inuv_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ______________________

Commission file number: 001-32442

INUVO, INC.

(Exact name of registrant as specified in its charter)

Nevada		87-0450450
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

143 Varick Street New York, NY		10013
(Address of principal executive offices)		(Registrant’s Zip Code)

(212) 231-2000

Registrant’s telephone number, including area code

not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Class		Shares Outstanding at November 1, 2012
Common Stock		23,497,123

FORM 10-Q

INUVO, INC.

Table of Contents

		Page No.
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements.		4

	Consolidated Balance Sheets September 30, 2012 (Unaudited) and December 31, 2011		4

	Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		5

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)		6

	Notes to Consolidated Financial Statements for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		20

Item 3.	Quantitative and Qualitative Disclosure About Market Risk.		30

Item 4.	Controls and Procedures.		30

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings.		31

Item 1A.	Risk Factors.		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		33

Item 3.	Defaults Upon Senior Securities		33

Item 4.	Mine Safety Disclosures		33

Item 5.	Other Information		33

Item 6.	Exhibits.		34

Signatures			35

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. 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; and

●	Evaluation of possible acquisitions of or investments in business, products, and technologies.

These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms the “Company,” "we," "us," "ours," and similar terms refers to Inuvo, Inc., a Nevada corporation, and our subsidiaries.

The information which appears on our web site at www.inuvo.com is not part of this report.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INUVO, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2012 (Unaudited) and December 31, 2011

	September 30, 2012			December 31, 2011
	(Unaudited)

ASSETS
Current assets
Cash	$	3,200,464		$	4,413
Restricted cash		301,083			475,586
Accounts receivable, net of allowance for doubtful accounts of $310,496 and $477,289, respectively		6,562,452			5,426,865
Unbilled revenue		35,350			49,196
Intangible assets - current, net of accumulated amortization		598,419			947,882
Prepaid expenses and other current assets		829,024			433,601
Total current assets		11,526,792			7,337,543
Property and equipment, net		2,671,277			1,590,011
Other assets
Goodwill		6,005,309			1,776,544
Intangible assets, net of accumulated amortization		11,366,830			390,000
Other assets		164,187			2,243
Total other assets		17,536,326			2,168,787
Total assets	$	31,734,395		$	11,096,341

LIABILITIES AND STOCKHOLDERS’ EQUITY (Deficit)
Current liabilities
Term and credit notes payable - current portion	$	1,333,333		$	452,000
Accounts payable		9,689,189			6,198,921
Accrued expenses and other current liabilities		3,535,417			1,611,831
Deferred compensation		—			929,428

Current liabilities of discontinued operations		—			160,000
Total current liabilities		14,557,939			9,352,180

Long-term liabilities
Deferred tax liability		4,543,000			—
Term and credit notes payable - long term		6,522,222			2,454,303
Other long-term liabilities		1,000,132			300,124
Total long-term liabilities		12,065,354			2,754,427

Stockholders’ equity (deficit)
Preferred stock, $.001 par value:
Authorized shares - 500,000 - none issued and outstanding		—			—
Common stock, $.001 par value:
Authorized shares - 40,000,000, issued shares 23,862,680 and 10,422,617, respectively
Outstanding shares - 23,497,123 and 10,035,790, respectively		23,862			10,422
Additional paid-in capital		127,282,457			115,096,953
Accumulated deficit		(120,806,925	)		(114,648,037	)
Accumulated other comprehensive income		505			—
Treasury stock, at cost - 365,557 and 386,827 shares, respectively		(1,388,797	)		(1,469,604	)
Total stockholders' equity (deficit)		5,111,102			(1,010,266	)
Total liabilities and stockholders' equity (deficit)	$	31,734,395		$	11,096,341

The accompanying notes are an integral part of these Consolidated Financial Statements.

