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 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 June 30, 2009, we recorded revenue from continuing operations of $6.0 million, a decrease of approximately 42% from the $10.3 million recorded in the same period in 2008, and approximately 3% decrease from the $6.2 million recorded in the first 3 months in 2009. For the six months ended June 30, 2009, we recorded revenue of $12.2 million compared with $22.4 million for the six months ended June 30, 2008, a decline of 45%. The decrease in our revenue is due to a combination of a decline in our active installed product base and a decrease in revenue rates generated per live user.

We believe our decline in revenue rates per live user is due to the following reasons: (i) reductions 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 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 six months of 2009 was $10.1 million, approximately 32% less than the $14.8 million spent on advertising in the first half of 2008. This reduction in advertising spend resulted in the total number of live users of our toolbar products to decrease from 6.3 million on June 30, 2008 to 4.7 million on June 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 2.9 million on June 30, 2008 to 3.3 million on March 31, 2009 and 4.1 million on June 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 3.5 million on June 30, 2008, to 1.1 million on March 31, 2009 and 0.7 million on June 30, 2009.

The second quarter of 2009 was the first 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 4.3 million at March 31, 2009 to 4.7 million users at June 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 six months ended June 30, 2009, one customer of our ALOT division, Google, accounted for approximately 89% and 90% of our consolidated revenue, respectively. In the three and six months ended June 30, 2008 Google accounted for 94% 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 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 $0.4 and $0.9 million for the three months and six months ended June 30, 2009, compared with $0.5 million and $1.3 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 and six month periods ended June 30, 2009, compared to the same periods in 2008, increased as a percentage of revenue from 5.0% to 7.4% and 5.7% to 7.4% respectively. This increase in cost of services as a percentage of revenue is primarily attributed to a decrease in revenue.

Operating Expenses

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

                                                                                                       QTD-2009
                                                         For the Three Months Ended June 30,             vs.
                                                          2009                        2008             QTD-2008
Marketing, sales, and service                                    6.1                          7.6           (1.5 )
General and administrative                                       2.2                          4.0           (1.9 )
Product development                                              0.6                          1.0           (0.4 )
Subtotal                                                         9.0                         12.6           (3.7 )

Amortization                                                     0.0                          0.5           (0.5 )
Restructuring Charges                                              -                          0.6           (0.6 )

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

                                                                                                      QTD-2009
                                                         For the Three Months Ended June 30,            vs.
                                                           2009                      2008             QTD-2008
Marketing, sales, and service                                    102.4 %                    73.8 %         28.6 %
General and administrative                                        36.6 %                    31.4 %         -2.7 %
Product development                                               10.6 %                     9.7 %          0.9 %
Subtotal                                                         149.5 %                   122.7 %         26.8 %

Amortization                                                       0.7 %                     4.9 %         -4.2 %
Restructuring Charges                                              0.0 %                     5.7 %         -5.7 %
Total                                                            150.2 %                   133.3 %         16.9 %

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

                                                                           YTD-2009
                                    For the Six Months Ended June            vs.
                                     2009                   2008           YTD-2008
Marketing, sales, and service   $         10.9         $         15.8           (4.9 )
General and administrative                 5.3                    8.3           (3.0 )
Product development                        1.3                    1.8           (0.5 )
Subtotal                                  17.5                   25.9           (8.4 )

Amortization                               0.0                    1.0           (0.9 )
Restructuring Charges                     (0.0 )                  0.6           (0.6 )
Total                           $         17.5         $         27.4     $     (9.9 )

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

                                                                               YTD-2009
                                    For the Six Months Ended June 30,            vs.
                                      2009                     2008            YTD-2008
Marketing, sales, and service               89.3 %                   70.5 %         18.8 %
General and administrative                  43.3 %                   33.2 %          6.2 %
Product development                         10.9 %                    8.2 %          2.7 %
Subtotal                                   143.5 %                  115.8 %         27.7 %

Amortization                                 0.3 %                    4.3 %         -3.9 %
Restructuring Charges                       -0.1 %                    2.5 %         -2.6 %
Total                                      144.0 %                  122.6 %         21.1 %

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 $1.5 million for the three months ended June 30, 2009, to $6.1 million compared to $7.6 million for the same period in 2008. Advertising spend used primarily to attract users of our alot.com brand decreased approximately $1.4 million to $5.8 million in the three months ended June 30, 2009 compared to $7.2 million for the same period in the prior year. Additionally, salaries and benefits expense decreased $0.9 million.

Marketing, sales, and service expense decreased approximately $4.9 million for the six months ended June 30, 2009, to $10.9 million compared to $15.8 million for the same period in 2008. Advertising spend used primarily to attract users of our alot.com brand decreased approximately $4.7 million to $10.1 million in the six months ended June 30, 2009 compared to $14.8 million for the same period in the prior year. Additionally, salaries and benefits expense decreased $1.0 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 expenses decreased by $1.9 million in the three months ended June 30, 2009, to $2.2 million compared to $4.0 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 ($0.5 million); and salaries, benefits, and other employee expenses, including share-based compensation ($0.5 million). Included within the three months ended June 30, 2009, consulting fees ($0.6 million) were amounts relating to acceleration of the Bridge Bank loan fees amortization. The final settlement of outstanding items with Perot contributed to lower consulting costs in the three months ended June 30, 2009. Under finance expense, the company was successful in reducing (Delaware) state franchise tax obligations for previous years. Additionally, with the reduction of assets, the state property taxes were down significantly year over year.

