 million). Thus, the cash used in operations before the effect of timing differences was ($8.7 million). With respect to revenue, the accounts receivable decreased ($5.0 million). With respect to expenses, the amount paid was more than the amount recorded by $3.2 million; payments on accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($3.8 million), but were offset by the decrease in prepaid expenses and other items ($0.4 million).

Net cash used in operations totaled $15.5 million in the nine months ended September 30, 2008. The net loss from operations ($22.1 million) included non-cash items for a decrease in the provision for doubtful accounts ($0.08 million), depreciation and amortization ($3.6 million), and compensation expense based on equity grants rather than cash ($2.6 million). Thus, the cash used in operations before the effect of timing differences was $16.0 million. With respect to revenue, the amount collected was more than the amount recorded ($2.1 million decrease in accounts receivable) but offset by a decrease in the revenue collected but deferred to the future ($0.9 million decrease in deferred revenue). With respect to expenses, the amount paid was more than the amount recorded by $0.8 million; payments on accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($1.8 million), but were offset by the decrease in prepaid expenses and other items ($1.0 million).

Investing Activities
Net cash provided by investing activities totaled approximately $10.9 million during the nine months ended September 30, 2009. Cash was provided by: the net proceeds from the sale of the MIVA Media business ($9.8 million) and cash released from restriction ($2.0 million) as collateral for the secured line of credit agreement with Bridge Bank. Offsetting these two sources was cash used to purchase and develop capital assets and $0.55 million of cash restricted under a cash account securing a letter of credit ($0.35 million) and an account to secure the credit limit for credit cards issued to the Company by Bridge Bank ($0.2 million).

Net cash used in investing activities totaled approximately $4.2 million during the nine months ended September 30, 2008. This use of cash was for the purchase of capital assets and the development of internally developed software.

Financing Activities

Net cash used in financing activities totaled approximately $4.5 million during the nine months ended September 30, 2009. This use of cash consisted of a one-time payment to pay off the secured line of credit agreement with Bridge Bank ($4.35 million) and cash used to pay the quarterly payments on the capital lease obligations ($0.18 million).

There was $0.6 million of cash used in in financing activities in the nine months ended September 30, 2008.

Liquidity

We currently anticipate that our working capital of approximately $0.3 million, including unrestricted cash of approximately $6.3 million as of September 30, 2009, along with cash flows from operations, will be sufficient to meet our expected liquidity needs for working capital and capital expenditures over at least the next 12 months. Our working capital is calculated by subtracting current liabilities from current assets on our balance sheet. We settled approximately $0.6 million of our current liabilities related to discontinued operations for less than their carrying value in Q3 2009. We expect to settle additional amounts as additional prepaid revenues expire in Q4 2009 and beyond. Our forecast for future liquidity and capital requirements is dependent on a number of factors, including our ability to monetize our products, our ability to retain our most significant customer, our ability to distribute our products, our ability to execute on our business plans, and our ability to meet financial forecasts. In the future, we may seek additional capital through the issuance of debt or equity to fund working capital, expansion of our business and/or acquisitions, or to capitalize on market conditions. As we require additional . . .