INUVO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three and Nine Months Ended September 30, 2012 and 2011

(UNAUDITED)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011

Net revenue	$	15,481,425		$	8,203,116		$	37,122,558		$	29,209,646
Cost of revenue
Affiliate expenses		5,471,602			3,922,166			14,118,763			14,090,378
Data acquisition		1,054,725			669,613			3,571,752			1,942,606
Merchant processing fees and product costs		218,701			44,129			499,605			73,203
Cost of services		6,745,028			4,635,908			18,190,120			16,106,187
Gross profit		8,736,397			3,567,208			18,932,438			13,103,459
Operating expenses
Search costs		5,832,243			1,959,042			13,098,236			6,749,115
Compensation and telemarketing		1,649,063			1,481,007			4,571,418			6,367,437
Selling, general and administrative		2,378,826			1,363,385			6,734,383			4,018,959
Total operating expenses		9,860,132			4,803,434			24,404,037			17,135,511
Operating loss		(1,123,735	)		(1,236,226	)		(5,471,599	)		(4,032,052	)
Other income (expenses)
Litigation settlements		(75,000	)		—			(75,000	)		(374,800	)
Write-off of capitalized development & note receivable		—			(78,361	)		—			(179,106	)
Interest expense, net		(127,379	)		(53,169	)		(398,801	)		(263,437	)
Other expense, net		(202,379	)		(131,530	)		(473,801	)		(817,343	)
Loss from continuing operations before taxes		(1,326,114	)		(1,367,756	)		(5,945,400	)		(4,849,395	)
Income tax expense		(8,690	)		(141	)		(70,667	)		(141	)
Net loss from continuing operations		(1,334,804	)		(1,367,897	)		(6,016,067	)		(4,849,536	)
Net income (loss) from discontinued operations		14,121			—			(142,821	)		257,136
Net loss	$	(1,320,683	)	$	(1,367,897	)	$	(6,158,888	)	$	(4,592,400	)
Other comprehensive income
Foreign currency revaluation		6,084			—			505			—
Total comprehensive loss	$	(1,314,599	)	$	(1,367,897	)	$	(6,158,383	)	$	(4,592,400	)

Per common share data
Basic and diluted
Net loss from continuing operations	$	(0.06	)	$	(0.14	)	$	(0.29	)	$	(0.53	)
Net loss (income) from discontinued operations	$	—		$	—		$	(0.01	)	$	(0.03	)
Net loss	$	(0.06	)	$	(0.14	)	$	(0.30	)	$	(0.50	)

Weighted average shares (Basic and diluted)		23,497,123			10,035,791			20,524,853			9,137,659

The accompanying notes are an integral part of these Consolidated Financial Statements.

INUVO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended September 30,
	2012			2011
	(Unaudited)
Operating activities:
Net loss	$	(6,158,888	)	$	(4,592,400	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,933,754			3,203,147
Provision for doubtful accounts		77,245			45,520
Loss on write-off of note receivable		—			100,745
Loss on write-off of capitalized development costs		—			78,361
Deferred compensation		—			368,193
Stock based compensation		632,477			1,092,282
Change in operating assets and liabilities:
Restricted cash		174,503			140,083
Accounts receivable		881,013			1,582,911
Prepaid expenses and other assets		266,338			157,490
Accounts payable		(263,345	)		(1,346,404	)
Other accrued expenses and current liabilities		(842,159	)		(43,951	)
Net cash provided by operating activities from continuing operations		700,938			784,139
Net cash used in operating activities of discontinued operations		(160,000	)		(376,424	)
Net cash provided by operating activities		540,938			407,715

Investing activities:
Purchases of equipment and capitalized development costs		(851,299			(430,610	)
Net cash received from merger with Vertro, Inc., net of merger costs		2,470,755			—
Purchase of names database and bundled downloads		(2,873,822	)		(2,143,370	)
Net cash used in investing activities		(1,254,366	)		(2,573,980	)

Financing activities:
Proceeds from sale of common stock, net		—			2,635,796
Proceeds from term note		5,000,000			—
Deposit to collateralize letter of credit		(475,000	)		—
Advances from credit note payable		3,808,742			4,631,144
Payments on term note payable and capital leases		(4,424,768	)		(4,059,056	)
Net cash provided by financing activities		3,908,974			3,207,884
Accumulated other comprehensive income		505			—
Net change – cash		3,195,546			1,041,619
Cash, beginning of period		4,413			118,561
Cash, end of period	$	3,200,464		$	1,160,180

Supplemental information:
Interest paid	$	238,501		$	312,912
Non-cash investing activities:
Issuance of stock as settlement of deferred compensation	$	915,750		$	—
Restricted advances on term note payable	$	300,000		$	475,000
Payment of litigation settlements with common stock	$	—		$	365,400
Retirement of 164,869 shares of treasury stock	$	—		$	626,502

The accompanying notes are an integral part of these Consolidated Financial Statements.