General and administrative expenses decreased by $3.0 million in the six months ended June 30, 2009, to $5.3 million compared to $8.3 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 ($1.3 million); finance expenses ($0.6 million); and salaries, benefits, and other employee expenses, including share-based compensation ($0.9 million). Included in salaries expense $(0.4 million) and share based compensation expense $(0.4 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 $0.4 million in the three months ended June 30, 2009, to $0.6 million compared to $1.0 million for the same period in the previous year.

Product development expenses decreased by $0.5 million in the six months ended June 30, 2009, to $1.3 million compared to $1.8 million for the same period in the previous year.

Amortization

Amortization expense recorded for the three months and six months ended June 30, 2009 respectively, was $0.04 million and $0.04 million compared to $0.5 million and $1.0 million in the same period in the prior year. These decreases are 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 net interest income of approximately $0.01 million and interest expense of approximately $0.072 million, respectively, for the three months and six months ended June 30, 2009 compared to net interest income of approximately $0.05 million and $0.15 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 June 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 from discontinued operations were $0.5 million and a loss of $2.6 million, respectively for the three months ended June 30, 2009 and 2008, and losses of $4.7 million and $5.3 million, respectively for the six months ended June 30, 2009 and 2008. Approximately $0.7 million of the income relates to EU receivables previously reserved and subsequently collected in the three months ended June 30, 2009 and partially offset by $0.2 million of other operational expenses. The loss from discontinued operations for the six months ended June 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 June 30, 2009 and 2008, of $0.01 million and $0.03 million, respectively, and six months ended June 30, 2009 and 2008 of $0.03 million and $0.09 million are primarily due to the FIN48 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 $(3.9) million and $(3.9) million for the three months ended June 30, 2009 and 2008, respectively, which represents: a loss per weighted average outstanding share of $(0.11) and $(0.12), respectively. For the six months ended June 30, 2009 and 2008 we generated a net loss from continuing operations of $(6.7) million and $(6.2) million, which represents: a loss per weighted average outstanding share of $(0.20) and $(0.19), respectively.

Weighted average common shares used in the earnings per share computation increased 1.2 million shares from 32.5 million shares for the year ended December 31, 2008 to approximately 33.7 million shares for the six months ended June 30, 2009. This increase is attributable to shares issued upon the vesting of restricted stock units.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, the Company had a total unrestricted cash of $8.3 million. This represents a $1.6 million or 24% increase from the total cash of $6.7 million at December 31, 2008. The increase 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 six months ending June 30, 2009.

Operating Activities

Net cash used in operations totaled $5.0 million in the six months ended June 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 ($4.2 million) included non-cash items of a provision for doubtful accounts ($0.7 million), depreciation and amortization ($0.3 million), write-off the deferred finance costs ($0.6 million), compensation expense based on equity grants rather than cash ($1.2 million) and gain on sale of business ($7.1 million). Thus, the cash used in operations before the effect of timing differences was ($8.1 million). With respect to revenue, the accounts receivable decreased ($4.8 million). With respect to expenses, the amount paid was more than the amount recorded by $4.7 million; payments on accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($2.2 million), but were offset by the decrease in prepaid expenses and other items ($0.5 million).

Net cash used in operations totaled $11.7 million in the six months ended June 30, 2008. The net loss from operations ($11.6 million) included non-cash items of a provision for doubtful accounts ($0.1 million), depreciation and amortization ($2.5 million), and compensation expense based on equity grants rather than cash ($1.4 million). Thus, the cash used in operations before the effect of timing differences was $7.6 million. With respect to revenue, the amount collected was more than the amount recorded $1.1 million decrease in accounts receivable) but offset by a decrease in the revenue collected but deferred to the future ($0.7 million decrease in deferred revenue). With respect to expenses, the amount paid was more than the amount recorded by $4.4 million; payments on accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($5.3 million), but were offset by the decrease in prepaid expenses and other items ($0.9 million).

Investing Activities

Net cash provided by investing activities totaled approximately $10.9 million during the six months ended June 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 $0.5 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 $4.5 million during the six months ended June 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 six months ended June 30, 2009. This use of cash consisted of a one-time payment to pay off the secured line of credit agreement with Bridge Bank ($4.4 million) and cash used to pay the quarterly payments on the capital lease obligations ($0.2 million).

There were no financing activities in the six months ended June 30, 2008.

Liquidity

We currently anticipate that our working capital of approximately $0.4 million, including unrestricted cash of approximately $8.3 million as of June 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 are in the process of reviewing our current liabilities and expect to settle a portion of our current liabilities related to discontinued operations for less than their carrying value in Q3 2009. Additionally, 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 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 capital resources, we may seek to sell additional equity or debt securities or look to enter into a new revolving loan agreement. The sale of additional equity or convertible debt securities could result in additional dilution to existing stockholders. There can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all. We also cannot . . .