UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K


(Mark
One)


x
            Annual Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
Fiscal Year Ended December 31, 2009


or


o
            Transition Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
transition period from ____ to ____





Commission
File Number:  0-30428


Vertro,
Inc.


(Exact
name of registrant as specified in its charter)





Delaware
              88-0348835(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)143
      Varick Street
                New
      York, New York
                10013
              (212)
      231-2000(Address
      of principal executive
                offices,
                including
      zip code)
              (Registrant’s
      telephone number,
                including
      area code)





Securities
registered pursuant to Section 12(b) of the Act:


Title of Each Class:
              
              Name of Each Exchange on which
      Registered:Common
      Stock, par value $0.001 per share
              
              The
      NASDAQ Stock Market LLC


Securities registered pursuant to
Section 12(g) of the Act:


None


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈       No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes   ̈      No  x





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
at least the past 90 days.


Yes  x      No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period of time that the registrant was required
to submit and post such files).


Yes  ̈   No
 ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and no disclosure will be contained, to
the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” ”accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer  ̈
                  
                  Accelerated
      filer   ̈Non-accelerated
      filer   ̈
                  (Do
      not check if a smaller reporting company)
                  Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈      No  x





The
aggregate market value of the Registrant’s common equity held by non-affiliates
of the Registrant was approximately $5,375,395 on June 30, 2009.





There
were 34,141,972 shares of the Registrant’s Common Stock outstanding on March 19,
2010.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s Definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders are incorporated by reference in Part III.








Table
of Contents





PagePart
      I
                    Safe
      Harbor Statement Under the Private Securities Litigation Reform Act of
      1995
                    3Explanatory
      Note
                    3Item
      1.
                    Business
                    4Item
      1A.
                    Risk
      Factors
                    8Item
      1B.
                    Unresolved
      Staff Comments
                    22Item
      2.
                    Properties
                    22Item
      3.
                    Legal
      Proceedings
                    23Item
      4.
                    Removed
      and Reserved
                    24Part
      IIItem
      5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters  and
      Issuer Purchases of Equity Securities
                    24Item
      6.
                    Selected
      Financial Data
                    25Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results  of
      Operations
                    25Item
      7A.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    41Item
      8.
                    Financial
      Statements and Supplementary Data
                    41Item
      9.
                    Changes
      in and Disagreements with Accountants on Accounting
      and  Financial Disclosure
                    41Item
      9A. (T)
                    Controls
      and Procedures
                    41Item
      9B.
                    Other
      Information
                    43Part
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance
                    43Item
      11.
                    Executive
      Compensation
                    43Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management  and
      Related Stockholder Matters
                    43Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    43Item
      14.
                    Principal
      Accountant Fees and Services
                    44Part
      IVItem
      15.
                    Exhibits
      and Financial Statement Schedules
                    44Signatures
                    48


2


PART I





Safe
Harbor Statement Under the Private Securities Litigation Reform Act of
1995





Some of
the statements in this report constitute forward-looking statements that are
based upon current expectations and involve certain risks and uncertainties
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
In some cases, you can identify forward-looking statements by terminology such
as “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” or “continue,” or the negative of such terms
or other comparable terminology. This report includes, among others, statements
regarding our:





·
            revenue;


·
            primary
      operating costs and expenses;


·
            capital
      expenditures;


·
            operating
      lease arrangements;


·
            evaluation
      of possible acquisitions of, or investments in businesses, products and
      technologies; and


·
            existing
      cash and investments being sufficient to meet operating
      requirements.





These
statements involve known and unknown risks, uncertainties and other factors that
may cause our or our industry’s results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed in
Part I, Item 1A Risk Factors and elsewhere in this report. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity,
performance, or achievements. We do not assume responsibility for the accuracy
and completeness of the forward-looking statements. We do not intend to update
any of the forward-looking statements after the date of this report to conform
them to actual results.





Explanatory
Note




References
to “we,” “us,” “our,” “Vertro” or “the Company” in this Annual Report on Form
10-K mean Vertro, Inc. and its wholly-owned subsidiaries.  On March
12, 2009, we and certain of our subsidiaries entered into and consummated an
Asset Purchase Agreement with Adknowledge, Inc. and certain of its subsidiaries
(“Adknowledge”) pursuant to which we sold to Adknowledge certain assets relating
to our MIVA Media division, including the MIVA name, for cash consideration of
approximately $11.6 million, plus assumption of certain balance sheet
liabilities, and subject to certain retained assets and liabilities, including
assets and liabilities of the MIVA Media division in France, and post-closing
adjustments (the “MIVA Media Sale”).  Following the MIVA Media Sale on
March 12, 2009, we no longer operate the MIVA Media
business.  References to the MIVA Media division or business in this
Annual Report on Form 10-K are to the MIVA Media business and operations as they
were conducted by us prior to the MIVA Media Sale and during the period required
to be covered by this report.  Please see Part I, Item 1A-Risk Factors
and elsewhere in this report for risks you should consider in light of the MIVA
Media Sale.


3


ITEM 1.
BUSINESS





Overview





We are an
Internet company that owns and operates the ALOT product
portfolio.  We were organized under the laws of the State of Nevada in
October 1995 under the name Collectibles America, Inc. and, in June 1999, we
merged with BeFirst Internet Corporation, a Delaware corporation
(“BeFirst”).  As a result of the merger, BeFirst became our
wholly-owned subsidiary.  In June 1999, we changed our name to
BeFirst.com and, in September 1999, we changed our name again to
FindWhat.com.  In September 2004, we reincorporated from the State of
Nevada to the State of Delaware, as a result of a merger.  The
reincorporation did not cause any change in our personnel, management, assets,
liabilities, net worth, or the location of our headquarters.  In June
2005, we changed our name to MIVA, Inc. and in June 2009 we changed our name to
Vertro, Inc.





During
the period covered by this report, we offered a range of products and services
through two divisions – ALOT and MIVA Media (which was sold in the MIVA Media
Sale on March 12, 2009).





ALOT





Our ALOT
division offers three different products, each of which is given to consumers
free of charge:





-
            ALOT
      Toolbar – a toolbar that can be permanently displayed in either an
      Internet Explorer or Firefox web
browser;





-
            ALOT
      Home – a web page that users can customize to suit their specific
      interests; and





-
            ALOT
      Desktop – a software application that enables users to display online
      content directly on their computer
desktop.





Each of
these ALOT products is used to display what we refer to as buttons. These
buttons provide quick and easy access to online content. There are more than
1,000 ALOT buttons available for our users, including buttons that can be used
to check the latest weather, listen to online radio stations, find recipes,
check email, keep up to date with news headlines, or catch up with the latest
celebrity gossip. Users can add and remove buttons from their ALOT products as
often as they like; all of our buttons are free to use.





Micro-segmentation





Our
in-house editorial team is constantly working to produce micro-segmented
configurations of our ALOT products. Consumers can, for example, choose to
install an ALOT Toolbar with buttons that relate specifically to video games,
finance, or health and fitness; or they could select an ALOT Home web page with
buttons specifically related to music, parenting, or travel. Regardless of which
configuration consumers choose, they can add and remove buttons to make their
ALOT product totally relevant to their individual interests.


4





Revenue
Model





As well
as displaying buttons, all of our ALOT products also include a search box and
this is where the majority of our revenue is derived. Our users conduct more
than 2 million searches per day and when they conduct these searches they are
returned both algorithmic results and associated sponsored listings. Both the
algorithmic results and sponsored listings are provided by third parties with
whom we have contractual relationships. If users click on a sponsored listing
after conducting a search we earn a percentage of the total click-through
revenue provided by the third-party that placed the advertisement. For the year
ended December 31, 2009, search revenue from Google accounted for approximately
91% of our consolidated revenue from continuing operations.





In
addition to search revenue, our ALOT products display third-party content
through buttons. These buttons generate Internet traffic that is monetized
through pay-per-click and cost-per-action relationships with publishing partners
and advertisers. Our website page-views are also monetized through
cost-per-thousand display ads. We are also able to utilize user behavioral data
to improve the targeting of our product offerings and to generate other forms of
revenue. As we continue to build a consumer audience in various marketable
affinity segments, we believe we will be positioned to monetize our properties
through behavioral, video, and other new advertising formats.





We have
historically experienced, and may continue to experience, seasonal fluctuations
in the number of click-throughs to advertisements on our ALOT products. 
Historically, during the first quarter and the early part of the fourth quarter
of each calendar year, we realize more activity than during the second and third
quarters, and late in the fourth quarter due to increased overall Internet usage
related to colder weather and holiday purchases.





We market
and distribute our ALOT products, which are free, directly to consumers. 
In order to promote our products with consumers, we buy key-word advertising on
Google, Yahoo, and other search engines, we buy display advertising on various
networks, and we bundle our products with third party software companies.
Depending on the media, usually we pay under Cost per Click (CPC), Cost per
Impression (CPM) or Cost per Acquisition (CPA) terms.





Competition





Our ALOT
competitors include, but are not limited to: IAC, MSN, Google, Yahoo!,
Answers.com, IncrediMail, InfoSpace and Conduit.com. Each of these entities
offers a form of online media or entertainment through websites or downloadable
products. These offerings can include web search, online news and information
and other content and services.


5





Technology
and Operations





Our
high-traffic websites and high volume of content and software downloads require
a fast, reliable and secure infrastructure that can be easily scaled to maintain
acceptable response times under the stress of growth. We believe that we have an
infrastructure for ALOT that provides us with a platform from which to operate
and grow our business, including core product engineering operations in our New
York City location, and redundant offsite co-location facilities and content
delivery networks.





Intellectual
Property





We rely
on a combination of patent, copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements, and other intellectual property
protection methods to protect our services and related products. We own several
domestic and international trade and service mark registrations related to our
products or services, including U.S. Federal Registration for ALOT® and we have additional
registrations pending.





Regulations





We are
not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and there are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that various laws and regulations may be adopted with respect to the
Internet, covering issues such as taxation, user privacy and characteristics,
and quality of products and services. In 1998, the United States Congress
established the Advisory Committee on Electronic Commerce, which is charged with
investigating and making recommendations to Congress regarding the taxation of
sales by means of the Internet. The adoption of any such laws or regulations
upon the recommendation of this Advisory Committee or otherwise, in any or all
of the countries we serve, may decrease the growth of the Internet, which could
in turn decrease the demand for our products or services, increase our cost of
doing business, or otherwise have an adverse effect on our business, financial
condition, and results of operations. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel,
and personal privacy is uncertain. Future international, federal, or state
legislation or regulations could have a material adverse effect on our business,
financial conditions, and results of operations. For instance, legislation has
been introduced and, in one instance, enacted, that, if upheld, may impact our
ability to display contextual ads.




6


Additionally,
the U.S. Congress and some state legislatures have introduced legislation
designed to regulate spyware, which has not been precisely defined, but which is
often defined as software installed on consumers’ computers without their
informed consent that is designed to gather and, in some cases, disseminate
information about those consumers, including personally identifiable
information. Our internal policies prohibit reliance on “spyware” for any
purpose and it is not part of our product offerings, but the definition of
spyware or proposed legislation relating to spyware may be broadly defined or
interpreted to include legitimate ad-serving software, including toolbar
offerings currently provided by our ALOT division. Currently, legislation has
focused on providing Internet users with notification of and the ability to
consent to or decline the installation of such software, but there can be no
guarantee that future legislation will not provide more burdensome standards by
which software can be downloaded onto consumers’ computers. Currently all
downloadable software that we distribute requires an express consent of the
consumer and provides consumers with an easy mechanism to delete the software
once downloaded. However, if future legislation is adopted that makes the
consent, notice, or uninstall procedures more onerous, we may have to develop
new technology or methods to provide our services or discontinue those services
in some jurisdictions altogether. There is no guarantee we will be able to
develop this new technology at all or in a timely fashion or on commercially
reasonable terms.





As a
result of our international operations, we are exposed to international laws and
proposed legislation relating to user privacy and related matters. For example,
the European Union has adopted directives designed to address privacy and
electronic data collection concerns. These directives have been implemented into
each of the member states and limit the manner in which personal data of
Internet users may be collected and processed.





Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel, and personal privacy is uncertain. Future
international, federal, or state legislation or regulations could have a
material adverse effect on our business, financial conditions, and results of
operations.





MIVA
Media – Pay-Per-Click Advertising and Publishing Network


Prior to
the MIVA Media Sale, MIVA Media operated an online auction based Pay-Per-Click
Advertising network within North America and in Europe. Advertisers and
advertising agencies used the MIVA Media network to create, manage, and execute
targeted pay-per-click advertising campaigns to reach potential customers. MIVA
Media then syndicated its advertising listings to online publishers who used the
MIVA Media network to generate recurring revenue from their online
properties.  The MIVA Media business derived its revenue primarily
from online advertising by delivering relevant contextual and search ad listings
on a pay-for-performance basis. Advertisers and advertising agencies only paid
when a predetermined action occurred, such as when an Internet user clicked on
an ad.  Following the sale of the MIVA Media business, we no longer
operate the MIVA Media business, and as a result these operations are presented
as discontinued operations for all periods presented.





MIVA
Media’s competitors included companies that offer various forms of performance
marketing solutions.  Typically these competitors serve ad listings to
consumers through branded search properties and/or through relationships with
third-party website publishers, through an advertising network similar to MIVA
Media. Examples of competitors that offer pay-per-click based ad solutions for
their own and third-party use include Google, MSN, Yahoo!, IAC/InteractiveCorp
(Ask.com), InfoSpace, LookSmart, Marchex, Adknowledge and 7Search.





We relied
on a patent license from Yahoo! for the operation of certain portions of our
MIVA Media business.  After the MIVA Media Sale we are still a party
to the license agreement.  We received the license on August 15, 2005,
when we settled a patent infringement lawsuit brought by Overture Services
(“Overture Services”) and Yahoo! Inc. (collectively with Overture Services
“Yahoo!”) against us regarding U.S. Patent No. 6,269,361 and received a royalty
bearing non-exclusive license from Yahoo! regarding certain
patents.  The license agreement may be terminated by Yahoo! or by us
upon the occurrence of certain events, including upon certain material breaches
by either party to the agreement or if we were to challenge the validity or
enforceability of the Yahoo! patents.  As of February 28, 2010, we had
a minimum payment obligation for royalty payments under the agreement totaling
$400,000 through August 2010.


7





Employees





As of
December 31, 2009, we had 42 full-time employees.  We had
approximately 9 employees in marketing, sales and service (which includes, but
is not limited to departments such as business development, sales, marketing,
customer service, credit transactions, business affairs, corporate development,
and affiliate relations), 23 employees in our technical, product development,
and product management departments, and 10 in our general and administrative
departments.





Our ALOT
sales and marketing activities are concentrated in New York.





We have
never had a work stoppage and our employees are not represented by any
collective bargaining unit.  We consider our relations with our
employees to be good.





Available
Information





We
maintain an Internet website at http://www.vertro.com. We make available free of
charge on our website links to our annual reports on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange
Commission.   We are providing the address to our
Internet website solely for the information of investors.  None of the
information on our Internet website is part of this report. Additionally,
individuals can access our electronically filed reports, proxy statements and
other information through the Internet site maintained by the Securities and
Exchange Commission at http://www.sec.gov. The public may also read and copy any
materials we file with the Securities and Exchange Commission at the SEC's
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.





ITEM 1A. RISK
FACTORS





Risks Related to Our
Business





One
paid listings provider, which is a competitor of ours, accounts for a
significant portion of our consolidated revenue and any adverse change in that
relationship would likely result in a significant decline in our revenue and our
business operations could be significantly harmed.




In
December 2006, we entered into an agreement with Google pursuant to which we
agreed to utilize Google’s paid listings and algorithmic search services for
approved ALOT websites and applications. We renewed our agreement with Google in
November 2008 for a two year term beginning on January 1, 2009.  We receive
a share of the revenue generated by the paid listing services supplied to us
from Google. The amount of revenue we receive from Google depends on a number of
factors outside of our control, including the amount Google charges for
advertisements, the depth of advertisements available from Google, and the
ability of Google's system to display relevant ads in response to our end-user
queries.   For the year ended December 31, 2009, Google accounted for
approximately 91% of our consolidated revenue from continuing operations. 
Our agreement with Google contains broad termination rights. Google also
competes with our ALOT business.  If (i) we fail to have websites and
applications approved by Google; (ii) Google’s performance deteriorates, (iii)
we violate Google’s guidelines, or (iv) Google exercises its termination rights,
we likely will experience a significant decline in revenue and our business
operations could be significantly harmed.  If any of these circumstances
were to occur, we may not be able to find another suitable alternate paid
listings provider or otherwise replace the lost revenues.


8


The
success of ALOT is dependent on our ability to maintain and grow our active
consumer base.





Our ALOT
division operates a portfolio of consumer-oriented interactive products
including toolbars, homepages and desktop applications. ALOT derives the
majority of its revenue from advertisements directed towards consumers. The
amount of revenue generated by ALOT is dependent on our ability to maintain and
grow our active consumer installed base.  Factors that could
negatively influence our ability to maintain and grow our active consumer base
include, but are not limited to, government regulation, acceptance of our
toolbar products by consumers, the availability of advertising to promote our
toolbar products, third-party designation of our toolbar and/or other products
as undesirable or malicious, user attrition, competition, and sufficiency of
capital to purchase advertising.  For example, advertising spend at
ALOT, which is used to promote and acquire consumers, was strategically reduced
throughout 2009 to meet acquisition cost targets and to ensure cash balances
were maintained and conserved.  If we are unable to maintain and grow
our active consumer base, it could have a material adverse effect on our
business, financial condition, and results of operations.





We
deliver advertisements to users from third-party ad networks that expose our
users to content and functionality over which we don’t have ultimate
control.





We
display to users pay-per-click, banner, cost per acquisition, and other forms of
Internet advertisements that come from third-party ad networks.  We do not
control the content and functionality of such third-party advertisements and,
while we provide guidelines as to what types of advertisements are acceptable to
us, there can be no assurance that such advertisements will not contain content
or functionality that is harmful to our relationship with our users.  Our
inability to control what types of advertisements get displayed to our users
could have a material adverse effect on our business, financial condition, and
results of operations.





Our
business is dependent upon our ability to deliver qualified leads to Google, our
primary paid listings provider.





Our
primary paid listings provider utilizes ALOT to deliver high quality Internet
traffic to its advertisers. We believe our primary paid listings provider will
only use our services if we deliver high quality Internet traffic. If our
primary paid listings provider is not satisfied with the quality of Internet
traffic delivered from us it may take remedial action. We may not be successful
in delivering high quality traffic to our primary paid listings provider, which
could have a material adverse effect on our business, financial position, and
results of operations.


9





New
technologies could limit the effectiveness of our products and services, which
would harm our business.





New
technologies may be developed by others that can block the display of ads or
sponsored listings or prevent Internet users from downloading our products.
Since most of our net revenue is derived from fees paid to us by our advertising
feed provider, ad-blocking or similar technology could materially adversely
affect our results of operations.





Our business is difficult to evaluate
because we have recently sold a significant portion of our business and operate
in an emerging and rapidly evolving market.





We began
operating our business in 1998 and since that time we have undergone significant
changes:





·
            we
      launched the Findwhat.com Network (which subsequently became MIVA Media
      US) in September 1999;


·
            in
      2004, we acquired several companies, including a U.S. performance-based,
      keyword-targeted advertising business (B & B Advertising, which
      subsequently became a part of MIVA Media); a provider of
      performance-based, keyword-targeted Internet advertising services in
      Europe (espotting, which subsequently became a part of MIVA Media); and a
      desktop software company (Comet Systems, that is now our ALOT
      division);


·
            in
      March 2009, we sold our MIVA Media business, which accounted for 61.2% of
      our consolidated revenues for the fiscal year ended December 31,
      2008.





Accordingly,
we have a limited operating history upon which an investor can make an
evaluation of the likelihood of our success. As of March 12, 2009, we operate
only the ALOT business.  Moreover, we derive nearly all of our net
revenue from online advertising, which is a rapidly evolving market. An investor
should consider the likelihood of our future success to be speculative in light
of our limited operating history, as well as the problems, limited resources,
expenses, risks, and complications frequently encountered by similarly situated
companies in emerging and changing markets, such as e-commerce. To address these
risks, we must, among other things:





·
            maintain
      and increase our user base;


·
            implement
      and successfully execute our business and marketing
    strategy;


·
            continue
      to develop and upgrade our
technology;


·
            continually
      update and improve our service offerings and
  features;


·
            find
      and integrate strategic
transactions;


·
            respond
      to industry and competitive developments;
and


10


·
            attract,
      retain, and motivate qualified
personnel.





We may
not be successful in addressing these risks, particularly as some of these are
largely outside of our control. If we are unable to do so, our business,
financial condition, and results of operations would be materially and adversely
affected.





We
continue to develop new initiatives related to current and future product and
service offerings that may not meet our expectations in terms of the viability,
success, or profitability of such initiatives.





We have
and continue to pursue new initiatives related to current and proposed product
and service offerings in an effort to stay aligned with the dynamic e-commerce
marketplace.  There can be no assurance that any of these initiatives
will be timely, viable, successful, and profitable or will enjoy the same
margins as our historical business. An investor should consider the likelihood
of our future success with respect to these and other initiatives to be
speculative in light of our limited history in successfully developing,
introducing, and commercially exploiting new initiatives of this nature, as well
as the problems, limited resources, expenses, risks, and complications
frequently encountered by similarly situated companies in emerging and changing
markets, such as e-commerce, with respect to the development and introduction of
initiatives of this nature. Any inability by us to successfully develop,
introduce, or implement these or other products or services could materially
adversely affect our business, financial condition, and results of
operations.




We
have recently divested our MIVA Media Division pursuant to an Asset Purchase
Agreement and we have certain ongoing obligations to the buyer and may have
future potential liability to third parties.





In March
2009, we sold our MIVA Media division pursuant to an Asset Purchase
Agreement.  Under the terms of the Asset Purchase Agreement, we made
certain representations and warranties and covenants in favor of the buyer and
we have certain indemnification obligations to the buyer.  Because the
transaction was structured as an asset purchase, we also retained potential
liability to third parties for the pre-closing operation of the MIVA Media
business.  These obligations and retained liabilities could subject us
to potential claims in the future, which could result in the diversion of
management’s time and attention and could cause us to incur expenditures
defending ourselves against such claims or could cause us to have to make
payments to the buyer or third parties.





In
addition, in connection with the MIVA Media Sale, we agreed to provide to the
buyer and receive from the buyer certain transition
services.  Examples of services under the arrangement include finance,
accounting, technology, office space, expense reimbursement and similar matters
that were substantially completed by November 30, 2009.  If (i) the
buyer of our MIVA Media division breaches its obligations under these
agreements, (ii) we are unable to fulfill our obligations to provide services,
or (iii) we are unable to obtain required consents to the transactions, it could
materially adversely affect our business, financial condition, and results of
operations.




11


We
have in the past and may in the future implement restructuring programs, which
may subject us to claims and liabilities.