INUVO, INC.

Notes to Consolidated Financial Statements

September 30, 2012 and 2011

(Unaudited)

Note 1 - Organization and Business and Accounting Policies

Inuvo® is an Internet marketing and technology company that manages a network of websites and builds and markets browser based consumer applications.

On March 1, 2012 we completed the acquisition of Vertro, Inc. (“Vertro”), an internet company that owns and operates the ALOT product portfolio. After seven months of combined operations, management has reduced the number of reporting segments from three to two. The new segments are Software Search and the Publisher Network. The Partner Programs segment from the previous reporting segments has been absorbed into the other two segments with consumer focused initiatives going to Software Search and all other business going to the Publisher Network. For presentation purposes, prior period results included herein have been reclassified for the new segment structure.

The former Vertro's operations are now part of the Software Search segment. Our Publisher Network segment consists of the technology and analytics platforms that provide advertisers and publishers the capability to facilitate performance based advertising. This segment also consists of websites we own and operate. The Software Search and Publisher Network segments represent approximately 50.9% and 49.1% respectively, of our total net revenue for the quarter ending September 30, 2012. Prior to 2012, we were organized under two segments; Web Properties and Performance Marketing.

Merger with Vertro

The merger with Vertro created a stronger, more scalable business, from which to attract advertisers, publishers and consumers. The benefits included:

	●	A more diversified revenue stream, which eliminated our dependence on one major customer;
	●	An install base in the Vertro ALOT toolbar, for the distribution of consumer facing innovations;

	●	A stronger business financially from which to access both debt and capital markets to support growth;
	●	The combination of two experienced digital marketing teams; and

●

The elimination of approximately $2.9 million in overlapping annual operating and public company expenses.

Software Search

Following our acquisition of Vertro, effective March 1, 2012, we include the ALOT product line into what we now call our Software Search segment. The ALOT product line offers two primary products to consumers; ALOT Home, a homepage product, and the ALOT Appbar, a software application that consumers install into their web browsers. Both ALOT Home and the ALOT Appbar include a search box from which consumers can conduct type-in web search requests. The ALOT Appbar provides access to a library of applications, which are used by consumers to receive dynamic information, perform useful tasks, or access their favorite content online. There are hundreds of apps available for consumers to choose from ranging from a weather app that provides an at-a-glance snapshot of the weather for the coming four days, to a radio app that enables consumers to instantly listen to thousands of radio stations from around the world. All ALOT products and apps are free to download and use.

The search box on the ALOT Home and ALOT Appbar products has historically been the source of a majority of the revenue. Users conduct millions of searches per day producing both algorithmic results and 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. Historically, search revenue from Google accounted for over 80% of revenue from the ALOT operations.

The Software Search segment also consists of affiliate programs, display revenues, data sales, and BargainMatch. Non-search revenue is generated from the interaction consumers have with certain applications launched from within the Appbar. We refer to these as sponsored apps and they generate either pay-per-click or cost-per-action revenue. Website page-views are also monetized through cost-per-thousand display ads. We also utilize user data to enhance product offerings and generate additional revenue.

The BargainMatch consumer product shopping, comparison and rewards application is a browser-based application where consumers can earn cashback on purchases made online through sponsored merchants.