Over the
past few years, we have implemented a number of restructuring programs to reduce
our headcount, reduce expenses and streamline our operations.  We may
implement further restructurings in the future.  These restructurings
may subject us to claims and liabilities from employees and third parties, which
could result in us making payments to such persons and could materially
adversely affect our financial condition.





We
face substantial and increasing competition in the market for Internet-based
marketing services.





We face
substantial competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Internet and
provide them with relevant advertising and commerce-enabling services, either
directly or through a network of partners. Some of our principal competitors
include IAC, MSN, Google, Yahoo!, Answers.com, Incredimail, Infospace and
Conduit.com. Some of our principal competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing, personnel, and other resources than we have. These
competitors historically have developed and expanded their portfolios of
products and services more rapidly than we have. In addition, these and other
competitors may have or obtain certain intellectual property rights that may
interfere with or prevent the use of one or more of our business models. These
and other competitors can use their experience and resources against us in a
variety of competitive ways, including by acquiring complementary companies or
assets, investing aggressively in research and development, and competing more
aggressively for consumers. We expect that these competitors will increasingly
use their financial and technological resources to compete with us.





Additionally, to the extent we pursue
strategic transactions, we may compete with other companies with similar growth
strategies, some of which may be larger and have greater financial and other
resources than we have. Competition for any such acquisition targets
likely also will result in increased prices of acquisition targets and a
diminished pool of companies available for acquisition.





If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive.





Our
success depends on providing products and services that provide consumers with a
high quality Internet experience. Our competitors are constantly developing
innovative Internet products. As a result, we must continue to seek to enhance
our technology and our existing products and services and introduce new
high-quality products and services that businesses and/or consumers will use.
Our success will depend, in part, on our ability to:





·
            enhance
      and improve the responsiveness and functionality of our Internet products
      and our other primary traffic
services;


·
            license,
      develop or acquire technologies useful in our business on a timely basis,
      to enhance our existing services and develop new services and technology
      that address the increasingly sophisticated and varied needs of the
      business; and


·
            respond
      to technological advances and emerging industry standards and practices on
      a cost-effective and timely
basis.


12





Because
our markets are still developing and rapidly changing, we must allocate our
resources based on our predictions as to the future development of the Internet
and our markets. These predictions ultimately may not prove to be accurate. If
our competitors introduce new products and services embodying new technologies,
or if new industry standards and practices emerge, our existing services,
technology and systems may become obsolete and we may not have the funds or
technical know-how to upgrade our services, technology, and systems. If we are
unable to predict user preferences or industry changes, or to modify our
products and services on a timely basis, we may lose consumers, which could
cause a material adverse effect on our business, financial condition, and
results of operations.





If
we fail to grow or manage our growth, our business will be adversely
affected.





To
succeed, we must grow. We may make additional acquisitions in the future as part
of our growth initiatives. These may include acquisitions of international
companies or other international operations. We have limited experience in
acquiring and integrating companies, and we may also expand into new lines of
business in which we have little or no experience. Additionally, we may fail to
achieve anticipated synergies from such acquisitions. Accordingly, our growth
strategy subjects us to a number of risks, including the following:





·
            we
      may incur substantial costs, delays, or other operational or financial
      problems in integrating acquired businesses, including integrating each
      company’s accounting, management information, human resource, and other
      administrative systems to permit effective
  management;


·
            we
      may not be able to identify, acquire, or profitably manage any additional
      businesses;


·
            with
      smaller acquired companies, we may need to implement or improve controls,
      procedures, and policies appropriate for a public
  company;


·
            the
      acquired companies may adversely affect our consolidated operating
      results, particularly since some of the acquired companies may have a
      history of operating losses;


·
            acquisitions
      may divert our management’s attention from the operation of our
      businesses;


·
            we
      may not be able to retain key personnel of acquired
      businesses;


·
            there
      may be cultural challenges associated with integrating employees from our
      acquired companies into our organization;
and


·
            we
      may encounter unanticipated events, circumstances, or legal
      liabilities.





Any of
these factors could materially adversely affect our business, financial
condition, and results of operations.


13





We
may not be able to return to our historical growth rates and operating margins
in the future.





In 2004,
we grew rapidly through multiple acquisitions and a significant merger and these
events assisted in achieving higher than normal growth rates.  In
March 2009, we divested a significant portion of our business through the sale
of our MIVA Media division.  We may not be able to return to the 2004
historical growth rates and our future growth rates may continue to decline as a
result of various factors.  Additionally, our growth rate could
continue to decline into and throughout 2010, due to, among other
things:




·
            operating
      in an environment of increased competition both domestically and
      internationally;




·
            increased
      expenditures for certain aspects of our business as a percentage of our
      net revenues, which may include product development expenditures, sales,
      advertising, and marketing expenses, and increased public company costs;
      and




·
            increased
      expenditures as a result of our divested
  operations.





We depend on third parties for certain
software and services to operate our business.





We depend
on third-party software and services to operate our business. Although we
believe that several alternative sources for this software are available, any
failure to obtain and maintain the rights to use such software on commercially
reasonable terms would have a material adverse effect on our business, financial
condition, and results of operations. We also are dependent on third parties to
provide Internet services to allow us to connect to the Internet with sufficient
capacity and bandwidth so that our business can function properly and our
websites can handle current and anticipated traffic. We currently have contracts
with certain telecommunications providers for these services. Any restrictions
or interruption in our connection to the Internet, or any failure of these
third-party providers to handle current or higher volumes of use, could have a
material adverse effect on our business, financial condition, and results of
operations, and our brand could be damaged if clients or prospective clients
believe our system is unreliable. Any financial or other difficulties our
providers face may have negative effects on our business, the nature and extent
of which we cannot predict. We exercise little control over these third party
vendors, which increases our vulnerability to problems with the services they
provide. We have experienced occasional system interruptions in the past and we
cannot assure you that such interruptions will not occur again in the
future.





Our
technical systems are vulnerable to interruption, security breaches, and damage,
which could harm our business and damage our brands if our clients or
prospective clients believe that our products are unreliable.





Our
systems and operations are vulnerable to damage or interruption from fire,
floods, hurricanes, power loss, telecommunications failures, break-ins,
sabotage, computer viruses, penetration of our network by unauthorized computer
users, or “hackers,” and similar events. Any such events could interrupt our
services and severely damage our business. The occurrence of a natural disaster
or unanticipated problems at our technical operations facilities could cause
material interruptions or delays in our business, loss of data, or render us
unable to provide services to our customers. In addition, we may be unable to
provide services and access to websites due to a failure of the data
communications capacity we require, as a result of human error, natural
disaster, or other operational disruptions. The occurrence of any or all of
these events could materially adversely affect our business, financial
condition, and results of operations, and damage our brands if clients or
prospective clients believe that our products are unreliable.


14


Our
intellectual property rights may not be protectable or of significant value in
the future.





We depend
upon confidentiality agreements with specific employees, consultants, and
subcontractors to maintain the proprietary nature of our technology. These
measures may not afford us sufficient protection, and others may independently
develop know-how and services similar to ours, otherwise avoid our
confidentiality agreements, or produce patents and copyrights that would
materially adversely affect our business, financial condition, and results of
operations.





Legal
standards relating to the validity, enforceability, and scope of the protection
of certain intellectual property rights in Internet-related industries are
uncertain and still evolving. The steps we take to protect our intellectual
property rights may not be adequate to protect our future intellectual property.
Third parties may also infringe or misappropriate any copyrights, trademarks,
service marks, trade dress and other proprietary rights we may have. Any such
infringement or misappropriation could have a material adverse effect on our
business, financial condition, and results of operations.





In
addition, the relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon, or otherwise decrease the value of our trademarks and other
proprietary rights, which may result in the dilution of the brand identity of
our services.





Our
business has historically been and may continue to be partially subject to
seasonality, which may impact our quarterly growth rate.





We have
historically experienced, and may continue to experience, seasonal fluctuations
in the number of click-throughs to advertisements available to
ALOT.  Historically, during the first quarter and the early part of
the fourth quarter of each calendar year, we realize more activity than during
the second and third quarters, and late in the fourth quarter due to increased
overall Internet usage related to colder weather and holiday purchases. These
seasonal fluctuations may continue in the future.




We
are subject to a patent settlement and license agreement from Yahoo! for certain
portions of a divested business.





We are
subject to a patent settlement and license agreement from Yahoo! for certain
portions of our MIVA Media business that were divested in March 2009. On August
15, 2005, we settled a patent infringement lawsuit brought by Overture Services
(“Overture Services”) and Yahoo!, Inc. (collectively with Overture Services,
“Yahoo!”) against us regarding U.S. Patent No. 6,269,361 and took a royalty
bearing non-exclusive license from Yahoo! regarding certain patents. We divested
our MIVA Media business in March 2009; however, we are still subject to the
terms of and have continuing obligations, including the payment of minimum
royalty fees under the settlement and license agreement.  As of
February 28, 2010, we have a minimum payment obligation totaling $400,000
through August 2010.  The settlement and license agreement contains
terms and conditions that may be unacceptable to a third party and could
negatively impact our ability to be sold or enter into a change of control
transaction.


15


Our future liquidity and capital
requirements are based on estimates and if we require additional capital we may
not be able to secure additional financing.





Our
future liquidity and capital requirements will depend on numerous factors. The
pace of expansion of our operations will affect our capital requirements. We may
also have increased capital requirements in order to respond to competitive
pressures. In addition, we may need additional capital to fund acquisitions of
complementary products, technologies, or businesses. Our forecast of the period
of time through which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and uncertainties
and actual results could vary materially as a result of the factors described in
this report. As we require additional capital resources, we may seek to sell
debt securities or additional equity securities, draw on our existing bank line
of credit, or obtain an additional bank line of credit. There can be no
assurance that any financing arrangements will be available in amounts, or on
terms, acceptable to us, if at all.





Our
credit facility with Bridge Bank imposes significant restrictions. Failure to
comply with these restrictions could result in the acceleration of a substantial
portion of our debt, which we may not be able to repay or
refinance.





In
December 2009, we entered into a credit facility with Bridge Bank, N.A., which
provides for up to $5.0 million in loans.  The credit facility
contains a number of covenants that, among other things, requires us and certain
of our subsidiaries to:





·
            pay
      fees to the lender associated with the credit
  facility;


·
            maintain
      our corporate existence in good
standing;


·
            grant
      the lender a security interest in our
assets;


·
            provide
      financial information to the lender;
and


·
            refrain
      from any transfer of any of our business or property (subject to customary
      exceptions).





Our
ability to comply with the provisions of the credit facility will be dependent
upon our future performance, which may be affected by events beyond our control.
A breach of any of our covenants could result in a default under the credit
facility. In the event of any such default, Bridge Bank could elect to declare
all borrowings outstanding under the credit facility, together with any accrued
interest and other fees, to be due and payable, as well as require us to apply
all available cash to repay the amounts.  If we were unable to repay
the indebtedness upon its acceleration, Bridge Bank could proceed against the
underlying collateral. There can be no assurance that our assets would be
sufficient to repay an amount in full, that we would be able to borrow
sufficient funds to refinance the indebtedness, or that we would be able to
obtain a waiver to cure any such default.


16




Virtually
all of our debt is subject to variable interest rates; and therefore rising
interest rates could negatively impact our business.




Borrowings
under our credit facility bear interest at a variable rate. In addition, we may
incur other variable rate indebtedness in the future. Carrying indebtedness
subject to variable interest rates makes us more vulnerable to economic and
industry downturns and reduces our flexibility in responding to changing
business and economic conditions. Increases in interest rates on this
indebtedness would increase our interest expense, which could adversely affect
our cash flows and our ability to service our debt as well as our ability to
grow the business.





Current
borrowings, as well as potential future financings, may substantially increase
our current indebtedness.





No
assurance can be given that we will be able to generate the cash flows necessary
to permit us to meet our payment obligations with respect to our debt. We could
be required to incur additional indebtedness to meet payment obligations and
there is no assurance that we would be able to secure such financing on
acceptable terms or at all, especially in light of the current economic, credit,
and capital market environment. Should we incur additional debt, among other
things, such increased indebtedness could:





·
            adversely
      affect our ability to expand our business, market our products, and make
      investments and capital
expenditures;


·
            adversely
      affect the cost and availability of funds from commercial lenders, debt
      financing transactions, and other sources;
and


·
            create
      competitive disadvantages compared to other companies with lower debt
      levels.




Any
inability to service our fixed charges and payment obligations, or the
incurrence of additional debt, would have a material adverse effect on our cash
flows, business financial position, and results of operations.




We
are subject to income taxes in both the United States and numerous international
jurisdictions.





We are
subject to income taxes in both the United States and numerous international
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are
many transactions and calculations where the ultimate tax determination is
uncertain. Although we believe our tax estimates are reasonable and appropriate,
the final determination of tax audits and any related tax litigation could be
materially different than that which is reflected in historical income tax
provisions and accruals. Based on the results of tax audits or tax litigation,
our income tax provision, net loss, or cash flows in the period or periods for
which that determination is made could be materially adversely
affected.


17


Risks Related to Our
Industry





Regulatory
and legal uncertainties could harm our business.





While
there are currently relatively few laws or regulations directly applicable to
Internet access, commerce, or commercial search activity, there is increasing
awareness and concern regarding some uses of the Internet and other online
services, leading federal, state, local, and international governments to
consider adopting civil and criminal laws and regulations, amending existing
laws and regulations, conducting investigations, or commencing litigation with
respect to the Internet and other online services covering issues such
as:





·
            user
      privacy;


·
            trespass;


·
            defamation;


·
            database
      and data protection;


·
            limitations
      on the distribution of materials considered harmful to
      children;


·
            liability
      for misinformation provided over the
web;


·
            user
      protection, pricing, taxation, and advertising restrictions (including,
      for example, limitation on the advertising on Internet gambling websites
      or of certain products);


·
            delivery
      of contextual advertisements via connected desktop
    software;


·
            intellectual
      property ownership and infringement, including liability for listing or
      linking to third-party websites that include materials infringing
      copyrights or other rights;


·
            distribution,
      characteristics, and quality of products and services;
  and


·
            other
      consumer protection laws.





Legislation
also has been introduced in the U.S. Congress and some state legislatures that
is designed to regulate spyware, which does not have a precise definition, but
often defined as software installed on consumers’ computers without their
informed consent and designed to gather and, in some cases, disseminate
information about those consumers, including personally identifiable
information. We do not rely on spyware for any purpose and it is not part of our
product offerings, but the definition of spyware or proposed legislation
relating to spyware may be broadly defined or interpreted to include legitimate
ad-serving software, including toolbar offerings and other downloadable software
currently provided by our ALOT division. Currently, legislation has focused on
providing Internet users with notification of and the ability to consent or
decline the installation of such software, but there can be no guarantee that
future legislation will not provide more burdensome standards by which software
can be downloaded onto consumers’ computers. Currently all downloadable software
that we distribute requires an express consent of the consumer and provides
consumers with an easy mechanism to delete the software once downloaded.
However, if future legislation is adopted which makes the consent, notice, or
uninstall procedures more onerous, we may have to develop new technology or
methods to provide our services or discontinue those services in some
jurisdictions or altogether. There is no guarantee we will be able to develop
this new technology at all or in a timely fashion or on commercially reasonable
terms.  The adoption of any additional laws or regulations,
application of existing laws to the Internet generally or our industry, or any
governmental investigation or litigation related to the Internet generally, our
industry, or our services may decrease the growth of the Internet or other
online services, which could, in turn:





·
            decrease
      the demand for our services;


·
            increase
      our cost of doing business;


·
            preclude
      us from developing additional products or
  services;


18


·
            result
      in adverse publicity to us; and


·
            subject
      us to fines, litigation, or criminal penalties, enjoin us from conducting
      our business or providing any of our services, otherwise have a material
      adverse effect on our business, financial condition, and results of
      operations, or result in a substantial decline in the market price of our
      common stock.





The
regulatory environment with respect to online marketing practices is also
evolving. The Federal Trade Commission, or FTC, has increasingly focused on
issues affecting online marketing, particularly online privacy and security
issues. One of the key areas of focus for the FTC is the difference between
spyware and ad-serving software, such as our downloadable toolbar
applications.





New
legislation, which could be proposed or enacted at any time in the future, new
regulations or changes in the regulatory climate, or the expansion, enforcement,
or interpretation of existing laws could prevent us from offering some or all of
our services or expose us to additional costs and expenses requiring substantial
changes to our business or otherwise substantially harm our
business.





Due to
the global nature of the Internet, it is possible that multiple state, federal,
or international jurisdictions might inconsistently regulate Internet
activities, which would increase our costs of compliance and the risk of
violating the laws of a particular jurisdiction, both of which could have a
material adverse effect on our business, financial condition, and results of
operations.





We
may face third party intellectual property infringement claims that could be
costly to defend and result in the loss of significant rights.





Our
current and future business activities may infringe upon the proprietary rights
of others, and third parties may assert infringement claims against us,
including claims alleging, among other things, copyright, trademark, or patent
infringement. We are aware of allegations from time to time concerning these
types of claims and in particular in respect of copyright and trademark
infringement claims. While we believe that we have defenses to these types of
claims under appropriate trademark legislation, we may not prevail in our
defenses to any intellectual property infringement claims. In addition, we may
not be adequately insured for any judgments awarded in connection with any
litigation. Any such claims and resulting litigation could subject us from time
to time to significant liability for damages, or result in the invalidation of
our proprietary rights, which would have a material adverse effect on our
business, financial condition, and results of operations. Even if we were to
prevail, these claims could be time-consuming, expensive to defend, and could
result in the diversion of our management’s time and attention.





Risks Relating to an
Investment in Our Common Stock





Our
failure to maintain continued listing compliance criteria in accordance with
NASDAQ Marketplace Rules could result in NASDAQ delisting our common
stock.




NASDAQ
Marketplace Rules require us to have a minimum closing bid price of $1.00 per
share for our common stock as well as maintaining certain stockholders equity,
marketplace value, or other financial metric criteria.  We did not maintain
compliance with the continued listing compliance criteria and we received notice
from NASDAQ that we are not in compliance with Marketplace Rules, which could
ultimately lead to the delisting of our common stock from the NASDAQ Global
Market.  In December 2009, we received the delisting notification
based on non-compliance with NASDAQ listing rules and we subsequently submitted
an appeal to NASDAQ and were granted a hearing.  At that hearing in
January 2010, we presented our plan to regain compliance with the listing
requirements along with a request for an extension to June 2010 to execute that
plan.  A favorable ruling on the appeal was issued in February 2010,
under which we were transferred to the NASDAQ Capital Market and given until
June 14, 2010 to comply with the cited issues.


19





Even with
the extension granted by NASDAQ, there is a risk we could not execute on our
plan for regaining compliance which ultimately could lead to the delisting of
our stock.   In the event that we were delisted from the NASDAQ Capital
Market, our common stock would become significantly less liquid, which would
likely adversely affect its value.  Although our common stock would likely
be traded over-the-counter or on pink sheets, these types of listings involve
more risk and trade less frequently and in smaller volumes than securities
traded on the NASDAQ Capital Market.





The
market price of our common stock has been and may continue to be
volatile.





The
market price of our common stock has in the past and may in the future
experience significant volatility as a result of a number of factors, many of
which are outside of our control. Each of the risk factors listed in this Part
I, Item 1A – Risk Factors, and the following factors, may affect the market
price for our common stock:





·
            our
      quarterly results and ability to meet analysts’ and our own published
      expectations;


·
            our
      ability to continue to attract and retain users and paid listings
      providers;


·
            the
      amount and timing of operating costs and capital expenditures related to
      the maintenance and expansion of our businesses, operations, and
      infrastructure;


·
            patents
      issued or not issued to us or our
competitors;


·
            announcements
      of technological innovations, new services or service enhancements,
      strategic alliances, mergers, acquisitions, dispositions, or significant
      agreements by us or by our
competitors;


·
            commencement
      or threat of litigation or new legislation or regulation that adversely
      affects our business;


·
            general
      economic conditions and those economic conditions specific to the Internet
      and Internet advertising;


·
            our
      ability to keep our products and services operational at a reasonable cost
      and without service interruptions;


·
            recruitment
      or departure of key personnel;


·
            geopolitical
      events such as war, threat of war, or terrorist
  actions;


·
            sales
      of substantial amounts of our common stock, including shares issued upon
      the exercise of outstanding options or warrants;
  and


·
            potential
      of industry consolidation in our
sector.





Because
our business is changing and evolving, our historical operating results may not
be useful in predicting our future operating results. In addition, advertising
spending has historically been cyclical in nature, reflecting overall economic
conditions as well as budgeting and buying patterns. Also, online user traffic
tends to be seasonal.


20





In
addition, the stock market has experienced significant price and volume
fluctuations that particularly have affected the trading prices of equity
securities of many technology and Internet companies. Frequently, these price
and volume fluctuations have been unrelated to the operating performance of the
affected companies. Following periods of volatility in the market price of a
company’s securities such as we have recently experienced, securities class
action litigation is often instituted against such a company, as we have
recently had a number of such suits instituted against us. See “We have had a
number of purported class action lawsuits filed against us and certain of our
officers and directors alleging violations of securities laws”
below.  This type of litigation, regardless of the outcome, could
result in substantial costs and a diversion of management’s attention and
resources, which could materially adversely affect our business, financial
condition, and results of operations.





Significant dilution will occur if
outstanding options are exercised or restricted stock unit grants
vest.





As of
December 31, 2009, we had stock options outstanding to purchase a total of
approximately 1.18 million shares at a weighted average exercise price of $9.63
per share under our stock incentive plans.





Also, as
of December 31, 2009, we had approximately 1.73 million restricted stock units
outstanding including approximately 0.15 million in restricted stock units that
would vest upon our common stock reaching, and closing, at share prices
exceeding $1.00 per share for ten consecutive trading days and approximately
0.23 million restricted stock units that would vest under similar vesting
criteria but with stock prices of $4.00, $8.00, $10.00 and $12.00,
respectively.   The remaining approximate 1.35 million restricted
stock units will vest predominately over the next three years in equal
increments.    Any such exercise of outstanding stock
options or vesting of restricted stock units will dilute our shareholders’
ownership interest.





Our
certificate of incorporation authorizes us to issue additional shares of stock,
which could impede a change of control that is beneficial to our
stockholders.





We are
authorized to issue up to 200 million shares of common stock that may be issued
by our board of directors for such consideration as they may consider sufficient
without seeking stockholder approval, subject to stock exchange rules and
regulations. Our certificate of incorporation also authorizes us to issue up to
500,000 shares of preferred stock, the rights and preferences of which may be
designated by our board of directors. These designations may be made without
stockholder approval. The designation and issuance of preferred stock in the
future could create additional securities that have dividend and liquidation
preferences prior in right to the outstanding shares of common stock. These
provisions could be used by our board to impede a non-negotiated change in
control, even though such a transaction may be beneficial to holders of our
securities, and may deprive you of the opportunity to sell your shares at a
premium over prevailing market prices for our common stock. The potential
inability of our shareholders to obtain a control premium could reduce the
market price of our common stock.


21





We
have had a number of purported class action lawsuits filed against us and
certain of our officers and directors alleging violations of securities
laws.




In 2005,
five putative securities fraud class action lawsuits were filed against us and
certain of our former officers and directors in the United States District Court
for the Middle District of Florida.  The complaints alleged that we and the
individual defendants violated Section 10(b) of the Securities Exchange Act of
1934 (the "Act") and that the individual defendants also violated Section 20(a)
of the Act as "control persons" of MIVA. Plaintiffs sought unspecified damages
and other relief alleging generally that, during the putative class period, we
made certain misleading statements and omitted material
information.




The Court
granted Defendants’ motion for summary judgment on November 16, 2009,
and the court entered final judgment in favor of
all Defendants on December 7, 2009.  On December 15, 2009,
Plaintiffs filed a notice of appeal.




If it is
determined that we or our officers or directors have engaged in the types of
activities alleged by these plaintiffs, we and our officers and directors could
be subject to damages and may be subject to further prosecution. Regardless of
the outcome, these litigations could have a material adverse impact on us
because of harm to our and our officers’ and directors’ reputations, defense
costs, diversion of management’s attention and resources, and other
factors.





A
putative derivative action has been filed against certain of our officers and
directors, purportedly on behalf of the Company.





On July
25, 2005, a shareholder, Bruce Verduyn, filed a putative derivative action
purportedly on behalf of us in the United States District Court for the Middle
District of Florida, against certain of our directors and officers. This action
is based on substantially the same facts alleged in the securities class action
litigation described above. The complaint is seeking to recover damages in an
unspecified amount.





If it is
determined that our officers or directors have engaged in the types of
activities alleged in the putative derivative action, our officers and directors
could be subject to damages and may be subject to further prosecution. We have
agreed to indemnify our officers and directors in connection with the defense of
this action. Accordingly, regardless of the outcome, this litigation could have
a material adverse impact on us because of harm to our reputation, defense
costs, diversion of management’s attention and resources, and other
factors.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





None.





ITEM
2.  PROPERTIES





Our
primary administrative, sales, customer service, and technical facilities are
leased in New York, New York and Fort Myers, Florida. Additionally, we maintain
technical data center operations in two third-party collocation facilities in
New York, New York.


22





As of
December 31, 2009, our leased properties provide us with an aggregate of
approximately 21,500 square feet for all of our operations.  This
total does not include our allocated space for our technical data centers as
noted above.  We believe these facilities are adequate, at this time,
for their intended use.





Item
3. LEGAL PROCEEDINGS




Shareholder
Class Action Lawsuits




In 2005,
five putative securities fraud class action lawsuits were filed against us and
certain of our former officers and directors in the United States District Court
for the Middle District of Florida.  The complaints alleged that we and the
individual defendants violated Section 10(b) of the Securities Exchange Act of
1934 (the "Act") and that the individual defendants also violated Section 20(a)
of the Act as "control persons" of MIVA. Plaintiffs alleged generally that,
during the putative class period, we made certain misleading statements and
omitted material information and sought unspecified damages and
other relief.




The Court
granted Defendants’ motion for summary judgment on November 16, 2009,
and the court entered final judgment in favor of
all Defendants on December 7, 2009.  On December 15, 2009,
Plaintiffs filed a notice of appeal.




Regardless
of the outcome, this litigation could have a material adverse impact on our
results because of defense costs, including costs related to our indemnification
obligations, diversion of management's attention and resources, and other
factors.





Derivative
Stockholder Litigation





On July
25, 2005, a shareholder, Bruce Verduyn, filed a putative derivative action
purportedly on behalf of us in the United States District Court for the Middle
District of Florida, against certain of our directors and
officers.  This action is based on substantially the same facts
alleged in the securities class action litigation described
above.  The complaint is seeking to recover damages in an unspecified
amount.  By agreement of the parties and by Orders of the Court, the
case was stayed pending the resolution of Defendants’ motion to dismiss and
renewed motion to dismiss in the securities class action.  On July 10,
2007, the parties filed a stipulation to continue the stay of the
litigation.  On July 13, 2007, the Court granted the stipulation to
continue the stay and administratively closed the case pending notification by
plaintiff’s counsel that the case is due to be reopened.  Regardless
of the outcome, this litigation could have a material adverse impact on our
results because of defense costs, including costs related to our indemnification
obligations, diversion of management's attention and resources, and other
factors.





Other
Litigation





We are a
defendant in various other legal proceedings from time to time, regarded as
normal to our business and, in the opinion of management, the ultimate outcome
of such proceedings are not expected to have a material adverse effect on our
financial position or our results of operations.




23





No
accruals for potential losses for litigation are recorded as of December 31,
2009, and although losses are possible in connection with the above litigation,
we are unable to estimate an amount or range of possible loss, in accordance
with accounting rules for estimates, but if circumstances develop that
necessitate a loss contingency being disclosed or recorded, we will do
so.  We expense all legal fees for litigation as
incurred.





ITEM 4. REMOVED AND
RESERVED





PART II





ITEM 5.  MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.





Market
for Common Stock





Our
common stock trades on the NASDAQ Capital Market under the symbol VTRO. Our
common stock was previously traded on the NASDAQ Global Market under the symbol
“VTRO” from June 9, 2009 to February 17, 2010, and under the symbol “MIVA”
during the remainder of the periods set forth in the table below.  The
following table sets forth the high and low sales prices of our common stock for
the periods indicated as reported by the NASDAQ Global Market:





Common
      Stock Market PriceHigh
                    
                    
                    Low2009Fourth
      Quarter
                    
                    $
                    0.61
                    
                    
                    $
                    0.30Third
      Quarter
                    
                    
                    0.84
                    
                    
                    
                    0.15Second
      Quarter
                    
                    
                    0.36
                    
                    
                    
                    0.14First
      Quarter
                    
                    
                    0.32
                    
                    
                    
                    0.092008Fourth
      Quarter
                    
                    $
                    0.62
                    
                    
                    $
                    0.18Third
      Quarter
                    
                    
                    1.11
                    
                    
                    
                    0.62Second
      Quarter
                    
                    
                    1.93
                    
                    
                    
                    1.06First
      Quarter
                    
                    
                    2.38
                    
                    
                    
                    1.40





Stockholders





We had
257 shareholders of record as of February 26, 2010.





Dividends





We have
never paid cash dividends and currently do not intend to pay cash dividends on
our common stock at any time in the near future.





Recent
Sales of Unregistered Securities





We did
not make any unregistered sales of our common stock during the 2008 or 2009
fiscal year.




24





Issuer Purchases of Equity
Securities





During
the three months ended December 31, 2009, we acquired shares in connection with
vesting of restricted stock units as described in the table
below.





Issuer Purchases of Equity Securities(d) Maximum Number(c) Total Number of
                  
                  
                  (or Approximate Dollar(a) Total
                  
                  
                  
                  
                  
                  Shares (or Units)
                  
                  
                  Value) of Shares (or Units)Number of
                  
                  
                  (b) Average
                  
                  
                  Purchased as Part of
                  
                  
                  that May Yet BeShares
                  
                  
                  Price Paid
                  
                  
                  Publicly Announced
                  
                  
                  Purchased Under thePurchased
                  
                  
                  per Share
                  
                  
                  Plans or Programs
                  
                  
                  Plans or ProgramsPeriodOct.
      1,  2009 through Oct. 31, 2009
                  
                  
                  15,227
                  
                  
                  $
                  0.45
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aNov.
      1,  2009 through Nov. 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aDec.
      1, 2009 through Dec. 31, 2009
                  
                  
                  816
                  
                  
                  
                  0.42
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aTotal
                  
                  
                  16,043
                  (1)
                  
                  $
                  0.45
                  
                  
                  
                  -





(1)
Represents shares withheld by us upon the vesting of restricted stock units to
satisfy withholding taxes.




ITEM 6.  SELECTED
FINANCIAL DATA





Not
applicable as a smaller reporting company.




ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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
commerce 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” under Item 1A of Part I of
this Annual Report on Form 10-K.





Executive
Summary





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 during the fourth quarter of
2009 generated an average of approximately 2.4 million Internet
searches per day.




25





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





Organization
of Information





This
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 operations




·
            Liquidity
      and capital resources




·
            Contractual
      obligations




·
            Use
      of estimates and critical accounting
policies





RESULTS
OF OPERATIONS





For
the Years Ended December 31, 2009 and 2008.





Revenue





During
2009, we recorded revenue from continuing operation of $27.6 million, a decrease
of approximately 33% from the $41.3 million recorded in 2008.  This
decrease was due primarily to a decrease in revenue rates generated per live
user year over year and a smaller live user base during 2009.  (Live
users are defined as the number of unique toolbar users active on the internet
in the last 15 days of each period.)





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 2009 triggering lower revenue sharing
rates in a tiered rate structure; and (iv) general adverse economic conditions
broadly affecting the value of search advertising.





With
respect to the size of the live user base, the year 2008 started with a base of
7.1 million.  Over the year the ALOT brand, which was started in 2007,
grew from 1.0 million to 3.1 million.  However, our legacy brand
shrank at a faster rate, going from 6.1 million at the beginning of the year to
1.6 million at the end.  Thus, we ended the year 2008 with a total
live user base of 4.7 million, a reduction of approximately 33%.




26





In 2009
the legacy brand continued to shrink (to 0.4 million) but the growth in the ALOT
brand (to 4.4 million) matched the decline.  At the end of 2009 our
live user base of 4.8 million was slightly better than the 4.7 million at the
end of 2008.





We
believe the growth of the ALOT brand over 2009 would have been better except for
reductions in advertising spend for cash conservation
purposes.  Advertising spend for the year ending December 31, 2009,
was $21.0 million, approximately 21% less than the $26.5 million
spent in 2008.   Over the year the amount of advertising to promote
our legacy toolbar brand was lowered and then completely eliminated, thus
leaving all the advertising spend to promote only the ALOT brand.  As
noted above, the ALOT brand increased from 3.1 million live users at the end of
2008 to 4.4 million live users at the end of 2009.





The
fourth quarter of 2009 was the third consecutive quarter where our growth in
ALOT toolbar users was greater than the attrition for our legacy toolbar
users.  It should be noted we reduced our advertising spend over the
last part of December based on historical experience relating to the
effectiveness of such spend during the final weeks of the holiday
season.  Subsequently, our advertising spend in January 2010 was
increased and by month’s end the number of live users increased to 5.8
million.





We are
continuing to focus on cost effective distribution and retention of our ALOT
branded products with our end users.  In addition to more efficient
buying that reduces our advertising cost per acquisition, we have engaged in
other on-going initiatives to expand distribution and reduce attrition for our
ALOT products that include: (i) diversifying our product line to include new
platforms, (ii) adding widget content to our products to expand the number of
categories of end-user interest, , (iii) optimizing landing pages for our
advertisements, and (iv) seeking new distribution relationships.  If our
effort to improve our live toolbar user base is not successful, it may have a
material adverse impact on our business, financial condition, and results of
operations.





For the
year ended December 31, 2009, one customer of our ALOT division, Google,
accounted for approximately 91% of our consolidated
revenue.





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 Part I, Item 3. Legal
Proceedings below.





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 for continuing operations 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.




27





Cost of
services for continuing operations decreased to $1.8 million for
the year ended December 31, 2009, compared with $2.4 million for the year ended
December 31, 2008.  The decrease was related to a reduction in the
depreciation charges ($0.3 million) caused by the impairment charges taken in
the quarter ended December 31, 2008, a reduction in cost of services ($0.2
million)  that corresponds to the drop in revenue, and reduced IT
costs ($0.1 million) related to a streamlining of operations.  Cost of
services for the year ended December 31, 2009, compared to the same period in
2008, remained at 6% of revenue.





Operating
Expenses


Operating
expenses for continuing operations in the years ended December 31, 2009 and
2008, were as follows (in millions):





For the Year Ended
                  
                  
                  2009December 31,
                  
                  
                  vs.2009
                  
                  
                  2008
                  
                  
                  2008Marketing,
      sales, and service
                  
                  $
                  22.6
                  
                  
                  $
                  28.3
                  
                  
                  
                  (5.7
                  )General
      and administrative
                  
                  
                  8.5
                  
                  
                  
                  14.8
                  
                  
                  
                  (6.3
                  )Product
      development
                  
                  
                  2.5
                  
                  
                  
                  3.6
                  
                  
                  
                  (1.1
                  )Amortization
                  
                  
                  0.1
                  
                  
                  
                  1.4
                  
                  
                  
                  (1.3
                  )Impairment
      loss on goodwill and other assets
                  
                  
                  -
                  
                  
                  
                  7.9
                  
                  
                  
                  (7.9
                  )Restructuring
      Charges
                  
                  
                  -
                  
                  
                  
                  0.6
                  
                  
                  
                  (0.6
                  )Legal
      Settlement
                  
                  
                  -
                  
                  
                  
                  1.9
                  
                  
                  
                  (1.9
                  )Total
                  
                  $
                  33.7
                  
                  
                  $
                  58.5
                  
                  
                  $
                  (24.8
                  )





Operating
expenses for continuing operations as a percent of revenue for the years ended
December 31, 2009 and 2008 were as follows:





For the Year Ended
                  
                  
                  2009December 31,
                  
                  
                  vs.2009
                  
                  
                  2008
                  
                  
                  2008Marketing,
      sales, and service
                  
                  
                  81.8
                  %
                  
                  
                  68.5
                  %
                  
                  
                  13.3
                  %General
      and administrative
                  
                  
                  30.8
                  %
                  
                  
                  35.8
                  %
                  
                  
                  -5.0
                  %Product
      development
                  
                  
                  9.0
                  %
                  
                  
                  8.7
                  %
                  
                  
                  0.3
                  %Amortization
                  
                  
                  0.4
                  %
                  
                  
                  3.4
                  %
                  
                  
                  -3.0
                  %Impairment
      loss on goodwill and other assets
                  
                  
                  0.0
                  %
                  
                  
                  19.2
                  %
                  
                  
                  -19.2
                  %Restructuring
      Charges
                  
                  
                  0.0
                  %
                  
                  
                  1.5
                  %
                  
                  
                  -1.5
                  %Legal Settlement
                  
                  
                  0.0
                  %
                  
                  
                  4.5
                  %
                  
                  
                  -4.5
                  %Total
                  
                  
                  122.0
                  %
                  
                  
                  141.7
                  %
                  
                  
                  -19.7
                  %





Marketing, Sales,
and Service





Marketing,
sales, and service expense for continuing operations consists primarily of
advertising spend that results in product downloads by our end-users and also
includes payroll expense and benefits related to individuals within this
category.




28





Marketing,
sales, and service expense for continuing operations decreased approximately
$5.7 million for the year ended December 31, 2009, to $22.6 million compared to
$28.3 million for the same period in 2008.  The year over year
decrease is related primarily to a reduction in our internet keyword and display
advertising spend ($5.6 million) used primarily to attract users of our Alot.com
brand and secondarily to a reduction in employee related costs ($0.1 million)
related to operational streamlining.  The initial decrease in
advertising spend was implemented to conserve cash during the first quarter of
2009 and that decrease had a suppressing effect on subsequent revenue caused by
the drop-off in our live user base.  Additionally, the lower costs can be
partially attributed to our more efficient keyword buying program that reduced
the average cost for getting an end user to download our products as our
advertising program was restored and our live user base was
rebuilt.





General and
Administrative





General
and administrative expense for continuing operations 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 for continuing operations decreased by $6.3 million in the year ended December 31, 2009, to $8.5 million compared to $14.8 million for the
same period in the previous year.  Decreases contributing to this variance
include: rent and office related expense ($0.4 million); consulting services
($3.5 million) related to lower legal, accounting, and other consulting
costs; reduced other taxes that included a franchise tax refund ($0.7
million); lower salaries, benefits, and other employee expenses, including
share-based compensation ($1.5 million), and lower insurance expenses ($0.2
million).  These cost reductions were indirectly related to our
sale of our MIVA Media Assets in March 2009, and the reductions are expected to
continue into 2010.  The amount of leased space we required was
significantly reduced and we sublet a portion of our space to the buyer of our
assets in March 2009.  For the most part, our office related expenses
and share based compensation are directly related to the number of people that
we employ, and that number was significantly reduced in 2009.  The smaller
size and less complex structure of our continuing operations had the effect of
reducing costs for legal, accounting, and other consulting fees, as well as
insurance costs.  Currently there are no plans for an employee
expansion in 2010.  No significant changes to the size and complexity of
our business are planned in 2010.




29





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 these activities.





Product
development expenses decreased by $1.1 million in the year ended
December 31, 2009, to $2.5 million compared to $3.6 million for the same period
in the previous year due primarily to reduced employee related costs from
streamlining operations.  In 2010, we expect the product development
program to operate at a level comparable to 2009.





Amortization





Amortization
expense is primarily related to the amortization of capitalized software
costs.  Amortization expense decreased by 92% from $1.3
million in 2008 to $0.1 million in 2009.  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
2008.





Impairment loss





We did
not record an impairment loss in 2009, compared to a $7.9 million impairment
loss recorded for the same period in 2008.  The impairment recognized
in 2008 reduced the value of our goodwill and indefinite-lived intangible assets
to zero.





Litigation
Settlement





In 2008,
we settled with the former shareholders of Comet Systems, Inc. for a net amount
of $1.9 million related to a dispute regarding the calculation of a contingent
payment due for a company that was acquired in 2004.





Non-Operating
Income


We
recorded other income of $0.36 million related to the sale of one
of our patents to a third party during 2009.  The gain from the sale
recorded in other income included the proceeds from the patent sale less the
fees and direct costs related to the sale.





Interest
Income (Expense) net





We had
net interest expense of approximately $0.08 million in 2009
compared to the net interest income of $0.15 million in the prior year. The net
interest expense for both years relates to interest for our capital lease
obligations and our Bridge Bank secured line of credit.  In the prior
year we earned net interest income through our cash and cash equivalent balances
and had only entered our capital lease obligations and our secured line of
credit with Bridge Bank after September 2008.




30





Exchange
Loss


We
incurred an exchange loss of approximately $0.5 million in 2009 compared to no
loss or gain recognized in 2008. We discontinued European operations when we
sold our operating assets to Adknowledge in March 2009.  However, we
retained certain financial assets and liabilities that were contained within the
related Vertro owned European legal entities whose liquidation is expected to
occur in 2010.  Given this post-sale structure, the U.S. dollar became
the functional currency for the EU entities causing us to record exchange rate
changes in our consolidated statement of operations.  Most of the
exchange rate loss relates to the outstanding intercompany loans between the EU
subsidiaries and our U.S. parent corporation that previous to the MIVA
Media sale were recognized in Accumulated Other Comprehensive
Income.  In anticipation of final liquidation of the EU legal
entities, similar exchange rate losses (or possible exchange rate gains) could
occur in 2010 should the relationship between the U.S. dollar and European
currencies change.





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 less post-closing adjustments of
approximately $0.7 million, plus the assumption of a software license of $0.3
million, which resulted in a gain on sale of approximately $7.1 million during
2009. We incurred approximately $1.3 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.   Our decision to
divest our MIVA Media business was due primarily to inconsistencies between the
division’s products and services and our current strategic
plan.





Loss from
discontinued operations was $3.5 million for the year ended
December 31, 2009, compared to a loss of $25.9 million for
the same period in the previous year.  These losses in 2009 included
approximately a $2.9 million in MIVA Media operating losses incurred up to the
date of sale on March 12, 2009 plus wind down costs incurred for the remainder
of the year, restructuring charges of approximately $0.3 million primarily
related to severance expense resulting from the termination of our Senior Vice
President of MIVA Media, and exchange losses of approximately $0.3 million.
The loss from discontinued operations for the year ended 2008, includes
approximately $6.7 million in losses from MIVA Media
operations, 10.8 million foran impairment loss from the
writedown of our goodwill, $3.6 million for restructuring
charges, and $5.4 million for exchange losses, which was partially offset by
$0.6 million related to a tax benefit and interest income.





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 we had tax basis
in excess of book basis.





As a
result of the MIVA Media sale we have terminated EU centered operations and all
operations are now centered in the U.S.  As a result, the U.S. dollar
subsequently became the functional currency for all
operations.  Effective April 1, 2009, we are 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
operations when the retained assets of the foreign subsidiaries are
substantially liquidated.




31





Income
Taxes





For the
years ended December 31, 2009 and 2008, we recorded the following loss from
continuing operations before the tax provision (benefit) (in thousands except
percentages):





2009
                    
                    
                    2008Provision
      (benefit) for taxes
                    
                    $
                    (285
                    )
                    
                    $
                    216Loss
      before provision for income taxes
                    
                    $
                    (8,026
                    )
                    
                    $
                    (19,347
                    )Effective
      tax rates
                    
                    
                    3.6
                    %
                    
                    
                    -1.1
                    %





The
primary reasons for the relationship of income taxes to pretax losses in 2009
and 2008 are the non-deductibility of the goodwill and other indefinite lived
asset portions of the impairment charges of $7.9 million in continuing
operations, our inability to recognize the tax benefits of losses carried
forward to future years, and the geographic distribution of profits and losses
in the applicable tax jurisdictions.  The tax benefit recorded in 2009
results from a federal tax receivable of $339 thousand originating from the
carry-back of a 2008 net operating loss that became available in 2009 due to
changes in tax carryback regulations, net of the additional interest of $54
thousand accrued in 2009 related to our liability for uncertain tax
positions.  As a
result of the geographic distribution of the loss from discontinued operations
and of the gain on sale of discontinued operations in the applicable
jurisdictions, no income tax provision or benefit is allocable to
discontinued operations for 2009.  In 2008, a benefit of $559 thousand
has been allocated to the loss from discontinued operations resulting from the
release of certain estimated tax liabilities of $669
thousand which were determined during 2008 to no longer be payable, offset by
state tax expenses of $110 thousand in the applicable tax
jurisdictions.





Income
taxes are recognized for temporary differences between financial statement and
income tax bases of assets and liabilities, loss carry-forwards, and tax credit
carry-forwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that all, or some portion, of such deferred tax
assets will not be realized.





At
December 31, 2009, we have recorded $27.8 million in deferred tax assets, offset
by valuation allowances of $27.4 million, and deferred tax liabilities of $0.4
million.  Included in deferred tax assets at December 31, 2009, is
$24.8 million related to the tax benefits of net operating loss (“NOL”)
carry-forwards.  The NOL carry-forwards include $59.5 million gross
federal NOL in the United States of which $36.5 million in losses is restricted
to annual usage of $3.5 million pursuant to Section 382 of the Internal Revenue
Code.  Any amounts not used may be carried forward to the following
year, however, the annual limitation may result in the expiration of a portion
of the affected NOLs before they are utilized.  The balance of the
U.S. NOL was generated as a result of operations from 2005 to 2009, and is not
limited in usage.  We have U.K. NOL carry-forwards of $10.0
million.  As of December 31, 2009, the deferred tax assets from all
remaining NOLs are fully offset by valuation allowances or deferred tax
liabilities. Per the adoption of new accounting guidance for business
combinations on January 1, 2009, subsequent releases, if any, of valuation
allowances established for deferred tax assets resulting from net operating loss
carry-forwards at the time of acquisition will be recorded as a reduction of the
income tax provision.