Publisher Network

The Publisher Network segment is made up of thousands of different websites, from large, well-known portals to independent tech bloggers into which Inuvo serves advertisements. The technology that supports the Publisher Network, the Inuvo platform, is an open, fraud filtering, lead, click or sales generation marketplace designed to allow advertisers and publishers the ability to manage their transactions in an automated and transparent environment. The following brands continue to be used within the Publisher Network:

●

The ValidClick® service at www.validclick.com. ValidClick is a fraud filtering, pay-per-click marketplace where publishers can integrate dynamically-generated advertisements within their websites based on the demographics and natural search behaviors of the consumer. ValidClick provides publishers with access to tens of thousands of advertisers in an easy-to-use XML-based implementation, giving the publisher greater control over content and integration than other competitive offerings.

●	The owned and operated websites including the Yellowise.com™ directory search website at www.yellowise.com and the recently launched Local.ALOT.com website. Both websites are local search and review sites powered by the LocalXML service which allows publishers the ability to make real-time calls to the LocalXML database and have users receive a listing of all local businesses that meet the search criteria. Users may also post reviews of their favorite and not-so-favorite businesses making the reviews available to all other users of the site.

●	The MyAP® Affiliate Platform at www.MyAP.com. MyAP is a complete affiliate tracking and management software solution providing advertisers the ability to sign up, manage and track the activities of their publishers through a reliable, easy-to-use, and privately-branded platform with full data transparency. Where the Inuvo Platform is an open platform where many advertisers and publishers interact, the MyAP platform is designed specifically to allow merchants to build private affiliate networks. Each advertising customer of MyAP is supported by a unique implementation of the software, customized to suit their individual needs and populated by publishers .

Liquidity

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank, N.A. for a revolving credit facility of up to $10 million and a term loan for up to $5 million (see Note 6). The Business Financing Agreement replaced our then existing $8 million revolving credit facility with Bridge Bank. The new credit facility is used primarily to satisfy our working capital needs. At September 30, 2012, we had a working capital deficit of approximately $3 million and availability under our revolving line of credit of approximately $1.1 million. We believe with the continued improvement in cash flow, the reduction of duplicate costs with respect to the merger with Vertro and the higher limit of the new bank facility, we will have sufficient cash for the next twelve months. On June 29, 2012, we entered into a modification of the Business Financing Agreement to waive certain events of default in April and May 2012, and modify the financial covenants thereafter. Subsequently, on October 11, 2012, we entered into a second modification of the Business Financing Agreement to waive certain events of default in July and August of 2012 and modify the financial covenants thereafter. As of September 30, 2012, we were not in compliance with all terms of the amended Bridge Bank credit facility, however we regained compliance upon execution of the Second Amendment.

Discontinued Operations

We reported a net gain of approximately $14,000 and a net loss of approximately $143,000 for the three and nine months ended September 2012, respectively, from discontinued operations associated with the European operations acquired with Vertro. For the nine months ended September 30, 2011 we reported a net gain of approximately $257,000 associated with the favorable settlement of a lawsuit involving a discontinued operation.

Basis of Presentation

The consolidated financial statements include our accounts and those of our subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 are prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 and filed with the SEC. The interim consolidated financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year. Our consolidated financial statements for the nine months ended September 30, 2012 include seven months of the operations and financial results of the Vertro subsidiary which was acquired on March 1, 2012.

Reclassification

For comparability, the 2011 consolidated financial statements reflect reclassifications where appropriate to conform to the interim consolidated financial statement presentation used in 2012. These reclassifications have no effect on total stockholders' equity (deficit) or net loss.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for returns and redemptions, allowances for doubtful accounts, goodwill and purchased intangible asset valuations, lives of intangible assets, deferred income tax asset valuation allowances, stock compensation, and the value of stock options and warrants. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Credit Risk, Customer and Vendor Evaluation

Accounts receivable are typically unsecured and are derived from sales to customers. We perform ongoing credit evaluations of our customers and maintain allowances for estimated credit losses. We apply judgment as to our ability to collect outstanding receivables based primarily on management's evaluation of the customer's financial condition and past collection history and records a specific allowance. In addition, we record an allowance based on the length of time the receivables are past due.