32





Net
Loss





As a
result of the factors described above, we generated a net loss from continuing
operations of $(7.7) million and $(19.6) million for the years ended December
31, 2009 and 2008, respectively.  The basic and diluted loss per share
from continuing operations for the years ended December 31, 2009 and 2008, was
$(0.23) and $(0.60), respectively.





Weighted
average common shares used in the earnings per share computation increased 1.0
million shares from 32.6 million shares for the year ended December 31, 2008, to
33.6 million for the year ended December 31, 2009. This increase was primarily
attributed to shares issued upon the vesting of restricted stock
units.





LIQUIDITY
AND CAPITAL RESOURCES





As of
December 31, 2009, we had a total unrestricted cash of $4.8
million.  This represents a $1.9 million or 28% decrease from the
total cash of $6.7 million at December 31,
2008.  The decrease in cash was primarily due to 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 year ending December 31, 2009, offset by the cash received in the
sale of the Media business on March 12, 2009.





Cash flow
from continuing operations has improved steadily since March 12, 2009, the date
of our asset sale.  By that date, our live user base suffered
significant deterioration as a direct result of our decision to lower ad spend
in order to conserve cash.  The reduced advertising spend, which is
used to obtain new live users to download our products and services resulted in
lower revenue.  Subsequent to the sale, and as we forecasted, it took
the rest of the year to “scale up” our live user base to a point that could
generate sustainable margins.  We went from negative cash flow from
continuing operations in the second and third quarters to positive cash flow in
the fourth quarter.  We expect this fourth quarter trend to continue
as our restored live user base continues to scale and at a lower cost per
acquisition.





Operating Activities


Net cash
used in operations totaled $9.2 million in the year ended December 31,
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 ($4.1
million) included non-cash items of, depreciation and amortization ($0.5
million), write-off the deferred finance costs ($0.6 million), compensation
expense based on equity grants rather than cash ($1.8 million), offset by gains
on the sale of one of our patents ($0.4 million) and the gain on
sale of business ($7.1 million).  Thus, the cash used in operations
before the effect of timing differences was ($8.3
million).  With respect to revenue, the amount collected was more than
the amount recorded ($4.8 million decrease in accounts receivable) partially
offset by the increase in the income taxes receivable ($0.1
million).  With respect to expenses, the amount paid was more than the
amount recorded by $5.6 million.




33





Net cash
used in operations totaled $24.9 million in the year ended December 31,
2008.  The net loss ($45.5 million) included non-cash items
of an impairment for goodwill and other assets ($18.7 million), bad debt
provision related to doubtful accounts ($0.8 million), depreciation and
amortization ($4.1 million), and compensation expense based on equity grants
rather than cash ($3.1 million).  Thus, the cash used in operations before
the effect of timing differences was $18.8 million.  With respect to
revenue, the amount collected was more than the amount recorded ($1.8 million
decrease in accounts receivable) but offset by a decrease in the revenue
collected but deferred to the future ($1.2 million decrease in deferred
revenue).  With respect to expenses, the amount paid was more than the
amount recorded by $6.7 million; payments on accounts payable, accrued expenses
and other liabilities were higher than the related amount of expenses
($8.0 million), but were offset by the decrease in prepaid expenses and
other items ($1.3 million).




Investing
Activities


Net cash
provided by investing activities totaled approximately $11.6 million during the
year ended December 31, 2009.  Cash was provided by: the net proceeds
from the sale of the MIVA Media business ($9.8 million), net
proceeds from the sale of a patent ($0.4 million),and cash released
from restriction ($2.0 million) as collateral for the secured line of credit
agreement with Bridge Bank. Offsetting these sources was cash restricted to
secure the credit limit for credit cards issued to us by Bridge Bank ($0.2
million) and the purchase of capital items ($0.03
million).





Net cash
used in investing activities totaled approximately $5.2 million during the year
ended December 31, 2008.   This use of cash was for the purchase
of capital assets, including internally developed software.  We were
also required to provide a restricted cash balance of $2.0 million under our
Loan Agreement with Bridge Bank.





At
December 31, 2009, our existing infrastructure used to support the development
and delivery of our products and services is more than adequate for the
foreseeable future.  Therefore the cash investment requirement 2010 is
expected to be limited.  Additionally, we continuously review our
strategy in an effort to enhance or refine our business model.  From
time to time, we consider mergers and acquisitions that could require the use of
cash or divesting non-core assets that alternatively could raise
cash.  Currently, there are no immediate plans to engage in merger,
acquisition, or divesture activity.





Financing
Activities





Net cash
used in financing activities totaled approximately $4.54 million
during the year ended December 31, 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 ($0.19 million).





Net cash
provided by financing activities totaled approximately $2.7 million during the
year ended December 31, 2008.  We received proceeds of $4.0 under our
Loan Agreement with Bridge Bank.  Offsetting thee proceeds, we used
cash of approximately $0.5 million for payments on our capital lease obligations
for the software and hardware related to our Transformation Project and
approximately $0.8 million in fees associated with the loan from Bridge
Bank.  We also incurred non-cash financing of approximately $1.8
million related to our two capital lease obligations.




34





Liquidity





We
currently anticipate that our working capital of approximately $1.4 million,
including unrestricted cash of approximately $4.8 million as of
December 31, 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. 
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. Based on the progressive improvements we achieved throughout 2009,
the positive results in the fourth quarter of 2009, and the continuing positive
trend so far in 2010, we expect to show positive liquidity throughout
2010.  Nevertheless, 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 draw down cash under our 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 assure you that we will be able to
successfully address these factors or that, if our expectations are not met, we
will have sufficient capital resources to meet our obligations.





In the
ordinary course of business, we have provided indemnifications of varying scope
and terms to advertisers, advertising agencies, distribution partners, vendors,
lessors, business partners, and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach of such
agreements (including our recently executed MIVA Media Sale), services to be
provided by us, or from intellectual property infringement claims made by third
parties.  We may have future liabilities for some of these MIVA Media
related indemnifications even though we have sold that division. In addition, we
have entered into indemnification agreements with our directors and certain of
our officers that will require us, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors or officers.  We also have agreed to indemnify certain
former officers, directors, and employees of acquired companies in connection
with the acquisition of such companies.  We maintain director and
officer insurance, which may cover certain liabilities arising from our
obligation to indemnify our directors and officers and former directors,
officers, and employees of acquired companies, in certain
circumstances.





At this
time, it is not possible to determine any potential liability under these
indemnification agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular
agreement.  Such indemnification agreements may not be subject to
maximum loss clauses.  Historically, we have not incurred material
costs as a result of obligations under these agreements and we have not accrued
any liabilities related to such indemnification obligations in our financial
statements.  If a need arises to fund any of these indemnifications,
it could have an adverse effect on our liquidity.




35





Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties and actual results could vary materially as a result of
the factors described above and in the section included in Part I, Item 1A,
titled “Risk Factors,” in this annual report on Form 10-K.





CONTRACTUAL
OBLIGATIONS





Operating
leases





Our
primary administrative, sales, customer service, and technical facilities are in
a leased office facility in New York, New York.   Our New York
office is approximately 10,700 square feet and the lease expires in January
2016.





We also
lease approximately 22,000 square feet in Fort Myers, Florida, that served
primarily as our headquarters and operations center for MIVA Media and the lease
will expire in November 2012.  We sublease portions of our Fort Myers
facility as set forth below.





Sublease
income





In March
2009, in conjunction with the MIVA Media Sale, we licensed one floor in our
office located in Fort Myers, Florida (approximately 11,000 square feet) to the
buyer with the intent to convert into a sublease agreement upon receipt of
landlord consent.  The term of the license agreement commenced on
March 13, 2009, and it is expected to end on November 30, 2012.  The
sublease payments are expected to be received over this term.





From
August 2007 until December 2009, we had entered into a real estate sublease
agreement with an unrelated party to sublease approximately 20,000 square feet
of our office located in Fort Myers, Florida.  In December 2009, the
lease was amended whereby the landlord entered into a direct lease arrangement
with Vertro’s sublessor thereby relieving Vertro of any further contractual
obligation for this space.





In
February 2006 Vertro, through its then Searchfeed subsidiary, entered into a
lease for office space in Bridgewater, NJ with an expiration date of February
2011.  In December 2008, a sublease was executed between Vertro and an
unrelated party for the remaining life of the lease.  The sublease
payments are expected to be received over this term.





Guaranteed Royalty
Payments





We have
minimum contractual payments as part of our royalty bearing non-exclusive
license to certain Yahoo! patents that were used in our MIVA Media operations,
that are payable quarterly through August 2010.  In addition, we have
ongoing royalty payments based on our use of those patents.   We
are not currently using these patents in our operations.  Our rights
and minimum payment obligations under this agreement were not assigned to or
assumed by Adknowledge as part of the MIVA Media Sale. Therefore, since we would
no longer be operating the MIVA Media business after the date of sale, the
remaining minimum payments of approximately $1.0 million due by us under the
agreement were accrued as of the date of the MIVA Media Sale, and are included
in loss from discontinued operations for the year ended December 31,
2009.  At
December 31, 2009, $0.4 million of minimum payments remain
outstanding




36





The
following table illustrates the above contractual obligations as of December 31,
2009 (in thousands):





Payments
      due by Period (in thousands)Due
      in
                      
                      
                      Due
      in
                      
                      
                      Due
      in
                      
                      
                      More
      thanTotal
                      
                      
                      2010
                      
                      
                      2011-2012
                      
                      
                      2013-2014
                      
                      
                      5 yearsOperating
      Leases
                      
                      $
                      4,946
                      
                      
                      $
                      1,171
                      
                      
                      $
                      2,129
                      
                      
                      $
                      1,050
                      
                      
                      $
                      596Sublease
      Income
                      
                      
                      (995
                      )
                      
                      
                      (400
                      )
                      
                      
                      (595
                      )
                      
                      
                      -
                      
                      
                      
                      -Guaranteed
      Royalty Payments
                      
                      
                      400
                      
                      
                      
                      400
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      4,351
                      
                      
                      $
                      1,171
                      
                      
                      $
                      1,534
                      
                      
                      $
                      1,050
                      
                      
                      $
                      596





USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES





This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. When preparing our consolidated financial statements, we make
estimates and judgments that affect the reported amounts on our balance sheets
and income statements, and our related disclosure about contingent assets and
liabilities. We continually evaluate our estimates, including those related to
allowance for doubtful accounts and valuation allowance for deferred tax assets.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable in order to form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
ascertained from other sources. Different results would be obtained if
alternative assumptions or conditions are used and actual results will differ
from these estimates and those differences may be material.





Revenue





When an
ALOT user clicks on a sponsored advertisement which is routed to a distribution
partner’s network, revenues and related profit are recognized in the amount of
ALOT’s share of the partner’s fee. Non-click-through-related revenue from ALOT
resulting from a variety of search-related applications is recognized when
earned under the terms of the contractual arrangement with the advertiser or
advertising agency, provided that collection is probable.




37





Allowance
for Doubtful Accounts





We
maintain allowances for doubtful accounts for estimated losses resulting from
non-payments by our billable customers and partners. Our allowance for bad debt
must be considered from both a continuing and discontinued operational
perspective.  A relatively small allowance for doubtful accounts has
been recorded for continuing operations since there is minimal delinquency for
all the customer accounts.  The discontinued operations allowance for
the year ending December 31, 2009, primarily relates to all of the EU trade
receivables that were considered uncollectible and resulted in a full allowance
against these receivables at the date of the MIVA Media Sale.  With
the sale of the MIVA Media in March 2009, we retained only the EU receivable
accounts and their related allowance.  Subsequent to the sale, we were
able to collect a portion of those receivables.   We will
continue our EU collection efforts until the legal entities are
liquidated.  The total allowance for doubtful accounts was
approximately $0.7 million and $1.3 million as of December 31, 2009 and 2008,
respectively, of which $0.02 million and $0.05 million related to the allowance
for doubtful accounts associated with continuing operations. The following table
illustrates the related bad debt expense (recovery) as a percentage of revenues
from continuing operations for 2009 and 2008 (in thousands, except
percentages):





2009
                    
                    
                    2008Revenues
      from continuning operations
                    
                    $
                    27,633
                    
                    
                    $
                    41,291Bad
      debt recovery from continuing operations
                    
                    $
                    (1
                    )
                    
                    $
                    -Bad
      debt recovery as a percent of revenue
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Bad
      debt (recovery) expense - discontinued operations
                    
                    $
                    (13
                    )
                    
                    $
                    804





The
allowance for doubtful accounts is an estimate calculated based on an analysis
of current business and economic risks, customer credit-worthiness, specific
identifiable risks such as bankruptcies, terminations, or discontinued
customers, or other factors that may indicate a potential loss. The allowance is
reviewed on a periodic basis to provide for all reasonably expected losses in
the receivable balances and an expense is recorded using a reserve rate based on
the age of outstanding accounts receivable or when it is probable that a certain
receivable will not be collected. An account may be determined to be
uncollectible if all collection efforts have been exhausted, the customer has
filed for bankruptcy and all recourse against the account is exhausted, or
disputes are unresolved and negotiations to settle are exhausted. This
uncollectible amount is written off against the allowance. If our billable
customers’ ability to pay our invoices were to suffer, resulting in the
likelihood that we would not be paid for services rendered, additional
allowances may be necessary, which would result in an additional general and
administrative expense in the period such determination was made.





Historically,
our actual results have been consistent with these allowances. However, future
changes in trends could result in a material impact to future consolidated
statement of income and cash flows.  Based on the results of our
continuing operations for the year ended December 31, 2009, a 25 point basis
deviation from our estimates would have had a minimal effect on operating
income.





Income
Taxes





Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities, loss carry-forwards,
and tax credit carry-forwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that all, or some portion, of
such deferred tax assets will not be realized after considering the available
positive and negative evidence.  This also requires us to make
estimates of our future taxable results by taxable jurisdiction and to evaluate
tax-planning strategies. As of December 31, 2009, we have deferred tax assets of
$27.8 million offset by valuation allowances of $27.4 million, and deferred tax
liabilities of approximately $0.4 million.




38





At
December 31, 2009, we had a United States net operating loss (NOL) carry-forward
of $59.5 million, of which $36.5 million can currently be used at an annual rate
of $3.5 million pursuant to Internal Revenue Code Section 382.  The
balance of the U.S. NOL was generated as a result of current operations from
2005 to 2009, and is not expected to be limited in usage.  We have
U.K. NOL carry-forwards of $10.0 million.  As of December 31, 2009,
the deferred tax assets from all remaining NOLs are fully offset by valuation
allowances or deferred tax liabilities. Upon the adoption of new accounting
guidance for business combinations on January 1, 2009, subsequent releases, if
any, of valuation allowances established for deferred tax assets resulting from
net operating loss carry-forwards at the time of acquisition will be recorded as
a reductions of  the income tax provision.





The
following table illustrates the effective total tax rates for 2009 and 2008 for
continuing operations (in thousands, except percentages):





2009
                  
                  
                  2008Provision
      (benefit) for taxes
                  
                  $
                  (285
                  )
                  
                  $
                  216Loss
      before provision for income taxes
                  
                  $
                  (8,026
                  )
                  
                  $
                  (19,347
                  )Effective
      tax rates
                  
                  
                  3.6
                  %
                  
                  
                  -1.1
                  %





Impairment
Evaluations





We
evaluate the recoverability of long-lived assets, including property, plant, and
equipment and certain identifiable intangible assets, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. We perform indefinite-lived impairment tests on an annual basis or
more frequently in certain circumstances, if necessary. Factors considered
important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the assets, or the strategy for the
overall business, significant decrease in the market value of the assets,
declines in our market capitalization below our book value, and significant
negative industry or economic trends. When we determine that the carrying amount
of long-lived assets may not be recoverable based on the existence of one or
more of the indicators, the assets are assessed for impairment based on the
estimated future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition. If the carrying amount of a long-lived asset
exceeds its estimated future undiscounted cash flows, an impairment loss is
recorded for the excess of the asset’s carrying amount over its fair
value.





Goodwill,
other indefinite lived intangible asset, and other long-lived asset impairment
assessments are generally determined based on fair value techniques, including
determining the estimated future discounted and undiscounted cash flows over the
remaining useful life of the asset.  Those models require estimates of
future revenue, profits, capital expenditures, and working capital for each
unit. We estimate these amounts by evaluating historical trends, current
budgets, operating plans, and industry data.  Discounted cash flows
are calculated using a discount rate determined by management to be commensurate
with the risk inherent in the current business model. Determining the fair value
of reporting units and goodwill includes significant judgment by management and
different judgments could yield different results. If these estimates or their
related assumptions change in the future, we might be required to record
impairment charges for the assets.




39





As
disclosed in Note D to our consolidated financial statements, Impairment of Goodwill, Other
Intangibles, and Long-lived Assets, we recorded total goodwill and other
tangible asset impairment charges of $18.7 million in the fourth quarter of
2008.  This amount consists of $14.7 million of goodwill impairment
charges, $1.1 million of other indefinite lived intangible asset impairment, and
$2.9 million of long lived asset impairment.  Of the total, $10.8
million related to and is classified in discontinued operations.





As of
December 31, 2008, we have no remaining recorded goodwill or other indefinite
lived intangible assets.





Share-Based
Compensation





Share-based
compensation is estimated at the grant date based on the award’s fair value as
calculated by option-pricing models and is recognized as expense over the
requisite service period.  The option-pricing models require various
highly judgmental assumptions including volatility, forfeiture rates, and
expected option life.  If any of the assumptions used in the models
change significantly, share-based compensation expense may differ materially in
the future from that recorded in the current period.





We have
elected to adopt the alternative transition method for calculating the tax
effects of share-based compensation.  The alternative transition
method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (“APIC pool”) related to the tax effects of
employee share-based compensation, and to determine the subsequent impact on the
APIC pool and consolidated statements of cash flows of the tax effects of
employee share-based compensation awards. See Note F to the consolidated
financial statements, Accounting for Share-Based
Compensation, for a further discussion of share-based
compensation.





Legal
Contingencies





We are
subject to lawsuits and other claims related to our business and operations.
Periodically, we review the status of each significant matter and assess
potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and the amount can be reasonably estimated, we
accrue a liability for the estimated loss. Accruals are based on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to pending claims and might revise
our estimates.  The lawsuits against us could result in material
losses for us, both as a result of paying legal defense costs and any damages
that may result if we are unsuccessful in our defense.




40





ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Foreign
Currency Risk





As a
result of the sale of the MIVA Media, we have terminated EU centered
operations.  However, as part of the sale, certain assets and
liabilities were retained by us, and these items will continue to be subject to
foreign currency risk until the EU legal entities can be
liquidated.





Our
international operations are subject to risks, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility when compared to the United States. Accordingly, our future results
could be materially adversely impacted by changes in these or other
factors.





Foreign
exchange rate fluctuations may adversely affect our consolidated financial
position as well as our consolidated results of operations. Foreign exchange
rate fluctuations may adversely impact our financial position as the assets and
liabilities of our foreign operations are translated into U.S. dollars in
preparing our consolidated balance sheet. Our exposure to international exchange
rate fluctuations arises in part from intercompany accounts where costs were
incurred in the United States or the United Kingdom and subsequently charged to
our subsidiaries. These intercompany accounts were typically denominated in the
functional currency of the international subsidiary. The effect of foreign
exchange rate fluctuations on our consolidated financial position for the years
ended December 31, 2009 and 2008, was a net translation gain of approximately
$0.5 million and $6.1 million, respectively. These gains were
recognized as an adjustment to stockholders’ equity through accumulated other
comprehensive income until the date of the MIVA Media sale, at which time the
U.S. dollar became the functional currency of our EU entities. Subsequent to the
date of the MIVA Media sale, and with the U.S. dollar becoming the functional
currency, the effects of exchange rate fluctuations as it relates to the
intercompany accounts is now reflected in our consolidated statement of
operations.  Additionally, other foreign exchange rate fluctuations
may impact our consolidated results from operations for ongoing transactions
related to our EU liquidation process and for asset and liability account
balances retained in the post MIVA Media sale period.  The balance of
foreign currency translation adjustments of $12.9 million accumulated through
the date of the MIVA Media sale reflected in the December 31, 2009 consolidated
balance sheet as accumulated other comprehensive income, will be reflected in
discontinued operations when the retained assets of the foreign subsidiaries are
substantially liquidated.





ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.





See index
to Consolidated Financial Statements table of contents.





ITEM 9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.





ITEM
9A(T).  CONTROLS AND PROCEDURES





Management's
Evaluation of Disclosure Controls and Procedures.





We
carried out an evaluation required by the Securities Exchange Act of 1934, as
amended (the “1934 Act”), under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined
in Rule 13a-15(e) of the 1934 Act.  Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 2009, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the 1934 Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and to provide reasonable assurance that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.




41





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.





All
internal control systems, no matter how well designed, have inherent
limitations.A system of internal
control over financial reporting can provide only reasonable assurance and may
not prevent or detect misstatements. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Further, because of changes in
conditions, effectiveness of internal control over financial reporting may vary
over time.





An
internal control material weakness is a deficiency or a combination of
deficiencies in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.  A significant deficiency is a control deficiency, or
combination of control deficiencies in internal control over financial reporting
that is less severe than a material weakness, yet important enough to merit the
attention of those responsible for oversight of the company’s financial
reporting.





Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting based on theInternal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31,
2009.




42





This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.





Changes
in Internal Control Over Financial Reporting





In the
fourth quarter of 2009, we implemented new accounting software replacing older
software that was more suited for our sold operations.  The same
internal controls over financial reporting that were used with the old
accounting system were deployed for the new system with only minor changes being
made to accommodate the different methods of operations between the two
accounting software packages.  We have made no substantive changes in
our internal control over financial reporting in connection with our fourth
quarter 2009 evaluation that would materially affect, or are reasonably likely
to materially affect, its internal control over financial
reporting.





ITEM 9B. OTHER
INFORMATION





Not
applicable.





PART III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
information required by this item is incorporated by reference herein from
Vertro, Inc.’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2009.





ITEM
11.  EXECUTIVE COMPENSATION





The
information required by this item is incorporated by reference herein from
Vertro, Inc.’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year
ended December 31, 2009.





ITEM 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





The
information required by this item is incorporated by reference herein from
Vertro, Inc.’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2009.





ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is incorporated by reference herein from
Vertro, Inc.’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2009.




43





ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES





The
information required by this item is incorporated by reference herein from
Vertro, Inc.’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2009.





PART IV





ITEM 15.  EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.





(a)
            The
      following documents are filed as part of this Annual Report on Form
      10-K:





(1) The
following financial statements are included in this report under Item
8:





·
            Report
      of Independent Registered Public Accounting
  Firm.





·
            Consolidated
      Balance Sheets as of December 31, 2009 and
2008.





·
            Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008.





·
            Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss for the years
      ended December 31, 2009 and 2008.





·
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008.





·
            Notes
      to the Consolidated Financial
Statements.





(2) None


44


(b) The
following exhibits are filed as part of and incorporated by reference into this
report:


Exhibit No.
                                                                                        
                                                                                        Footnote
                                                                                        
                                                                                        Description2.1
                                                                                        
                                                                                        u
                                                                                        
                                                                                        Certificate
      of Ownership and Merger, Merging MIVA Name Change, Inc. into MIVA,
      Inc.2.2
                                                                                        
                                                                                        k*
                                                                                        
                                                                                        Asset
      Purchase Agreement dated March 12, 2009 among Vertro, Inc. (formerly known
      as MIVA, Inc.), B & B Advertising, Inc., MIVA (UK) Limited, U.S.
      Acquisition Sub, Inc., Ajax Media Ltd., and Adknowledge,
    Inc.2.3
                                                                                        
                                                                                        cc
                                                                                        
                                                                                        Certificate
      of Ownership and Merger, merging MIVA Renaming Corp. into
      Findwhat.com.3.1
                                                                                        
                                                                                        b
                                                                                        
                                                                                        Amended
      and Restated Certificate of Incorporation of Vertro, Inc. (formerly known
      as FindWhat.com, Inc.).3.2
                                                                                        
                                                                                        b
                                                                                        
                                                                                        Amended
      and Restated By-laws of Vertro, Inc. (formerly known as FindWhat.com,
      Inc.).10.1
                                                                                        
                                                                                        p+
                                                                                        
                                                                                        Executive
      Employment Agreement with Lowell Robinson.10.2
                                                                                        
                                                                                        p+
                                                                                        
                                                                                        Executive
      Employment Agreement between Vertro, Inc. (formerly known as FindWhat.com)
      and John Pisaris.10.3
                                                                                        
                                                                                        p+
                                                                                        
                                                                                        2007
      Long Term Incentive Compensation Program dated May 11,
    2007.10.3
                                                                                        
                                                                                        t+
                                                                                        
                                                                                        Description
      of the Material Terms of the Vertro (formerly known as MIVA, Inc.) 2009
      Bonus Program.10.4
                                                                                        
                                                                                        c+
                                                                                        
                                                                                        Vertro,
      Inc. (formerly known as Findwhat.com) 1999 Stock Incentive Plan, as
      amended.10.5
                                                                                        
                                                                                        d*
                                                                                        
                                                                                        Settlement
      and License Agreement with Overture Services, Inc. and Yahoo!
      Inc.10.6
                                                                                        
                                                                                        d+
                                                                                        
                                                                                        Executive
      Employment Agreement between Vertro, Inc. (formerly known as MIVA, Inc.)
      and Peter Corrao.10.7
                                                                                        
                                                                                        e+
                                                                                        
                                                                                        Form
      of Non-Qualified Stock Option Agreement.10.8
                                                                                        
                                                                                        f+
                                                                                        
                                                                                        Service
      Based RSU Agreement for 2006 Stock Award and Incentive
    Plan.10.9
                                                                                        
                                                                                        j+
                                                                                        
                                                                                        Performance
      Based RSU Agreement for 2006 Stock Award and Incentive
    Plan.10.10
                                                                                        
                                                                                        g+
                                                                                        
                                                                                        Vertro,
      Inc. (formerly known as MIVA, Inc.) 2006 Stock Award and Incentive
      Plan.10.11
                                                                                        
                                                                                        i
                                                                                        
                                                                                        Lease
      dated February 29, 2000 by and between Alot, Inc. (formerly Comet
      Systems, Inc.) and The Rector, Church-Wardens and Vestrymen of Trinity
      Church in New York, a religious corporation in the State of New York,
      including the previous amendment dated August 8,
  2000.10.12
                                                                                        
                                                                                        i
                                                                                        
                                                                                        Lease
      Modification and Extension Agreement by and between Alot, Inc.(formerly
      known as MIVA Direct, Inc.) and The Rector, Church-Wardens and
      Vestrymen of Trinity Church in New York, dated February 23,
      2006.10.13
                                                                                        
                                                                                        j
                                                                                        
                                                                                        Colonial
      Bank Plaza Office Building Lease, dated January 31, 2002, as
      amended.10.14
                                                                                        
                                                                                        v+
                                                                                        
                                                                                        Vertro,
      Inc. (formerly known as MIVA, Inc.) Policy for Compensation For
      Independent Members of the Board of Directors, as amended and restated
      June 3, 2009.10.15
                                                                                        
                                                                                        l+
                                                                                        
                                                                                        Form
      of Restricted Stock Unit Agreement for Non-Employee
    Directors.10.16
                                                                                        
                                                                                        w
                                                                                        
                                                                                        Third
      Amendment to Colonial Bank Plaza Office Building Lease, dated December 18,
      2009.10.17
                                                                                        
                                                                                        x
                                                                                        
                                                                                        Business
      Financing Agreement, dated December 17, 2009, among Vertro, Inc., Alot,
      Inc. and Bridge Bank N.A. and related Intellectual Property Security
      Agreement.10.18
                                                                                        
                                                                                        o+
                                                                                        
                                                                                        Form
      of Incentive Stock Option Agreement.10.19
                                                                                        
                                                                                        r+
                                                                                        
                                                                                        Form
      of Performance Based RSU Agreement for the Vertro, Inc. (formerly known as
      MIVA, Inc.) 2006 Stock Award and Incentive Plan.10.20
                                                                                        
                                                                                        s*
                                                                                        
                                                                                        Master
      Services Agreement and Statements of Work between Vertro, Inc. (formerly
      known as MIVA, Inc.) and Perot Systems Corporation dated May 11,
      2007.10.21
                                                                                        
                                                                                        bb
                                                                                        
                                                                                        Amendment
      No. 1 to the Agreement and Work Order No. 3 dated September 1, 2008
      between Vertro, Inc. (formerly known as MIVA, Inc.) and Perot Systems
      Corporation.10.22
                                                                                        
                                                                                        bb
                                                                                        
                                                                                        Amendment
      No. 2 to the Agreement and Work Order No. 3 dated February 1, 2009 between
      Vertro, Inc. (formerly known as MIVA, Inc.) and Perot Systems
      Corporation.10.23
                                                                                        
                                                                                        o+
                                                                                        
                                                                                        Vertro,
      Inc. (formerly known as FindWhat.com) 2004 Stock Incentive
      Plan.10.24
                                                                                        
                                                                                        m+
                                                                                        
                                                                                        Executive
      Employment Agreement with Subhransu “Brian”
    Mukherjee.




45




The
following exhibits are filed as part of and incorporated by reference into this
report:





Exhibit No.
                                                                    
                                                                    Footnote
                                                                    
                                                                    Description10.25
                                                                    
                                                                    o+
                                                                    
                                                                    Form
      of Stock Option Agreement for the Vertro (formerly known as FindWhat.com)
      2004 Stock Incentive Plan.10.26
                                                                    
                                                                    t+
                                                                    
                                                                    Amendment
      to Employment Agreement with Lowell Robinson.10.27
                                                                    
                                                                    t+
                                                                    
                                                                    Amendment
      to Employment Agreement with Subhransu “Brian”Mukherjee.10.28
                                                                    
                                                                    bb
                                                                    
                                                                    Amended
      and Restated Google Services Agreement dated November 10, 2008 between
      Vertro, Inc. (formerly known as MIVA, Inc.) and Google,
    Inc.10.29
                                                                    
                                                                    bb
                                                                    
                                                                    Google
      Services Agreement Order Form dated November 10, 2008 between Vertro, Inc.
      (formerly known as MIVA, Inc.) and Google, Inc.10.31
                                                                    
                                                                    aa+
                                                                    
                                                                    Description
      of the Material Terms of the Amended and Restated Vertro 2009 Bonus
      Program.10.32
                                                                    
                                                                    t+
                                                                    
                                                                    Amendment
      I to Employment Agreement with John B. Pisaris.10.33
                                                                    
                                                                    
                                                                    
                                                                    Reserved.10.34
                                                                    
                                                                    t+
                                                                    
                                                                    Amendment
      I to Employment Agreement with Peter Corrao.10.35
                                                                    
                                                                    t+
                                                                    
                                                                    First
      Amendment to Vertro, Inc. (fka FindWhat.com, Inc.) 1999 Stock Incentive
      Plan.10.36
                                                                    
                                                                    t+
                                                                    
                                                                    First
      Amendment to Vertro, Inc. (fka FindWhat.com, Inc.) 2004 Stock Incentive
      Plan.10.37
                                                                    
                                                                    t+
                                                                    
                                                                    First
      Amendment to Vertro, Inc. 2006 Stock Award and Incentive
    Plan.10.38
                                                                    
                                                                    +
                                                                    
                                                                    Summary
      of the Material Terms of the Vertro Inc. 2009 Long Term Incentive
      Compensation Program.14.1
                                                                    
                                                                    n
                                                                    
                                                                    Code
      of Ethics21.1
                                                                    
                                                                    
                                                                    
                                                                    List
      of Subsidiaries23.1
                                                                    
                                                                    
                                                                    
                                                                    Consent
      of Independent Registered Public Accounting Firm24.1
                                                                    
                                                                    
                                                                    
                                                                    Power
      of Attorney31.1
                                                                    
                                                                    
                                                                    
                                                                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                                                                    
                                                                    
                                                                    
                                                                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
                                                                    
                                                                    
                                                                    
                                                                    Certification
      of Chief Executive Officer of Periodic Financial Reports pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
      1350.32.2
                                                                    
                                                                    
                                                                    
                                                                    Certification
      of Chief Financial Officer of Periodic Financial Reports pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
      1350.




46




Footnote
References:


a.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on June 16, 2005 with
      Vertro's Form 8-K/A.b.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on September 3, 2004
      with Vertro's Form 8-K.c.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 17, 2004 with
      Vertro's Form S-8.d.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on November 9, 2005 with
      Vertro's Form 10-Q.e.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on August 6, 2004 with
      Vertro's Form 10-Q.f.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on November 13, 2006
      with Vertro's Form 10Q/A.g.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on August 22, 2006 with
      Vertro's Form 8-K.h.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 14, 2008 with
      Vertro's Form 10-K.i.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 1, 2006 with
      Vertro's Form 8-K.j.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on November 6, 2002 with
      Vertro's Form 10-QSB.k.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 18, 2009 with
      Vertro's Form 8-K.l.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on June 20, 2006 with
      Vertro's Form 8-K.m.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on July 14, 2006 with
      Vertro's Form 8-K.n.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 5, 2004 with
      Vertro's Form 10-K.o.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 16, 2005 with
      Vertro's Form 10-K.p.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on March 16, 2007 with
      Vertro's Form 10-K.q.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on December 19, 2007 with
      Vertro's Form 8-Kr.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on December 21, 2007 on
      Vertro's Form 8-K.s.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on August 8, 2007 with
      Vertro's Form 10-Q.t.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on December 23, 2008 with
      Vertro's Form 8-K.u.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on June 30, 2009 with
      Vertro's Form 8-K.v.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on November 12, 2009 with
      Vertro's Form 10-Q.w.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on December 24, 2009 with
      Vertro's Form 8-K.x.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on February  2,
      2010 with Vertro’s Form 8-K.aa.
                                                                                
                                                                                Incrporated
      by reference to the exhibit previously filed on July 2, 2009 with Vertro's
      Form 8-K.bb.
                                                                                
                                                                                Incorported
      by reference to the exhibit previously filed on March 31, 2009 with
      Vertro's Form 10-K.cc.
                                                                                
                                                                                Incorporated
      by reference to the exhibit previously filed on June 9, 2009 with Vertro’s
      Form 8-K.+
                                                                                
                                                                                Management
      compensatory contract or plan.*
                                                                                
                                                                                Portions
      of this exhibit have been omitted pursuant to a request for confidential
      treatment filed with the Commission under Rule 24b-2. The omitted
      confidential material has been filed separately with the
      Commission.  The location of the omitted confidential
      information is indicated in the exhibit with asterisks
    (***).




47





The
Agreements that have been filed or incorporated herein by reference (the
“Agreements”) are included to provide investors and security holders with
information regarding their terms.  They are not intended to provide
any other financial information about the Company or its subsidiaries and
affiliates. The representations, warranties and covenants contained in each of
the Agreements were made only for purposes of the Agreements and as of specific
dates; were solely for the benefit of the parties to the Agreements; may be
subject to limitations agreed upon by the parties, including being qualified by
confidential disclosures made for the purposes of allocating contractual risk
between the parties to the Agreement instead of establishing these matters as
facts; and may be subject to standards of materiality applicable to the
contracting parties that differ from those applicable to
investors.  Investors should not rely on the representations,
warranties and covenants or any description thereof as characterizations of the
actual state of facts or condition of the Company or any of its subsidiaries or
affiliates. Moreover, information concerning the subject matter of the
representations, warranties and covenants may change after the date of the
Agreements, which subsequent information may or may not be fully reflected in
public disclosures by the Company.




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Vertro,
      INC.Date:  March
      25, 2010
              By:
              /s/ Peter A. CorraoPresident
      and Chief Executive Officer





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities indicated on the
25th
day of March 2010.





Signature
                        
                        Title/s/ Peter A. Corrao
                        
                        President,
      Chief Executive Officer, and DirectorPeter
      A. Corrao
                        
                        (principal
      executive officer)/s/ Michael Cutler
                        
                        Chief
      Financial OfficerMichael
      Cutler
                        
                        (principal
      financial and accounting officer)*/s/ Lawrence Weber *
                        
                        Chairman
      of the Board of DirectorsLawrence
      Weber*/s/ Gerald W. Hepp *
                        
                        DirectorGerald
      W. Hepp*/s/ Joseph P. Durrett *
                        
                        DirectorJoseph
      P. Durrett*/s/ Adele Goldberg *
                        
                        DirectorAdele
      Goldberg*/s/ Lee S. Simonson *
                        
                        DirectorLee
      S. Simonson*By: /s/ Peter A. Corrao
                        
                        Attorney-in-Fact




48





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageConsolidated
      Financial Statements:Report
      of Independent Registered Public Accounting Firm
                    
                    50Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                    
                    51Consolidated
      Statements of Operations for each of the two years in the
      period  ended December 31, 2009
                    
                    52Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss for each of the
      two years in the period ended December 31, 2009
                    
                    53Consolidated
      Statements of Cash Flows for each of the two years in the period ended
      December 31, 2009
                    
                    54Notes
      to Consolidated Financial Statements
                    
                    55Financial
      Statement Schedules:All
      schedules are omitted because they are not required for a smaller
      reporting company.




49




Report
of Independent Registered Public Accounting Firm




Board of
Directors and Stockholders


Vertro,
Inc.


New York,
New York




We have
audited the accompanying consolidated balance sheets of Vertro, Inc. (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and comprehensive loss, and cash
flows for each of the two years in the period ended December 31,
2009.    These financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.   The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion.An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements.  We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Vertro, Inc. at December 31,
2009 and 2008, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.





Miami, Florida
              /s/
      BDO Seidman, LLPMarch
      25, 2010
              Certified
      Public Accountants




50




Vertro,
Inc.
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except par values)
 
 December 31,
                      
                      
                      December 31,ASSETS
                      
                      2009
                      
                      
                      2008CURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      4,837
                      
                      
                      $
                      6,699Accounts
      receivable, less allowances of $679 and $1,242 at December 31, 2009 and
      2008.
                      
                      
                      3,041
                      
                      
                      
                      11,204Deferred
      tax assets
                      
                      
                      -
                      
                      
                      
                      167Income
      tax receivable
                      
                      
                      695
                      
                      
                      
                      247Prepaid
      expenses and other current assets
                      
                      
                      651
                      
                      
                      
                      1,584TOTAL
      CURRENT ASSETS
                      
                      
                      9,224
                      
                      
                      
                      19,901Property
      and equipment, net
                      
                      
                      71
                      
                      
                      
                      4,975Restricted
      cash
                      
                      
                      200
                      
                      
                      
                      2,000Other
      assets
                      
                      
                      517
                      
                      
                      
                      703TOTAL
      ASSETS
                      
                      $
                      10,012
                      
                      
                      $
                      27,579LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      4,706
                      
                      
                      $
                      6,609Accrued
      expenses
                      
                      
                      2,778
                      
                      
                      
                      9,620Current
      portion of long-term debt
                      
                      
                      -
                      
                      
                      
                      783Income
      tax payable
                      
                      
                      299
                      
                      
                      
                      -Deferred
      revenue
                      
                      
                      25
                      
                      
                      
                      1,914TOTAL
      CURRENT LIABILITIES
                      
                      
                      7,808
                      
                      
                      
                      18,926Deferred
      tax liabilities long-term
                      
                      
                      -
                      
                      
                      
                      167Long-term
      debt
                      
                      
                      -
                      
                      
                      
                      4,595Other
      long-term liabilities
                      
                      
                      1,365
                      
                      
                      
                      1,305TOTAL
      LIABILITIES
                      
                      
                      9,173
                      
                      
                      
                      24,993COMMITMENTS
      AND CONTINGENCIES
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS’
      EQUITYPreferred
      stock, $.001 par value; authorized, 500 shares; none issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $.001 par value; authorized, 200,000 shares; issued 35,642 and
      34,480 respectively; outstanding 33,852 and 32,731,
      respectively
                      
                      
                      35
                      
                      
                      
                      34Additional
      paid-in capital
                      
                      
                      270,690
                      
                      
                      
                      268,841Treasury
      stock; 1,790 and 1,749 shares at cost, respectively
                      
                      
                      (6,722
                      )
                      
                      
                      (6,719
                      )Accumulated
      other comprehensive income
                      
                      
                      12,914
                      
                      
                      
                      12,393Accumulated
      Deficit
                      
                      
                      (276,078
                      )
                      
                      
                      (271,963
                      )TOTAL
      STOCKHOLDERS' EQUITY
                      
                      
                      839
                      
                      
                      
                      2,586TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      10,012
                      
                      
                      $
                      27,579
 
 The
accompanying notes are an integral part of these consolidated
statements.
  51
 
 Vertro,
Inc.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except per share amounts)
 
 For the Year Ended December 31,2009
                          
                          
                          2008Revenues
                          
                          $
                          27,633
                          
                          
                          $
                          41,291Cost
      of services
                          
                          
                          1,767
                          
                          
                          
                          2,352Gross
      profit
                          
                          
                          25,866
                          
                          
                          
                          38,939Operating
      expensesMarketing,
      sales, and service
                          
                          
                          22,597
                          
                          
                          
                          28,269General
      and administrative
                          
                          
                          8,521
                          
                          
                          
                          14,808Product
      development
                          
                          
                          2,452
                          
                          
                          
                          3,562Amortization
                          
                          
                          146
                          
                          
                          
                          1,364Impairment
      loss on goodwill and other assets
                          
                          
                          -
                          
                          
                          
                          7,927Restructuring
      Charges
                          
                          
                          (15
                          )
                          
                          
                          634Litigation
      Settlement
                          
                          
                          -
                          
                          
                          
                          1,875Total
      operating expenses
                          
                          
                          33,701
                          
                          
                          
                          58,439Loss
      from operations
                          
                          
                          (7,835
                          )
                          
                          
                          (19,500
                          )Other
      Income
                          
                          
                          360
                          
                          
                          
                          -Interest
      income (expense), net
                          
                          
                          (75
                          )
                          
                          
                          153Exchange
      rate loss
                          
                          
                          (476
                          )
                          
                          
                          -Loss
      before provision for income taxes
                          
                          
                          (8,026
                          )
                          
                          
                          (19,347
                          )Income
      tax expense (benefit)
                          
                          
                          (285
                          )
                          
                          
                          216Net
      loss from continuing operations
                          
                          
                          (7,741
                          )
                          
                          
                          (19,563
                          )Loss
      from discontinued operations, net of income taxes
                          
                          
                          (3,513
                          )
                          
                          
                          (25,890
                          )Gain
      on Sale of discontinued operations, net of income taxes
                          
                          
                          7,139
                          
                          
                          
                          -Net
      loss
                          
                          $
                          (4,115
                          )
                          
                          $
                          (45,453
                          )Basic
      and Diluted Earnings (loss) per shareContinuing
      operations
                          
                          $
                          (0.23
                          )
                          
                          $
                          (0.60
                          )Discontinued
      operations
                          
                          $
                          0.11
                          
                          
                          $
                          (0.79
                          )Total
      Earnings (loss) per share
                          
                          $
                          (0.12
                          )
                          
                          $
                          (1.39
                          )Weighted-average
      number of common shares outstandingBasic
                          
                          
                          33,648
                          
                          
                          
                          32,621Diluted
                          
                          
                          33,648
                          
                          
                          
                          32,621
 
 The
accompanying notes are an integral part of these consolidated
statements.
  52
 
 Vertro,
Inc.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (in
thousands)
 
 For the Year EndedDecember
      31,2009
                                
                                
                                2008Common
      stockBalance,
      beginning of year
                                
                                $
                                34
                                
                                
                                $
                                34Common
      stock issued related to restricted stock unit issuances
                                
                                
                                1
                                
                                
                                
                                -Balance,
      end of year
                                
                                $
                                35
                                
                                
                                $
                                34Additional
      paid-in-capitalBalance,
      beginning of year
                                
                                $
                                268,841
                                
                                
                                $
                                265,721Compensation
      charge related to restricted stock unit issuance and non-employee
      options
                                
                                
                                1,849
                                
                                
                                
                                3,120Balance,
      end of year
                                
                                $
                                270,690
                                
                                
                                $
                                268,841Treasury
      stockBalance,
      beginning of year
                                
                                $
                                (6,719
                                )
                                
                                $
                                (6,694
                                )Treasury
      stock received to satisfy receivables
                                
                                
                                (3
                                )
                                
                                
                                (25
                                )Balance,
      end of year
                                
                                $
                                (6,722
                                )
                                
                                $
                                (6,719
                                )Accumulated
      deficitBalance,
      beginning of year
                                
                                $
                                (271,963
                                )
                                
                                $
                                (226,514
                                )Equity
      Transition Adjustment
                                
                                
                                
                                
                                
                                
                                4Net
      loss
                                
                                
                                (4,115
                                )
                                
                                
                                (45,453
                                )Balance,
      end of year
                                
                                $
                                (276,078
                                )
                                
                                $
                                (271,963
                                )Accumulated
      other comprehensive incomeBalance,
      beginning of year
                                
                                $
                                12,393
                                
                                
                                $
                                6,294Foreign
      currency translation adjustment
                                
                                
                                521
                                
                                
                                
                                6,099Balance,
      end of year
                                
                                $
                                12,914
                                
                                
                                $
                                12,393Stockholders’
      Equity
                                
                                $
                                839
                                
                                
                                $
                                2,586Comprehensive
      lossNet
      loss
                                
                                $
                                (4,115
                                )
                                
                                $
                                (45,453
                                )Other
      comprehensive income foreign currency translation
                                
                                
                                521
                                
                                
                                
                                6,099Comprehensive
      loss
                                
                                $
                                (3,594
                                )
                                
                                $
                                (39,354
                                )Number
      of SharesCommon
      stockBalance,
      beginning of year
                                
                                
                                34,480
                                
                                
                                
                                33,934Common
      stock issued related to restricted stock unit issuances
                                
                                
                                1,162
                                
                                
                                
                                546Balance,
      end of year
                                
                                
                                35,642
                                
                                
                                
                                34,480
 The
accompanying notes are an integral part of these consolidated
statements.
  53
 
 Vertro,
Inc.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 
 For the Year Endedended December 31,2009
                  
                  
                  2008Cash
      Flows from Operating ActivitiesNet
      loss
                  
                  $
                  (4,115
                  )
                  
                  $
                  (45,453
                  )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activitiesProvision
      recovery for doubtful accounts
                  
                  
                  (14
                  )
                  
                  
                  804Depreciation
      and amortization
                  
                  
                  474
                  
                  
                  
                  4,069Impairment
      loss on goodwill and other assets
                  
                  
                  -
                  
                  
                  
                  18,725Write-off
      of deferred financing costs
                  
                  
                  560
                  
                  
                  
                  -Equity
      based compensation
                  
                  
                  1,850
                  
                  
                  
                  3,120Foreign
      Exchange Loss
                  
                  
                  476
                  
                  
                  
                  -Gain
      on sale of business
                  
                  
                  (7,139
                  )
                  
                  
                  (75
                  )Gain
      on sale of patent
                  
                  
                  (360
                  )
                  
                  
                  -Changes
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  4,784
                  
                  
                  
                  1,764Prepaid
      expenses and other current assets
                  
                  
                  (18
                  )
                  
                  
                  1,226Income
      taxes receivable less payable
                  
                  
                  (149
                  )
                  
                  
                  174Deferred
      revenue
                  
                  
                  (1,889
                  )
                  
                  
                  (1,221
                  )Other
      Assets
                  
                  
                  54Accounts
      payable, accrued expenses and other liabilities
                  
                  
                  (3,672
                  )
                  
                  
                  (7,990
                  )Net
      Cash (used in) operating activities
                  
                  
                  (9,158
                  )
                  
                  
                  (24,857
                  )Cash
      Flows from Investing ActivitiesRelease
      (provision) of line of credit restricted collateral
                  
                  
                  2,000
                  
                  
                  
                  (2,000
                  )Net
      increase for cash restricted to secure credit cards
                  
                  
                  (200
                  )
                  
                  
                  -Net
      proceeds from sale of business
                  
                  
                  9,770
                  
                  
                  
                  -Net
      Proceeds from sale of patent
                  
                  
                  360Purchase
      of capital items including internally developed software
                  
                  
                  (334
                  )
                  
                  
                  (3,190
                  )Net
      Cash provided by (used in) investing activities
                  
                  
                  11,596
                  
                  
                  
                  (5,190
                  )Cash
      Flows from Financing ActivitiesProceeds
      (repayment) of secured line of credit
                  
                  
                  (4,351
                  )
                  
                  
                  3,204Payments
      made on notes payable and capital leases
                  
                  
                  (186
                  )
                  
                  
                  (476
                  )Net
      Cash provided by (used in) financing activities
                  
                  
                  (4,537
                  )
                  
                  
                  2,728Effect
      of Foreign Currency Exchange Rates
                  
                  
                  237
                  
                  
                  
                  4,113Decrease
      in Cash and Cash Equivalents
                  
                  
                  (1,862
                  )
                  
                  
                  (23,206
                  )Cash
      and Cash Equivalents, Beginning of year
                  
                  
                  6,699
                  
                  
                  
                  29,905Cash
      and Cash Equivalents, End of year
                  
                  $
                  4,837
                  
                  
                  $
                  6,699
  The
accompanying notes are an integral part of these consolidated
statements.
  54




Vertro,
Inc.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
A - NATURE OF BUSINESS





Vertro,
Inc., together with its wholly-owned subsidiaries, collectively, the “Company,”
“we,” “us” or “Vertro,” is an online media and advertising network
company.





In 2009,
we offered a range of products and services through two divisions – ALOT and
MIVA Media (which was sold in the MIVA Media Sale on March 12,
2009.  See Note C – Sale of MIVA Media and Discontinued
Operations).





ALOT.com


ALOT
offers homepage, desktop application, and Internet browser toolbar products
under the ALOT brand. Our customizable ALOT Homepage, ALOT Desktop and ALOT
Toolbar products are designed to make the Internet easy for consumers by
providing direct access to affinity content and search results. These products
generate over two million Internet searches per day.





MIVA
Media


Prior to
the MIVA Media Sale, MIVA Media was an auction based pay-per-click advertising
network that we operated across North America and in Europe.  MIVA Media
connected buyers and sellers online by displaying advertisements in response to
consumer search or browsing activity on select Internet properties.





The
majority of ALOT.com revenue is generated through Internet search queries. Each
of our products includes a search box that generates search queries to our
website http://search.alot.com
where we serve algorithmic and sponsored search listings through our contractual
relationships with third-party providers. When consumers conduct web searches
through our products and subsequently click-through on relevant ad listings, we
earn a percentage of the total click-through revenue provided by the third-party
providers that serviced the advertisement. Our search revenue is not subject to
further revenue share arrangements and we recognize 100% of the revenue
earned.  In addition to search revenue, our ALOT products display
third-party content through buttons.  Some of these buttons generate
Internet traffic that is monetized through pay-per-click and cost-per-action
relationships with publishing partners and advertisers. Our website page-views
are also monetized through cost-per-thousand display ads. We also are able to
utilize user behavioral data to improve the targeting of our product offerings
and to generate other forms of revenue. As we continue to build a consumer
audience in various marketable affinity segments, we believe we will be
positioned to monetize our properties through behavioral, video and other new
advertising formats.





Prior to
the sale of the MIVA Media assets to Adknowledge on March 12, 2009, we derived
MIVA Media revenue primarily from online advertising by delivering relevant
contextual and search ad listings to our third-party ad network and our consumer
audiences on a performance basis. Marketers only paid for advertising when a
predetermined action occurred, such as when an Internet user clicked on an
ad.


55





NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





These
consolidated financial statements include the accounts and operations
of Vertro, Inc. and our wholly-owned domestic and international
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the current year presentation.





Liquidity





Despite
our negative operating performance in 2009 and 2008, we currently anticipate
that our working capital of approximately $1.4 million, including
cash of approximately $4.8 million as of December 31, 2009,
along with cash flows from operations, will be sufficient to meet our liquidity
needs for working capital and capital expenditures over at least the next 12
months.





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.  Our future liquidity and capital
requirements will depend on numerous factors including the pace of expansion of
our operations, competitive pressures, and acquisitions of complementary
products, technologies, or businesses.  As we require additional
capital resources, we may seek to sell additional equity or debt securities or
look to borrow against our financed receivable loan agreement.  The
sale of additional equity or convertible debt securities would result in
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.  Our forecast of the period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties and actual
results could vary materially as a result of the factors described
above.





Use
of Estimates





The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions in determining the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period.  Significant estimates in these
consolidated financial statements include estimates of: asset impairment; income
taxes; tax valuation reserves; restructuring reserve; loss contingencies;
allowances for doubtful accounts; share-based compensation; and useful lives for
depreciation and amortization.  Actual results could differ materially
from these estimates.





Revenue
Recognition





When an
ALOT user clicks on a sponsored advertisement on a partner’s network, revenues
are recognized in the amount of the partner’s fee due to ALOT.
Non-click-through-related revenue from ALOT is recognized when earned under the
terms of the contractual arrangement with the advertiser or advertising agency,
provided that collection is reasonably assured.


56





In our
MIVA Media Division, revenue was generated primarily from click-throughs on our
managed advertisers’ paid listings. When an Internet user clicked on a keyword
advertisement, revenue was recognized in the amount of the advertiser’s bid
price. We recorded the MIVA Media click-through revenue gross, and private label
revenue net. As a result of the MIVA Media sale, revenue recorded from the MIVA
Media Division is now included as part of discontinued operations for all
periods presented.





Cost
of Services





Our cost
of services consists of infrastructure, personnel, and backfill expenses
directly related to the production, distribution and usage of our ALOT
products.





Cash
and Cash Equivalents





Cash
consisted of highly liquid investments.  We did not maintain a balance
in short-term investments as of December 31, 2009 or 2008.





Allowance
for Doubtful Accounts





We record
our allowance for doubtful accounts based on our assessment of various
factors.  We consider historical experience, the age of the accounts
receivable balances, the credit quality of our customers, current economic
conditions, and other factors that may affect our customers’ ability to pay to
determine the level of allowance required.





Concentration
of Credit Risk





Financial
instruments that potentially subject us to significant concentration of credit
risk consist primarily of cash and accounts receivable. As of December 31,
2009, substantially all of our cash was on deposit with a single financial
institution.  As of December 31, 2009, our cash and restricted cash
with this financial institution exceeded FDIC insured
limits.  Accounts receivable are typically unsecured and are derived
from revenue earned from customers primarily located in the United States. As of
December 31, 2009, one customer (Google) accounted for approximately 81% of
the accounts receivable balance and represented approximately 91% of
consolidated revenues from continuing operations for 2009. This same customer,
as of December 31, 2008, represented approximately 22% of the consolidated
accounts receivable balance, 88% of the continuing accounts receivable balance,
and approximately 94% of the continuing revenues for 2008.  The 2008
accounts receivable balance represents balances arising prior to the sale of
Media Assets and includes MIVA Media balances.





Fair
Value of Financial Instruments





At
December 31, 2009, our financial instruments included cash and cash equivalents,
accounts receivable, and accounts payable.  At December 31, 2008 our
financial instruments included cash and cash equivalents, accounts receivable,
accounts payable, and other long-term debt, including approximately $4.0 million
under our credit facility with Bridge Bank that was entered into on November 7,
2008 and repaid in March 2009.


57





The fair
values of these financial instruments approximated their carrying values based
on either their short maturity or current terms for similar
instruments.





Capitalized
Software





Product
development costs for internal use software are expensed as incurred or
capitalized into property and equipment in accordance with applicable accounting
guidance, which requires that costs incurred in the preliminary project and
post-implementation stages of an internal use software project be expensed as
incurred and that certain costs incurred in the application development stage of
a project be capitalized. Capitalized costs are amortized over the estimated
useful life of two to five years using the straight line method.  In
2009 there was no amortization of capitalized software costs due to the full
amortization or impairment of previously capitalized software costs in 2008, and
the Transformation Project (see Note E) had not been placed in service prior to
its inclusion in the sale of the MIVA Media assets.  In 2008, the
amortization of capitalized costs totaled approximately $2.2
million, of which $0.8 million is included in loss from discontinued operations
and $1.4 million is included in continuing operations.





Comprehensive
Loss


Total
comprehensive loss is comprised of net loss shown in the consolidated statement
of operations and net foreign currency translation
adjustments..  Total comprehensive loss for the year ended December
31, 2009 and 2008, was $(3.6) million and $(39.4) million,
respectively.





Accumulated
Other Comprehensive Income


At
December 31, 2009, Accumulated Other Comprehensive Income, which is shown in the
equity section of the consolidated balance sheet, is an accumulation of prior
net foreign currency translation adjustments of approximately $12.9
million.  The sale of MIVA Media on March 12, 2009, did not include
the transfer to the buyer of any significant assets or liabilities of our
foreign subsidiaries.  We will release the $12.9 million of related
currency translation adjustments from Accumulated Other Comprehensive Income
into discontinued operations in the consolidated statement of operations when
the retained foreign entity assets are substantially liquidated.





Advertising
Costs





Advertising
costs are expensed as incurred, and are included in Marketing, Sales and Service
expense. We incurred approximately $21.0 million and $26.5 million in advertising expense during 2009 and 2008,
respectively. The majority of this was spent on keyword and display advertising
that we used to promote downloads of our consumer software products in 2009 and
2008.





Income
Taxes





Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities, loss carry-forwards,
and tax credit carry-forwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that all, or some portion, of
such deferred tax assets will not be realized. See Note P – “Income Taxes” for
additional information.


58





Property
and Equipment





Equipment
and furniture are stated at cost.  In the case of items acquired as a
part of business acquisitions, cost is recorded at fair value on the date of
acquisition. Equipment and furniture are depreciated using the straight-line
method over the estimated useful lives for the respective assets, which range
from two to five years. Depreciation expense consists of depreciation of
computer equipment and furniture. Improvements to leased premises are
capitalized and amortized over the shorter of the related lease term or the
useful lives of the improvements, which periods range from three to ten
years.





Goodwill
and Other Long-Lived Assets





Our
methodology for allocating the purchase price of acquisitions is based on
established valuation techniques.  Goodwill is measured as the excess
of the cost of an acquired entity over the net of the amounts assigned to
identifiable assets acquired and liabilities assumed. We perform goodwill and
indefinite lived intangible asset impairment tests on an annual basis as of
October 1st or more frequently in certain circumstances, if necessary. We
compare the fair value of the reporting unit to its carrying amount including
goodwill. If the carrying amount of a reporting unit exceeds the fair value, we
perform an additional fair value measurement calculation to determine the
impairment loss, which would be charged to operations.





We
evaluate the recoverability of long-lived assets, including property and
equipment, and certain identifiable intangible assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  Additionally, on an annual basis, we review the
useful lives of these assets to ensure they remain appropriate. Factors
considered important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the assets or the strategy for the
overall business, significant decrease in the market value of the assets, an
increase in competition or loss of affiliates, or significant negative industry
or economic trends. When we determine that the carrying amount of long-lived
assets may not be recoverable based on the existence of one or more of the
indicators, the assets are assessed for impairment based on the estimated future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the carrying amount of a long-lived asset exceeds its
estimated future undiscounted cash flows, an impairment loss is recorded for the
excess of the asset’s carrying amount over its fair value.





Goodwill,
indefinite life, and long-lived asset impairment assessments are generally
determined based on fair value techniques, including determining the estimated
future discounted and undiscounted cash flows over the remaining useful life of
the asset.  Those models require estimates of future revenue, profits,
capital expenditures and working capital for each unit. We estimate these
amounts by evaluating historical trends, current budgets, operating plans and
industry data.  Discounted cash flows are calculated using a discount
rate determined by management to be commensurate with the risk inherent in the
current business model. Determining the fair value of reporting units and
goodwill includes significant judgment by management and different judgments
could yield different results. If these estimates or their related assumptions
change in the future, we might be required to record impairment charges for the
assets.


59





Share
Based Compensation





We used
the modified-prospective-transition method in connection with the adoption of
fair value recognition provisions for share based compensation
expense.  Under that transition method, compensation cost recognized
in 2008 and 2009 includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimate previously established; and (b) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimates.





Foreign
Currency Translation





As a
result of the sale of MIVA Media, we have terminated EU centered operations and
all operations are now centered in the U.S.  As a result, the U.S.
dollar has become the functional currency for all
operations.  Effective April 1, 2009, we are recording all current
foreign currency translation adjustments in current period income (loss) from
continuing operations.  The balance of foreign currency translation
adjustments accumulated through the date of sale, which is reflected in the
balance sheet as accumulated other comprehensive income, will be reflected in
discontinued operations when the retained foreign entities are substantially
liquidated.





Operating
Leases





We lease
office space under operating lease agreements with remaining lease periods of up
to 6 years.  Certain of the lease agreements contain rent holidays and rent
escalation provisions.  Rent holidays and rent escalation provisions are
considered in determining straight-line rent expense to be recorded over the
lease term.  The lease term begins on the date of initial possession of the
lease property for purposes of recognizing lease expense on a straight-line
basis over the term of the lease.  Lease renewal periods are considered on
a lease-by-lease basis and generally are not included in determining the initial
lease term rent expense.





New
Accounting Pronouncements


On July
1, 2009, the FASBAccounting Standards
Codification was issued.  Upon release of the Codification all
previously existing non-governmental GAAP standards were
superseded.  The Codification was established as the source of
authoritative GAAP recognized by the FASB to be applied to nongovernmental
entities, along with the rules and interpretive releases of the SEC, as
authoritative GAAP for SEC registrants.  The Codification supersedes
all existing non-SEC accounting and reporting
standards.  Subsequently, the FASB will issue Accounting Standards
Updates (“ASU”) to the Codification and will not issue new standards in the form
of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts.  The Codification, which was effective for us in the third
quarter of 2009, does not have a material impact on our consolidated financial
statements.


60





In
December 2007, new accounting standards were issued regarding non-controlling
interests in consolidated financial statements. These rules establish accounting
and reporting standards that require (i) non-controlling interests to be
reported as a component of equity, (ii) changes in a parent’s ownership interest
while the parent retains its controlling interest to be accounted for as equity
transactions, and (iii) any retained non-controlling equity investment upon the
deconsolidation of a subsidiary to be initially measured at fair value. The new
rules are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008, with early adoption
prohibited.  Our adoption of these rules on January 1, 2009, did not
have a material effect on our financial position or results of
operations.





In
December 2007, a revision of accounting standards for “Business Combinations”
was issued. (The substance of the revised accounting rules can be found in the
Business Combinations Topic of the FASB Accounting Standards Codification.) The
revised standards establish the principles and requirements for how an acquirer:
(i) recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree; (ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. These standards
are to be applied prospectively to business combinations consummated on or after
the beginning of the first annual reporting period on or after December 15,
2008, with early adoption prohibited. Previously, any release of valuation
allowances for certain deferred tax assets would serve to reduce goodwill
whereas under the new standard any release of valuation allowances related to
acquisitions currently or in prior periods will serve to reduce our income tax
provision in the period in which the reserve is
released.  Additionally, under the revised accounting standards
transaction related expenses, which were previously capitalized as "deal cost,"
will be expensed as incurred.  We had no capitalized deal costs or
acquisitions pending at December 31, 2008. Therefore, we did not have any
transition adjustments resulting from our adoption of the revised standards on
January 1, 2009.





In April
2009, related Business Combination accounting standards were adopted that deal
with accounting for assets acquired and liabilities assumed in a business
combination that arise from contingencies.  These related rules amend
and clarify the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination.  These standards are effective for fiscal
years beginning on or after December 15, 2008.  The adoption of these
rules by us on January 1, 2009, did not have a material effect on our financial
position or results of operations.





In June
2009, accounting standards were issued related to “Subsequent Events”. These
standards incorporate the subsequent events guidance contained in the auditing
standards literature into authoritative accounting literature. They also require
entities to disclose the date through which they have evaluated subsequent
events and whether the date corresponds with the release of their financial
statements. These standards are effective for all interim and annual periods
ending after June 15, 2009. Our adoption of these standards upon issuance had no
material impact on our consolidated financial statements.




In August
2009, standards were established for Measuring Liabilities at Fair Value that
clarified how to measure the fair value of liabilities in circumstances when a
quoted price in an active market for the identical liability is not
available.  The new standards are effective for the first reporting
period beginning after the issuance of this standard. We are currently
evaluating the impact that the adoption of the new standards will have on our
consolidated financial statements.


61





In
October 2009, new standards were established for Multiple-Deliverable Revenue
Arrangements that address the accounting for multiple-deliverable arrangements
to enable vendors to account for products or services (deliverables) separately
rather than as a combined unit. The standards are effective prospectively for
revenue arrangements entered into or materially modified beginning in fiscal
years on or after June 15, 2010, however early adoption is permitted. We
are currently evaluating the impact that the adoption of these standards will
have on our consolidated financial statements.





NOTE C – SALE OF MIVA MEDIA AND DISCONTINUED
OPERATIONS





March 2009 MIVA
Media





On March
12, 2009, we and certain of our subsidiaries entered into and consummated an
Asset Purchase Agreement with Adknowledge, Inc. (“Adknowledge”) and certain of
its subsidiaries pursuant to which we sold to Adknowledge certain assets
relating to our MIVA Media Division, including the MIVA name, for cash
consideration of approximately $11.6 million, plus assumption of a software
lease of approximately $0.3 million, less post-closing adjustments
of approximately $0.7 million. We retained certain assets and liabilities,
including assets and liabilities of the MIVA Media division in
France.  The sale resulted in a gain of approximately $7.1 million
during the year ended December 31, 2009 (the “MIVA Media Sale”).  We
incurred approximately $1.3 million of legal and financial
advisory fees in connection with the MIVA Media Sale, which are included in the
net gain on sale.





In
addition, in connection with the MIVA Media Sale, we agreed to provide to and
receive from Adknowledge certain transition services which
were substantially complete as of November 30, 2009..





As a
result of the MIVA Media Sale and our decision during March 2009 to cease
operations of the MIVA Media division in France, the operations of the MIVA
Media division, including those in France, are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations for all periods presented.  Income tax expense (benefit) of
$0.0 and $(0.6) million have been allocated to discontinued
operations.




62





For
      the Year
                                  Ended
      December 31,2009
                                
                                
                                2008Revenue
      from discontinued operations
                                
                                $
                                11,888
                                
                                
                                $
                                75,875Loss
      from discontinued operations
                                
                                
                                (3,513
                                )
                                
                                
                                (25,890
                                )Gain
      on Sale of discontinued operations
                                
                                
                                7,139
                                
                                
                                
                                -Net
      gain (loss)
                                
                                $
                                3,626
                                
                                
                                $
                                (25,890
                                )




The
following is a summary of the net assets sold in the MIVA Media Sale as of the
March 12, 2009, closing date:




Accounts
      receivable, net
                    
                    $
                    3,379Prepaid
      Expenses and Other Receivables
                    
                    
                    523Property
      and Equipment, net
                    
                    
                    4,760Accounts
      payable, accrued expenses and other current
    liabilities
                    
                    
                    (3,903
                    )Long-term
      debt
                    
                    
                    (643
                    )Deferred
      Revenue
                    
                    
                    (1,272
                    )Net
      Assets sold
                    
                    $
                    2,844




As of
December 31, 2008, the MIVA Media Sale was not yet considered probable,
therefore, the assets and liabilities of the division were classified as held
and used in the accompanying balance sheet.  The approximate amount of
major classes of assets and liabilities included as part of the disposal group
in the consolidated balance sheet at December 31, 2008 are as
follows:




Current
      Assets
                          
                          $
                          4,119Property
      and equipment, net
                          
                          
                          4,737Current
      liabilities
                          
                          
                          5,150Long-term
      debt
                          
                          
                          1,378




NOTE
D–IMPAIRMENT OF GOODWILL, OTHER INTANGIBLES, AND LONG-LIVED ASSETS





We had no
impairment losses in 2009 as the carrying value of all of our goodwill and other
indefinite lived intangible assets was reduced to zero as of December 31,
2008.


63





During
the fourth quarter of 2008, in connection with our annual impairment testing, we
performed a step 1 impairment test of our two reporting units, Searchfeed and
ALOT, with remaining recorded indefinite lived intangible assets and goodwill
for potential impairment.  The fair value estimates used in the initial
impairment test were based on market approaches and the present value of future
cash flows.  As a result of this analysis, we determined that the
carrying values of the reporting units exceeded their estimated fair values
which could result in potential impairment.  We then performed an
assessment of the long-lived assets of our Searchfeed and ALOT divisions and
determined these assets were impaired.  Accordingly, in the fourth
quarter of 2008, we recorded approximately $2.9 million in non-cash impairment
charges to reduce the carrying value of the remaining long-lived tangible and
intangible assets to their estimated fair values.  We then performed a step
2 impairment test to determine if the remaining carrying values of recorded
goodwill and other indefinite lived intangible assets in these divisions was
impaired.  The step 2 impairment test resulted in a non-cash
impairment charge of $14.7 million and $1.1 million, respectively, to reduce the
carrying value of goodwill and other indefinite lived intangible assets to their
implied fair value.  Total impairment charges of $7.9 million related to
the ALOT reporting unit are included in operating expenses of continuing
operations in 2008, and 10.8 million of impairment charges related to the
Searchfeed reporting unit, which was part of the MIVA Media business, are
included in discontinued operations in 2008.  As a result of these
impairment charges, the carrying value of all of our goodwill and other
indefinite lived intangible assets was reduced to zero as of December 31,
2008.





We will
continue to assess the potential of impairment for other long-lived assets in
future periods.  Should our business prospects change, and our
expectations for acquired business be further reduced, or other circumstances
that affect our business dictate, we may be required to recognize additional
impairment charges.





NOTE E–RESTRUCTURING AND MASTER SERVICES
AGREEMENT





Restructuring
–2009





During
2009, approximately $0.6 million in additional future severance payments were
accrued as a restructure reserve and are included in loss from discontinued
operations. Of that amount, $0.3 million is expected to be paid by April
2010 and $0.2 million by year end 2010.





Restructuring
– August 2008 United Kingdom, Germany, France, and Spain Operations





On August
21, 2008, we initiated a restructuring plan that further consolidated the MIVA
Media EU operations primarily in one office resulting in a total charge of
approximately $3.2 million.  The restructuring plan resulted in the closure
of our offices in Germany, reductions in headcount in our offices in Paris,
Madrid and London, and exiting certain contractual relationships with third
parties.   Payments for the restructuring totaled approximately $2.1
million in 2008, with the remaining $1.1 million paid in 2009.


64





Restructuring
– June 2008




On June
17, 2008, we initiated a restructuring plan in order to maximize efficiencies,
eliminate certain unprofitable operations, and better position us for the
future, including the closure of our MIVA Media Italian operations. We developed
a formal plan that included the identification of a workforce reduction totaling
30 employees and cash payments totaling approximately $1.0 million that was
completed in February 2009.  Of the $1.0 million in cash to be paid,
$0.6 million was related to restructuring and $0.4 million to the
discontinued operations related to closing our MIVA Media Italian
operation.  Payments for the restructuring totaled approximately $0.3
million in 2008, with the remaining $0.5 million paid in 2009.





Restructuring
- February 2008





On
February 19, 2008, we announced a restructuring plan aimed at continued
reduction of the overall cost structure of the Company, which was designed to
align the cost structures of our U.S. and U.K. operations with the operational
needs of these businesses.  We developed a formal plan that included
the identification of a workforce reduction totaling 8 employees, all of which
involved a restructuring accrual of approximately $0.1 million.  The
cash payment related to this restructuring was completed by June
2008.





The
following reserve for restructuring is included in accrued expenses in the
accompanying consolidated balance sheet as of December 31, 2009 and 2008 (in
thousands):





Employee
                                          Severance
                                        
                                        
                                        Other
                                          Charges
                                        
                                        
                                        TotalBalance
      as of December 31, 2007
                                        
                                        $
                                        0.1
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        0.1Restructuring charges in 2008
                                        
                                        
                                        3.0
                                        
                                        
                                        
                                        1.1
                                        
                                        
                                        
                                        4.1Adjustments in 2008
                                        
                                        
                                        (0.1
                                        )
                                        
                                        
                                        (0.2
                                        )
                                        
                                        
                                        (0.3
                                        )Cash payments in 2008
                                        
                                        
                                        (1.9
                                        )
                                        
                                        
                                        (0.4
                                        )
                                        
                                        
                                        (2.3
                                        )Balance
      as of December 31, 2008
                                        
                                        $
                                        1.1
                                        
                                        
                                        $
                                        0.5
                                        
                                        
                                        $
                                        1.6Restructuring
      charges in 2009
                                        
                                        
                                        0.6
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        0.6Cash payments in
      2009
                                        
                                        
                                        (1.2
                                        )
                                        
                                        
                                        (0.5
                                        )
                                        
                                        
                                        (1.7
                                        )Balance
      as of December 31, 2009
                                        
                                        $
                                        0.5
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        0.5





Master
Services Agreement and Transformation Project





On
May 11, 2007, we entered into a master services agreement (the "Master
Services Agreement") with Perot Systems Corporation ("Perot Systems"), pursuant
to which we outsourced certain of our information technology infrastructure
services, application development and maintenance, MIVA Media US support
services, and transactional accounting functions.





The
Master Services Agreement had a term of 84 calendar months commencing
June 1, 2007, unless earlier terminated or extended pursuant to its terms.
Aggregate fees payable by us to Perot Systems under the Master Services
Agreement were originally expected to be approximately $41.8 million, but
as a result of the August 2008 amendment to the Master Services Agreement, the
total was reduced to approximately $37.9 million. As of December 31,
2008, we incurred approximately $12.6 million of operating expenses for
services received under the agreement since the agreement's
inception.


65





On
April 10, 2008, we entered into an approximate $2.4 million software
development statement of work with Perot Systems, pursuant to which we were to
pay Perot Systems to develop a new global advertiser and distribution partner
application called the "Transformation Project". The Transformation Project
involved the development and implementation of one enhanced consolidated global
system to replace MIVA Media's existing Internet advertising management and
distribution partner management systems. As of the March 12, 2009, MIVA Media
Sale, in connection with the Transformation Project, we had incurred
approximately $2.4 million of costs, including $1.9 million of cost
with Perot Systems, and $0.5 million of internal development costs, all of
which was capitalized and was to be amortized over the five year estimated
useful life of the software once it was placed in service. This Transformation
Project was sold in March 2009 as part of the MIVA Media Sale.





On
February 1, 2009, we entered into an amendment to the Master Services
Agreement. Under the terms of the amendment, the Master Services Agreement
expired on April 30, 2009, and certain other provisions of the Master
Services Agreement were either modified or terminated. In connection with the
amendment, we issued a letter of credit to Perot Systems for approximately
$1.0 million for a portion of the remaining application development costs
related to the Transformation Project. Additionally, we incurred approximately
$0.6 million in fees for transition services through April 2009 under the
amendment. As of December 31, 2009, we had no further payment obligations to
Perot Systems.





NOTE
F – ACCOUNTING FOR SHARE-BASED COMPENSATION





In 2009
and 2008, we granted share-based compensation in the form of restricted stock
units (“RSUs”) to selected individuals within the management
team.  For the twelve months ended December 31, 2009, our total
share-based employee compensation expense consisted of stock option expense of
$0.03 million and $1.6 million in restricted stock unit expense.  The
RSU expense total includes approximately $0.8 million in
accelerated stock-based compensation expense resulting from the vesting of
certain RSUs and $0.2 million in accelerated stock option expense related to
the severance agreements for certain senior executives. For the twelve
months ended December 31, 2008, our total share-based employee compensation
expense consisted of stock option expense of $0.7 million and $2.4 million in
restricted stock unit expense.  The RSU expense total includes
approximately $0.6 million in accelerated stock-based compensation expense
resulting from the vesting of certain RSUs related to a former officer’s
resignation in August 2008.  Of the total amounts, $1.1 million and $2.3 million of share-based compensation expense is
included in operating expenses of continuing operations for 2009 and 2008, and
$0.7 million and $0.8 million is included in the loss from discontinued
operations for 2009 and 2008 in the accompanying consolidated statements of
operations.





In June
1999, the Board of Directors adopted the 1999 Stock Incentive Plan and in June
2004 the Board of Directors adopted the 2004 Stock Incentive Plan and the EMI
Replacement Option Plan.  Awards permitted under the 1999 Plan and
2004 Plans consist of stock options (both qualified and non-qualified options),
restricted stock awards, deferred stock awards, and stock appreciation
rights.  Under these plans, there were 9.2 million shares approved for
issuance and, as of August 16, 2006, prior to consolidation with the 2006 Plan
discussed below, there were 1.3 million shares available for equity awards under
these prior plans.


66





At our
2006 annual stockholders meeting, stockholders of the Company approved the 2006
Stock Award and Incentive Plan (“Plan”).  The Plan, among other
things, increased by 2.0 million the number of shares of common stock available
for equity awards.  Under the Plan, no further awards are to be
granted under the 1999 Stock Incentive Plan and the 2004 Stock Incentive Plan,
although any outstanding awards under those plans continue in accordance with
their terms.





Collectively,
as of December 31, 2009, there are approximately 1.5 million shares available
for new equity awards after combining the shares of the 2006 Plan with the
remaining shares of the superseded plans.  Options issued to employees
generally vest in a range of immediate vesting to up to four years vesting, and
expire ten years following the grant date.





Stock
option activity under the plans during the years ended December 31, 2009 and
2008, are summarized below (in thousands, except per share
amounts):





Options
                          
                          
                          Weighted-
                            Average
                            Exercise
                            PriceOptions
      outstanding at December 31, 2007
                          
                          
                          1,939
                          
                          
                          $
                          9.85Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (310
                          )
                          
                          
                          14.17Expired
                          
                          
                          (53
                          )
                          
                          
                          11.44Options
      outstanding at December 31, 2008
                          
                          
                          1,576
                          
                          
                          
                          8.94Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (396
                          )
                          
                          
                          6.88Expired
                          
                          
                          -
                          
                          
                          
                          -Options
      outstanding at December 31, 2009
                          
                          
                          1,180
                          
                          
                          $
                          9.63





The
following table summarizes information as of December 31, 2009, concerning
outstanding and exercisable stock options under the plans (in thousands, except
per share amounts):




Range of Exercise
                    Prices
                  
                  Number
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual Life
                    (Years)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exexcisable
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price$1.00
      - $3.00
                  
                  
                  15
                  
                  
                  
                  1.0
                  
                  
                  $
                  1.64
                  
                  
                  
                  15
                  
                  
                  $
                  1.64$3.01
      - $6.00
                  
                  
                  818
                  
                  
                  
                  5.4
                  
                  
                  
                  4.93
                  
                  
                  
                  765
                  
                  
                  
                  4.93$6.01
      - $14.00
                  
                  
                  33
                  
                  
                  
                  4.8
                  
                  
                  
                  10.76
                  
                  
                  
                  33
                  
                  
                  
                  10.76$14.01
      - $23.14
                  
                  
                  314
                  
                  
                  
                  4.4
                  
                  
                  
                  22.19
                  
                  
                  
                  314
                  
                  
                  
                  22.191,180
                  
                  
                  
                  5.1
                  
                  
                  $
                  9.63
                  
                  
                  
                  1,126
                  
                  
                  $
                  9.87




As of
December 31, 2009, unrecognizedcompensation
expense related tostock
options totaled approximately
$0.01 million,which
will be recognized over a weighted averageperiod
of 0.2 years.The fair value of the stock options was
estimated at the date of the grant using the Black-Scholes option-pricing
model.  No stock options were granted during the years ended December
31, 2009 or 2008.





In
January 2009, we issued restricted stock units with service based vesting
provisions (4 year vesting in equal increments), and market condition
performance based restricted stock units that vest upon our common stock
reaching, and closing, at a share price at or exceeding $1.00 per share, for ten
consecutive trading days.





In
January 2008, we issued restricted stock units with service based vesting
provisions (4 year vesting in equal increments), and market condition
performance based restricted stock units that vest upon our common stock
reaching, and closing, at a share price at or exceeding $4.00 per share, for ten
consecutive trading days.


67





The fair
value of our service based restricted stock units is the quoted market price of
our common stock on the date of grant.  Further, we utilize a Monte
Carlo simulation model to estimate the fair value and compensation expense
related to our market condition performance based restricted stock
units.  We recognize stock compensation expense for options or
restricted stock units that have graded vesting on the graded vesting
attribution method.





New stock
options granted and new restricted stock units granted, each with
the   related expenses for the years ended December 31, 2009 and
2008, are summarized below (in thousands):


For the Year EndedDecember 31,2009
                  
                  
                  2008Stock
      options granted - new
                  
                  
                  -
                  
                  
                  
                  -Stock
      option expense - new
                  
                  $
                  -
                  
                  
                  $
                  -Restricted
      stock units granted - new
                  
                  
                  1,462
                  
                  
                  
                  1,963Restricted
      stock unit expense  - new
                  
                  $
                  128
                  
                  
                  $
                  1,081





For the
years ended December 31, 2009 and 2008, the following assumptions were used in
our performance based restricted stock units with market based
conditions:





For the Year EndedDecember 31,2009
                  
                  
                  2008Volatility
                  
                  
                  111.8
                  %
                  
                  
                  70.5
                  %Expected
      life
                  
                  7.6
      Years
                  
                  
                  10
      yrsRisk-free
      rate
                  
                  
                  2.49
                  %
                  
                  
                  4.03
                  %





The
restricted stock unit (“RSU”) activity for the years ended December 31, 2009 and
2008, are summarized below (in thousands):





Total
                          
                          
                          Service Based
                          
                          
                          Performance based RSUs with Market based conditionsRSUs
                          
                          
                          RSUs
                          
                          
                          $1.00
                          
                          
                          $4.00
                          
                          
                          $6.00
                          
                          
                          $8.00
                          
                          
                          $10.00
                          
                          
                          $12.00Balance,
      December 31, 2007
                          
                          
                          1,589
                          
                          
                          
                          1,325
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          88
                          
                          
                          
                          88
                          
                          
                          
                          88Granted
                          
                          
                          1,963
                          
                          
                          
                          1,600
                          
                          
                          
                          -
                          
                          
                          
                          363
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Vested
                          
                          
                          (729
                          )
                          
                          
                          (729
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (567
                          )
                          
                          
                          (397
                          )
                          
                          
                          -
                          
                          
                          
                          (110
                          )
                          
                          
                          -
                          
                          
                          
                          (20
                          )
                          
                          
                          (20
                          )
                          
                          
                          (20
                          )Expired
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Balance,
      December 31, 2008
                          
                          
                          2,256
                          
                          
                          
                          1,799
                          
                          
                          
                          -
                          
                          
                          
                          253
                          
                          
                          
                          -
                          
                          
                          
                          68
                          
                          
                          
                          68
                          
                          
                          
                          68Granted
                          
                          
                          1,462
                          
                          
                          
                          1,210
                          
                          
                          
                          252
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Vested
                          
                          
                          (1,160
                          )
                          
                          
                          (1,160
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (826
                          )
                          
                          
                          (502
                          )
                          
                          
                          (100
                          )
                          
                          
                          (122
                          )
                          
                          
                          -
                          
                          
                          
                          (34
                          )
                          
                          
                          (34
                          )
                          
                          
                          (34
                          )Expired
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Balance,
      December 31, 2009
                          
                          
                          1,732
                          
                          
                          
                          1,347
                          
                          
                          
                          152
                          
                          
                          
                          131
                          
                          
                          
                          -
                          
                          
                          
                          34
                          
                          
                          
                          34
                          
                          
                          
                          34


68





NOTE
G – PROPERTY AND EQUIPMENT





The
majority of our assets were a part of the MIVA Media sale of assets that was
completed on March 12, 2009.  Property and equipment at December 31,
2009 and 2008 consisted of the following (in thousands):





Estimated2009
                  
                  
                  2008
                  
                  Useful LifeTechnical
      equipment
                  
                  $
                  83
                  
                  
                  $
                  17,865
                  
                  3
      yearsFurniture
                  
                  
                  14
                  
                  
                  
                  1,488
                  
                  5
      yearsLeasehold
      improvements
                  
                  
                  342
                  
                  
                  
                  826
                  
                  10
      yearsCapitalized
      software
                  
                  
                  7,637
                  
                  
                  
                  12,833
                  
                  1
      to 5 yearsSubtotal
                  
                  
                  8,076
                  
                  
                  
                  33,011Accumulated
      Depreciation & Amortization
                  
                  
                  (8,005
                  )
                  
                  
                  (28,036
                  )$
                  71
                  
                  
                  $
                  4,975





Depreciation
expense was $0.5 million and $1.9 million for the years ended December 31,
2009 and 2008, respectively.  Of these amounts, $0.4 million and
$0.4 million was included in continuing operations during 2009 and 2008, and
$0.1 million and $1.4 million was included in discontinued operations during
2009 and 2008 in the accompanying consolidated statements of
operations.





NOTE
H – INTANGIBLE ASSETS





The
balance in intangible assets at December 31, 2009, was zero as all goodwill and
intangible assets were fully impaired at December 31, 2008.





Amortization
expense related to intangible assets was $2.2 million for the year ended
December 31, 2008, including $1.4 million in continuing operations, and $0.8
million in discontinued operations in the accompanying consolidated statement of
operations.





NOTE
I - ACCRUED EXPENSES





Accrued
expenses at December 31, 2009 and 2008, consisted of the following (in
thousands):


December
      31,2009
                      
                      
                      2008Revenue-sharing
      agreements
                      
                      $
                      -
                      
                      
                      $
                      4,146Accrued
      compensation
                      
                      
                      538
                      
                      
                      
                      1,777Professional
      fees
                      
                      
                      91
                      
                      
                      
                      1,198Royalty
      payments
                      
                      
                      400
                      
                      
                      
                      800Operating
      expenses
                      
                      
                      1,426
                      
                      
                      
                      1,260Other
                      
                      
                      323
                      
                      
                      
                      439$
                      2,778
                      
                      
                      $
                      9,620


69





NOTE
J – PER SHARE DATA





For the
years ended December 31, 2009 and 2008, we incurred a net
loss.  Therefore, potentially dilutive shares (related to stock
options and restricted stock units) are not included in the per share data, as
they would have an anti-dilutive effect on net loss per share. Had we not
incurred a net loss, the number of stock options included in the computation of
diluted EPS and the range of exercise prices would have been: 2009 – 1.2 million shares at a price range of $1.25 - $23.14; and, 2008 –
1.6 million shares at a price range of $1.25 - $23.14.Also, had we not incurred a loss,
the numberof Restricted Stock Units included in
thecomputation of diluted EPS would have
beenapproximately 1.7 million shares with
0.4million variously vesting as our
commonstock reaches $1.00 - $12.00 for
tenconsecutive trading days and the
remainingapproximate 1.3 million restricted stock
unitsvesting predominately over the next
threeyears in equal increments.





The
following is the number of shares used in the basic and diluted computation of
loss per share (in thousands):





For the Year Ended December 31,2009
                    
                    
                    2008Weighted-average
      number of common shares outstanding basic and diluted
                    
                    
                    33,648
                    
                    
                    
                    32,621





NOTE
K – LITIGATION




Shareholder
Class Action Lawsuits




In 2005,
five putative securities fraud class action lawsuits were filed against us and
certain of our former officers and directors in the United States District Court
for the Middle District of Florida.  The complaints alleged that we and the
individual defendants violated Section 10(b) of the Securities Exchange Act of
1934 (the "Act") and that the individual defendants also violated Section 20(a)
of the Act as "control persons" of MIVA. Plaintiffs sought unspecified damages
and other relief alleging that, during the putative class period, we made
certain misleading statements and omitted material information.




The Court
granted Defendants’ motion for summary judgment on November 16, 2009,
and the court entered final judgment in favor of
all Defendants on December 7, 2009.  On December 15, 2009,
Plaintiffs filed a notice of appeal.




Regardless
of the outcome, this litigation could have a material adverse impact on our
results because of defense costs, including costs related to our indemnification
obligations, diversion of management's attention and resources, and other
factors.




Derivative
Stockholder Litigation





On July
25, 2005, a shareholder, Bruce Verduyn, filed a putative derivative action
purportedly on behalf of us in the United States District Court for the Middle
District of Florida, against certain of our directors and
officers.  This action is based on substantially the same facts
alleged in the securities class action litigation described
above.  The complaint is seeking to recover damages in an unspecified
amount.  By agreement of the parties and by Orders of the Court, the
case was stayed pending the resolution of Defendants’ motion to dismiss and
renewed motion to dismiss in the securities class action.  On July 10,
2007, the parties filed a stipulation to continue the stay of the
litigation.  On July 13, 2007, the Court granted the stipulation to
continue the stay and administratively closed the case pending notification by
plaintiff’s counsel that the case is due to be reopened.  Regardless
of the outcome, this litigation could have a material adverse impact on our
results because of defense costs, including costs related to our indemnification
obligations, diversion of management's attention and resources, and other
factors.


70





Comet
Systems, Inc.





The agent
for the former shareholders of Comet Systems, Inc., a company that merged
with and into one of our subsidiaries in March 2004, filed a lawsuit against us
in Delaware Chancery Court on March 13, 2007. In the suit the shareholders'
agent contended that our calculation and payment of contingent amounts payable
under the merger agreement were not correct and we contended that we calculated
and paid the contingent amounts correctly. On October 22, 2008, the Court
granted summary judgment to the plaintiff in the amount of $1.7 million,
pre-judgment interest in the amount of $0.6 million, and reimbursement of
attorney fees of $0.1 million. After receiving summary judgment we entered
into negotiations with the plaintiffs and reached a binding settlement agreement
to pay a lesser amount. We agreed to pay $1.875 million to resolve this
dispute and made payment, in full, in December 2008, which is included in
litigation settlement in operating expenses in the accompanying 2008
consolidated statement of operations.





Other
Litigation





We are a
defendant in various other legal proceedings from time to time, regarded as
normal to our business and, in the opinion of management, the ultimate outcome
of such proceedings are not expected to have a material adverse effect on our
financial position or our results of operations.





No
accruals for potential losses for litigation are recorded as of December 31,
2009, and although losses are possible in connection with the above litigation,
we are unable to estimate an amount or range of possible loss, but if
circumstances develop that necessitate a loss contingency being disclosed or
recorded, we will do so.  We expense all legal fees for litigation as
incurred.





NOTE
L - DEBT





On
November 7, 2008, we entered into a Loan and Security Agreement with Bridge
Bank.  The Loan Agreement provided us with a revolving credit facility
(“Facility”).  Subject to the terms of the Loan Agreement, the borrowing
base used to determine loan availability under the Facility was equal to 80% of
our eligible U.S. accounts receivable plus the lesser of $3.5 million or 65% of
eligible U.K. accounts receivable, with account eligibility measured in
accordance with standard determinations.  All amounts borrowed under the
Facility were secured by a general security interest on our assets, including
our intellectual property, and a pledge of 65% of our outstanding UK Vertro (UK)
Limited subsidiary shares.  In addition, Vertro (UK) Limited and certain of
the Company’s domestic subsidiaries were guarantying our obligations under the
Facility, to be secured by general security interests in the assets of such
companies.  Except as otherwise set forth in the Loan Agreement, borrowings
made pursuant to the Loan Agreement were to bear interest at a rate equal to the
greater of  (i) 6.5% or (ii) the Prime Rate (as announced by Bridge
Bank) plus 1.5%.  At December 31, 2008, we were eligible to draw down a
total of approximately $6.8 million under the Facility, and had drawn down
approximately $4.0 million.  As of December 31, 2008, of the total
$6.7 million in our cash and cash equivalents, and $2.0 million in restricted
cash, approximately $2.8 million was held in our account at Bridge
Bank.  Under the terms of the Loan Agreement, we were required to
maintain in an account at Bridge Bank an amount equal to or greater than 50% of
the funded loan balance.  The Facility would have expired on November
7, 2010, at which time all outstanding loan advances would have become due and
payable.


71





On March
12, 2009, we entered into a Consent and Amendment to Loan and Security Agreement
(the “Amendment”) with Bridge Bank, which amends certain terms and conditions of
the Loan Agreement.  Pursuant to the Amendment, ALOT became a borrower
under the Loan Agreement and granted a general security interest in its assets
to Bridge Bank.  The Amendment further provides Bridge Bank’s consent
to the MIVA Media Sale, provided that the Company was required to repay
immediately, out of the proceeds of the MIVA Media Sale, all outstanding
advances plus any accrued interest under the Loan Agreement in the amount of
approximately $4.4 million.  In addition, no further advances were to
be made under the Loan Agreement until the parties have agreed upon new terms
and conditions for borrowing.  The Amendment also provided a letter of
credit for the benefit of Perot Systems, Ltd. in the amount of $693,628 issued
by Bridge Bank which was secured by a cash deposit.  In October 2009,
Perot exercised its right to draw down the letter of credit.  The last
draw for approximately $343,000 was a provisional draw for which we would be
reimbursed by Adknowledge upon full acceptance of the software product that was
under development as part of the purchase agreement between Vertro and
Adknowledge.  On March 11, 2010, Adknowledge paid the $343,000 to
Vertro.





On
December 17, 2009, we executed an amendment to the Bridge Bank Loan
Agreement.  The lending agreement was amended to a “financed
receivable” agreement to accommodate the new structure of the
business.  The agreement has a credit limit of $5.0
million.   Loan draws are secured against individual, qualified
accounts receivable held by Vertro and the “financed receivables” are paid off
as Vertro’s clients make payments on their accounts.  Delinquencies
greater than 90 days are subject to a demand payment by Bridge
Bank.  Except as otherwise set forth in the Loan Agreement, borrowings
made pursuant to the Loan Agreement will bear interest at a rate equal to the
greater of  (i) 6.5% or (ii) the Prime Rate (as announced by Bridge
Bank) plus 2.5% plus a monthly maintenance fee equal to 0.2%.  We are
obligated to maintain an average daily balance of $1 million in Vertro’s demand
deposit account at Bridge Bank.  At December 31, 2009, no amounts were
outstanding and we were eligible to draw down a total of approximately $2.1
million under the Facility.  The amended Loan Agreement expires on
December 17, 2010, if we do not exercise our option to renew the facility for
another year.





NOTE M – COMMITMENTS AND CONTINGENCIES





In July
2005, we received payment of approximately $1.3 million following
our receipt of a favorable court judgment in a dispute with a Media EU
distribution partner.  The amount received, net of legal fees, was
recorded as a deferred liability pending the appeal process.  On
May 22, 2008, we received notification the original court’s decision was
reversed.  This decision called for Vertro to refund the $1.3 million
payment to the MIVA Media EU distribution partner.  During the quarter
ended December 31, 2008, we negotiated and settled this dispute for
approximately $0.7 million that was paid in this same period.


72





We have
minimum contractual payments as part of our royalty bearing non-exclusive
license to certain Yahoo! patents payable quarterly through August
2010.  In addition, we have ongoing royalty payments based on our use
of those patents.  We do not use these patents in our continuing
operations.Our rights
and minimum payment obligations under this agreement were not assigned to or
assumed by Adknowledge as part of the MIVA Media Sale. Therefore, since we are
no longer operating the MIVA Media business, the remaining minimum payments of
approximately $1.0 million due by us under the agreement were accrued as of the
date of the MIVA Media Sale, and are included in loss from discontinued
operations for the year ended December 31, 2009.  At
December 31, 2009, $0.4 million of minimum payments remain due and are included
in accrued expenses in the accompanying consolidated balance
sheet.





Operating
Leases





On
September 30, 2008, we provided notice of termination for the operating lease
agreements for both the Munich and Hamburg office locations.  The
Munich lease ended on December 31, 2009 and the Hamburg office lease expired on
March 31, 2009.  Additionally, on October 3, 2008, we provided notice
to terminate the office lease for our Spain office, which in turn expired on
March 31, 2009.





On
September 10, 2008, we entered into an operating lease agreement with an
unrelated third party to lease work space for our London office for the term of
12 months commencing on December 1, 2008.  The agreement includes a right
to three month renewals.  Base rent is approximately $0.3 million per
year.   This lease was not renewed and expired in November
2009.





On
February 26, 2008, we entered into an agreement (the “Lease Amendment”) amending
the April 15, 2005 operating lease agreement for our London
office.  The Lease Amendment, among other items, provided each party
with an early termination right to terminate the underlying Lease Agreement on
or before December 31, 2008.  We exercised this termination right and
in accordance with the agreement received a one-time surrender premium of
approximately $0.4 million in the fourth quarter of 2008.





For the
years ended December 31, 2009 and 2008, we recorded approximately $0.8 million
and $0.9 million, respectively, as rent expense under operating leasing
arrangements.  Of the 2009 and 2008 totals, approximately $0.1 million
and $0.3 million is included in discontinued operations.





Sublease
Income





In March
2009, in conjunction with the MIVA Media Sale, we licensed one floor in our
office located in Fort Myers, Florida (approximately 11,000 square feet) to the
buyer with the intent to convert into a sublease agreement upon receipt of
landlord consent.  The term of the license agreement commenced on
March 13, 2009, and it is expected to end on November 30, 2012.  The
sublease payments are expected to be received over this term.





From
August 2007 until December 2009, we had entered into a real estate sublease
agreement with an unrelated party to sublease approximately 20,000 square feet
of our office located in Fort Myers, Florida.  In December 2009, the
lease was amended whereby the landlord entered into a direct lease arrangement
with Vertro’s sublessor thereby relieving Vertro of any further contractual
obligation for this space.


73





In
February 2006 we entered into a lease for office space in Bridgewater, NJ with
an expiration date of February 2011.  In December 2008, a sublease was
executed between Vertro and an unrelated party for the remaining life of the
lease.  The sublease payments are expected to be received over this
term.





During
the fourth quarter of 2008, we entered into two separate and non-cancelable
sublease agreements covering the remaining lease obligations periods in both
Germany (Munich) and France (Paris) leases with unrelated third
parties.  The sublease payments were received ratably over the
subsequent 12 months.





Capital
Leases





In
September 2008, we entered into non-cancelable leases with unrelated third
parties for software and related maintenance, and hardware, for our new
Transformation Project.  The total fair market value of this software was
approximately $1.0 million with a lease term of nineteen months. The software
lease had an imputed interest rate of 9% with quarterly cash outlays of
approximately $0.2 million.  The total fair market value of the
hardware was approximately $1.1 million with a lease term of three years. 
The hardware lease had an imputed interest rate of 12.0%.  These
leases were classified as capital lease obligations, are reported as long-term
debt in our December 31, 2008, consolidated balance sheet, and represent
non-cash investing and financing activities in our consolidated statement of
cash flows for the year ended December 31, 2008.   During 2008,
we made cash payments, including interest, of approximately $0.9 million on
these lease obligations.  These capital leases were assumed by the
buyer of our MIVA Media asserts in March 2009.





As of
December 31, 2009, our minimum contractual payment obligations for the
commitments described herein are as follows (in thousands):





Payments due by Period (in thousands)Total
                    
                    
                    2010
                    
                    
                    Due
                      2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    BeyondOperating
      Leases
                    
                    $
                    4,946
                    
                    
                    $
                    1,171
                    
                    
                    $
                    1,081
                    
                    
                    $
                    1,048
                    
                    
                    $
                    517
                    
                    
                    $
                    533
                    
                    
                    $
                    596Sublease
      Income
                    
                    
                    (995
                    )
                    
                    
                    (400
                    )
                    
                    
                    (308
                    )
                    
                    
                    (287
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Guaranteed
      Royalty Payments
                    
                    
                    400
                    
                    
                    
                    400
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    4,351
                    
                    
                    $
                    1,171
                    
                    
                    $
                    773
                    
                    
                    $
                    761
                    
                    
                    $
                    517
                    
                    
                    $
                    533
                    
                    
                    $
                    596





Indemnification
Agreements





In the
ordinary course of business, we may provide indemnification of varying scope and
terms to advertisers, agencies, distribution partners, vendors, lessors,
business partners, and other parties with respect to certain matters, including,
but not limited to, losses arising out of our breach of such agreements,
services to be provided by us, or from intellectual property infringement claims
made by third parties. In addition, we have entered into indemnification
agreements with our directors and certain of our officers that will require us,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers. We have also
agreed to indemnify certain former officers, directors and employees of acquired
companies in connection with the acquisition of such companies. We maintain
director and officer insurance, which may cover certain liabilities arising from
our obligation to indemnify our directors, and officers and former directors,
officers, and employees of acquired companies, in certain
circumstances.


74





In
connection with the MIVA Media sale, we and Adknowledge made customary
representations, warranties and covenants in the Asset Purchase Agreement
(“Agreement”) and each party has certain indemnification obligations under the
Agreement. Further, the Agreement prohibits us for five years from competing in
the business of owning and operating a pay-per-click network connecting
advertisers and third party publishers, and prohibits us for two years from
diverting or soliciting past, existing or prospective clients, customers, or
Adknowledge sources of financing or from employing or soliciting for employment
Adknowledge's employees (including the our employees that transferred to
Adknowledge pursuant to the terms of the Asset Purchase Agreement). In addition,
the Agreement for two years prohibits Adknowledge from employing or soliciting
for employment our employees who did not transfer to Adknowledge pursuant to the
terms of the Agreement.





Generally,
it is not possible to determine the maximum potential amount under these
indemnification agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular
agreement. Such indemnification agreements may not be subject to maximum loss
clauses. Historically, we have not incurred material costs as a result of
obligations under these agreements and we have not accrued any liabilities
related to such indemnification obligations in our financial
statements.





See NOTE
S – Subsequent Events regarding some of the matters discussed
above.





NOTE N – SEGMENT INFORMATION





We had
two operating divisions as of December 31, 2008, MIVA Media and ALOT, that
constituted one reporting segment, performance marketing.  Separate
segment disclosures for MIVA Media are presented as of and for the years ended
December 31, 2009 and 2008 in Note C – Sale of MIVA Media and Discontinued
Operations.  Additionally, with the sale of MIVA Media assets all
revenues from continuing operations are geographically located in the United
States, therefore no separate geographic disclosures are presented as of and for
the years ended December 31, 2009 and 2008.





NOTE
O - RELATED PARTY TRANSACTIONS





On
October 31, 2009, we executed the sale of patents to LEXOS,
Inc.  LEXOS, Inc. is a start-up business which plans to engage in
internet advertising that is owned predominantly by Craig Pisaris-Henderson, who
is related to Vertro’s General Counsel John Pisaris.  The purchase
price for the patents was $390,000.  John Pisaris was not a part of
the negotiations.  Currently, there are no plans to conduct ongoing
business between the two companies.


75





On
December 31, 2008, Seb Bishop, who resigned his position of Chief Marketing
Officer and President of Vertro, Inc. on August 5, 2008, resigned from the Board
of Directors. Mr. Bishop is a Director of Steakmedia Limited and also owns a
2.5% interest in Steakmedia.  Steakmedia is an advertising agency
owned predominately by Oliver Bishop, Mr. Bishop’s brother.  We used
this agency to generate advertisers onto our MIVA Media Networks and invoice
them for all revenue generated on our networks through their
advertisers.  The amount invoiced to Steakmedia during the year ended
December 31, 2008 was $210,447.





In
addition to Steakmedia, Mr. Bishop is a Director of Adjug, a company that
entered into a non-cancelable sublease obligation with our MIVA Media EU
division to sublet office space in Munich, Germany during the fourth quarter of
2008.  This agreement had a term beginning December 1, 2008 through
December 31, 2009 with annual sublease payments totaling approximately
$54,900.





Lawrence
Weber, who joined our Board of Directors in June 2005, and was subsequently
elected Chairman of the Board of Directors in April 2006, is the Chairman and
Founder of W2 Group Inc., which owns Racepoint Group, Inc.  We entered
into an agreement in November 2005 with Racepoint for public relations
professional services.  During 2009 we incurred no fees and during
2008, we incurred fees for services from Racepoint of $84,141.


76


NOTE
P - INCOME TAXES





The
provision (benefit) for income taxes consists of the following (in
thousands):





For the Year Ended
                                    December 31,2009
                                  
                                  
                                  2008CurrentUnited
      States Federal
                                  
                                  $
                                  (339
                                  )
                                  
                                  $
                                  160State
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3Foreign
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Interest
      on uncertain tax positions
                                  
                                  
                                  54
                                  
                                  
                                  
                                  53$
                                  (285
                                  )
                                  
                                  $
                                  216DeferredUnited
      States Federal & State
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Foreign
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Interest
      on uncertain tax positions
                                  
                                  
                                  -
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  -$
                                  (285
                                  )
                                  
                                  $
                                  216





The
components of loss from continuing operations before income taxes are as follows
(in thousands):





For the Year Ended
                            December 31,2009
                          
                          
                          2008United
      States Federal
                          
                          $
                          (7,550
                          )
                          
                          $
                          (19,347
                          )Foreign
                          
                          
                          (476
                          )
                          
                          
                          -$
                          (8,026
                          )
                          
                          $
                          (19,347
                          )





A
reconciliation of the difference between the expected provision for income taxes
using the statutory United States Federal tax rate and our actual provision for
continuing operations is as follows (in thousands):




For the Year Ended
                              December 31,2009
                            
                            
                            2008Tax
      benefit using statutory United States federal tax rate
                            
                            $
                            (2,729
                            )
                            
                            $
                            (6,578
                            )Write-down
      of non-deductible costs in excess of net assets of acquired
      companies
                            
                            
                            -
                            
                            
                            
                            1,997Deferred
      tax asset valuation increase
                            
                            
                            2,553
                            
                            
                            
                            4,465Fixed
      and intangible assets
                            
                            
                            171
                            
                            
                            
                            -Realization
      of tax credits
                            
                            
                            (339
                            )
                            
                            
                            -Other
                            
                            
                            59
                            
                            
                            
                            332$
                            (285
                            )
                            
                            $
                            216


77





Our
current tax provision (benefit) excludes the effect of stock option compensation
deductible for tax purposes in the United States and overseas as these amounts
were credited to additional paid-in-capital.  The 2009 net benefit reflects
the expected tax effect of carrying back a portion of our 2008 alternative
minimum tax net operating loss to our 2003 and 2004 tax years to recover the
remaining alternative minimum income tax liability of $339 thousand that is
eligible to be refunded for those tax years, offset by $54 thousand of interest
and penalties accrued in 2009 related to our liability for uncertain tax
positions. The opportunity for carryback became available due to 2009 changes in
regulations governing the carryback of certain tax losses.  The 2008 tax
expense relates primarily to state income tax, and interest and penalties
accrued in 2008 related to our liability for uncertain tax positions. In 2009 no
income tax provision or benefit was allocable to discontinued
operations.  In 2008 approximately $559 thousand of benefit was
allocated to discontinued operations.  This amount consisted of $669
thousand of benefit related to  the release of an estimated tax
liability that was determined during 2008 to no longer be
payable, offset by approximately $110 thousand of state tax.  The
deferred tax assets in 2009 and 2008 were subject to corresponding valuation
allowances.





Deferred
taxes arise due to temporary differences in reporting of certain income and
expense items for book purposes and income tax purposes. We anticipate that our
taxable temporary differences will reverse over the same period as the
deductible temporary differences, therefore assuring the realization of the
non-reserved portion of our deferred tax assets.  Details of the
significant components of deferred tax assets and liabilities in the
accompanying consolidated balance sheet before netting within tax jurisdictions
are as follows (in thousands):





At December 31,2009
                                
                                
                                2008Deferred
      tax assets, short-termAccounts
      receivable allowances
                                
                                $
                                294
                                
                                
                                $
                                92Accruals
                                
                                
                                167
                                
                                
                                
                                60Other
                                
                                
                                23
                                
                                
                                
                                15Valuation
      Allowance
                                
                                
                                (484
                                )
                                
                                
                                0Total
                                
                                $
                                -
                                
                                
                                $
                                167Deferred
      tax assets, long-termStock
      Options
                                
                                
                                2,590
                                
                                
                                
                                -Fixed
      Assets
                                
                                
                                -
                                
                                
                                
                                1,585Accruals
                                
                                
                                -
                                
                                
                                
                                2,220Intangible
      Assets
                                
                                
                                -
                                
                                
                                
                                4,242Net
      operating losses
                                
                                
                                24,771
                                
                                
                                
                                16,868Valuation
      allowance
                                
                                
                                (26,949
                                )
                                
                                
                                (24,579
                                )Total
                                
                                $
                                412
                                
                                
                                $
                                336Capitalized
      Software
                                
                                
                                (298
                                )
                                
                                
                                (298
                                )Other
                                
                                
                                (114
                                )
                                
                                
                                (205
                                )Total
                                
                                $
                                (412
                                )
                                
                                $
                                (503
                                )Net
      deferred tax assets
                                
                                $
                                -
                                
                                
                                $
                                -





As of
December 31, 2009, we had United States and non-U.S. net operating loss (“NOL”)
carry-forwards for tax purposes of approximately $59.5 million and $10.0
million, respectively. These U.S. NOL carry-forwards will expire at various
dates beginning in 2019.  The NOLs carry forward indefinitely in the
non-U.S entities.  As of December 31, 2009, the deferred tax assets
related to NOLs in the United States and international jurisdictions are fully
offset by valuation allowances.  Upon adoption of new accounting
guidance for business combinations on January 1, 2009, subsequent releases, if
any, of valuation allowances established at the time of acquisition for deferred
tax assets resulting from NOLs will be recorded as reductions to the income tax
provision.


78





Utilization
of the acquired United States NOLs is subject to annual limitation due to the
ownership change provisions of the Internal Revenue Code.  At December
31, 2009, the annual limitation is $3.5 million, with any unused amounts
eligible to be carried forward to future years.  This annual
limitation may result in the expiration of a portion of the affected NOLs before
they are utilized.





We record
liabilities for probable assessments in income taxes payable. These liabilities
would relate to uncertain tax positions in a variety of taxing jurisdictions and
are based on what we believe will be the ultimate resolution of these positions.
The liabilities may be affected by changing interpretations of laws, rulings by
tax authorities, or the expiration of the statute of limitations.





Uncertain
Tax Positions





Accounting
guidance for uncertainty in income taxes prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax
return.  This guidance also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.





We
adopted this guidance as of January 1, 2007.  The
guidance modified previous guidance on accounting for contingencies
and accounting for income taxes for uncertainties related to our global income
tax liabilities.  In connection with the adoption of this guidance, we
recorded a net decrease to retained earnings of approximately $0.7 million
related to the measurement of a position previously taken with respect to
certain transfer pricing adjustments reported on our foreign tax
returns.  This amount of unrecognized tax benefit has not materially
changed as of December 31, 2009.





A
condensed summary of our unrecognized tax benefits is presented as follows (in
millions):





Balance
                            
                            
                            Adjustments
                            
                            
                            Balance
                            
                            
                            Adjustments
                            
                            
                            BalanceJan-08
                            
                            
                            in
      2008
                            
                            
                            Dec-08
                            
                            
                            in
      2009
                            
                            
                            Dec-09Unrecognized tax
      benefits that affect effective
      tax rate upon recognition
                            
                            $
                            0.60
                            
                            
                            $
                            -
                            
                            
                            $
                            0.60
                            
                            
                            
                            
                            
                            $
                            0.60Interest
      / Penalties
                            
                            
                            0.10
                            
                            
                            
                            0.05
                            
                            
                            
                            0.15
                            
                            
                            
                            0.05
                            
                            
                            
                            0.20Total
      Unrecognized Tax Benefits
                            
                            $
                            0.70
                            
                            
                            $
                            0.05
                            
                            
                            $
                            0.75
                            
                            
                            $
                            0.05
                            
                            
                            $
                            0.80





We
recognized accrued interest and penalties related to these unrecognized tax
benefits in income tax expense.





As of
December 31, 2009, open tax years in major jurisdictions date back to 2002 due
to the taxing authorities’ ability to adjust operating loss
carry-forwards.





It is
expected that the amount of unrecognized tax benefits will change in the next
twelve months.  However, we do not expect the change to have a
material impact on the results of operations or on our financial
position.


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NOTE Q – EMPLOYEE BENEFIT PLAN




We
provide retirement benefits to our employees through the MIVA, Inc. 401(k) Plan,
pursuant to which employees may elect a number of investment options. As allowed
under Section 401(k) of the Internal Revenue Code, the plan provides tax
deferred salary deductions for eligible employees. The 401(k) Plan permits
substantially all United States employees to contribute up to 92% of their base
compensation (as defined) to the 401(k) Plan, limited to a maximum amount as set
by the Internal Revenue Service. We may, at the discretion of the Board of
Directors, make a matching contribution to the 401(k) Plan. Costs charged to
operations for matching contributions were $0.05 million in 2009 and $0.06
million in 2008.  In 2009, the administration for our 401k plan will
be assumed by Administaff (see Note S – Subsequent Events).




NOTE R – TREASURY STOCK





For the
year ended December 31, 2009, our shares held in treasury increased by 49,000
shares or approximately $0.003 million.  This increase in treasury
shares resulted from shares withheld to pay withholding taxes upon the vesting
of restricted stock units during the year.





For the
year ended December 31, 2008, our shares held in treasury increased by 23,340
shares or approximately $0.03 million.  This increase in treasury
shares resulted from shares withheld to pay withholding taxes upon the vesting
of certain restricted stock units during the year.





NOTE S – SUBSEQUENT EVENTS


Beginning
January 1, 2010, we began utilizing the services of Administaff, a Professional
Employer Organization (PEO).  As such, Administaff took over
responsibility for HR Administration and compliance including benefit and
payroll administration.  Additionally, Administaff will assume
responsibility for administering our 401k plan.


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