At September 30, 2012, we have two individual customers with accounts receivable balances greater than 10% of our gross accounts receivable from continuing operations. These customers owed approximately $5.5 million or 79.4% of gross accounts receivable from continuing operations at September 30, 2012. These same customers contributed approximately $14.2 million or 91.6% of total net revenue from continuing operations for the three months ended September 30, 2012 and $33.2 million or 86.5% of total net revenue from continuing operations for the nine months ended September 30, 2012. At September 30, 2011, we had one customer with receivable balance greater than 10% of our gross accounts receivable from continuing operations. This customer owed approximately $2.2 million or 66.1% of gross accounts receivable from continuing operations at September 30, 2011. This same customer contributed approximately $7.3 million or 88.8% of total net revenue from continuing operations for the three months ended September 30, 2011, and $25.2 million or 86.4% of total net revenue from continuing operations for the nine months ended September 30, 2011.

Note 2 - Property and Equipment

The net carrying value of property and equipment consisted of the following as of:

	September 30, 2012			December 31, 2011
	(unaudited)
Furniture and fixtures	$	427,121		$	427,121
Equipment		2,381,861			2,005,505
Software		7,971,097			5,469,804
Leasehold improvements		343,796			310,416
Subtotal		11,123,875			8,212,846
Less: accumulated depreciation and amortization		(8,452,598	)		(6,622,835	)
Total	$	2,671,277		$	1,590,011

Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2012 and 2011 was approximately $694,000 and $379,000, respectively. Additionally, depreciation and amortization expense for the nine months ended September 30, 2012 and 2011 was approximately $1,830,000 and $1,184,000, respectively. Depreciation and amortization is included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

Note 3 - Goodwill and Intangible Assets

The following is a schedule of our goodwill and intangible assets from continuing operations as of September 30, 2012 (unaudited):

Description	Term		Carrying Value		Accumulated Amortization(1)			Net Carrying Value

Names database	9 months		$	15,848,688	$	(15,475,715	)	$	372,973
Customer list	20 years			8,820,000		(257,250	)		8,562,750
Customer list	10 years			1,610,000		(93,919	)		1,516,081
Bundled downloads	4.5 months			2,446,697		(2,221,252	)		225,445
Exclusivity and non-compete agreements	1 year			120,000		(70,000	)		50,000
Trade names	5 years			960,000		(112,000	)		848,000
Trade names		—		390,000		—			390,000
Total intangible assets			$	30,195,385	$	(18,230,136	)	$	11,965,249
Goodwill			$	6,005,309	$	—		$	6,005,309

(1)

Amortization for the three months ended September 30, 2012 and 2011 was approximately; names database $244,000 and $661,000, respectively; customer lists $151,000 and $0 respectively; bundled downloads $811,000 and $0, respectively; exclusivity and non-compete agreements $30,000 and $0, respectively; and trade names $48,000 and $0, respectively. Amortization for the nine months ended September 30, 2012 and 2011 was approximately; Names database $1,350,000 and $1,860,000, respectively; customer lists $351,000 and $0, respectively; bundled downloads $2,221,000 and $0, respectively; exclusivity and non-compete agreements $70,000 and $0 respectively; and trade names $112,000 and $0, respectively. Intangible assets with an amortization term of less than one year are shown in the current assets section of the consolidated balance sheets.

Our amortization expense over the next five years and thereafter as of September 30, 2012 is as follows:

2012	$	652,805
2013		988,113
2014		794,004
2015		794,004
2016		794,004
Thereafter		7,552,319
Total	$	11,575,249

Note 4 - Accrued Expenses and Other Current Liabilities

The accrued expenses and other current liabilities consisted of the following as of:

	September 30, 2012		December 31, 2011
	(Unaudited)

Search costs	$	1,714,209	$	109,706
Taxes		145,315		-
Capital leases - current portion		54,299		57,581
Payroll and commission liabilities		21,961		8,370
Affiliate expenses		5,873		16,570
All other expenses		1,593,760		1,419,604
Total	$	3,535,417	$	1,611,831

Note 5 - Other Long Term Liabilities

Other long term liabilities consisted of the following as of:

	September 30, 2012		December 31, 2011
	(Unaudited)
Taxes payable	$	506,453	$	—
Deferred rent		403,117		283,469
Capital leases - less current portion		57,824		16,655
Long-term deposits		32,738		—
Total	$	1,000,132	$	300,124

Note 6 - Term and Credit Notes Payable

The following table summarizes our notes payable balance as of:

Lender	Due Date	Interest Rate	September 30, 2012			December 31, 2011
			(Unaudited)
Bridge Bank - term note; paid in full on March 1, 2012	February 2013(paid in full)	Prime + 2 percentage points	$	—		$	475,000
Bridge Bank - term note	February 2016	Prime + 1 percentage points	4,555,555
Bridge Bank - credit facility; paid in full on March 1, 2012	February 2013(paid in full)	Prime + 2 percentage points	—			2,431,303
Bridge Bank - credit facility	February 2014	Prime + 0.5 percentage points	3,300,000
Totals			7,855,555			2,906,303
Less: term and credit notes payable - current portion			(1,333,333		)	(452,000		)
Term and credit notes payable - long-term			$	6,522,222		$	2,454,303

Principal Payments Due

Principal payments due are as follows as of September 30, 2012:

2012	$	333,333
2013		1,333,333
2014		1,333,333
2015		1,333,333
2016		222,223
Total	$	4,555,555

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank. N.A. (“Bridge Bank”), for up to a $10 million revolving credit facility (the “Revolving Credit Line”) and a $5 million term loan (the “Term Loan”). The Revolving Credit Line replaced our then existing $8 million revolving credit facility. The new credit facility is used primarily to satisfy our working capital needs following the closing of the merger with Vertro described herein. As of September 30, 2012, there was approximately $1.1 million credit available on the revolving credit facility and $0 on the term loan. Subject to the terms of the new agreement, we are entitled to obtain advances against the Revolving Credit Line up to 80% of eligible accounts receivable balances, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of invoice, plus $1 million up to the credit limit of $10 million. In addition, subject to the terms of the agreement, we are entitled to borrow up to $5 million under the Term Loan, which is repayable in 45 equal monthly installments beginning June 2012. The Revolving Credit Line portion of the credit facility expires on February 28, 2014, at which time all loan advances under the Revolving Credit Line become due and payable. The Term Loan expires in February 2016. Under the terms of the new agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; and limit additional indebtedness to $500,000 of purchase money including capital leases and an additional $500,000 of all other indebtedness. In addition, the new agreement required that we maintain through May 2012 an “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations, non-recurring non-cash items and certain closing costs associated with the Merger Transaction with Vertro of not less than $200,000 for the immediate proceeding three month period; after May 2012 a Debt Service Coverage Ratio of at least 1.50 to 1.0 tested on the immediate proceeding three month period; and an Asset Coverage Ratio of not less than 1.10 to 1.0 at all times until September 30, 2012 and 1.25 to 1.0 thereafter. Interest on the Revolving Credit Line is payable monthly at prime plus 0.5% (3.75% at September 30, 2012) plus a monthly maintenance fee of 0.125 percentage points on the average daily account balance. Interest on the Term Loan bears interest at prime plus 1% (4.25% at September 30, 2012). In connection with establishing the credit facility, the Company incurred fees payable to Bridge Bank of approximately $100,000. The agreement calls for a termination fee until the first anniversary and prepayment fee on the Term Loan until the first anniversary.

On October 11, 2012, we entered into the Second Amendment to the Business Financing Modification Agreement with Bridge Bank (“Second Amendment”). Second Amendment modified the minimum asset coverage ratio to 0.9 to 1.00 for September 2012 and October 2012, 1.0 to 1.00 for November and December 2012 and 1.15 to 1.0 for each measuring period thereafter beginning January 2013. It also changed the minimum operating profit measured monthly on a trailing 3 month basis to not less than $600,000 for the September 2012 measuring period and $1,000,000 for the October 2012 measuring period. Also changed was the minimum debt service ratio, measured monthly on a trailing 3 month basis, to not less than 1.1 to 1.0 for November 2012 measuring period, 1.25 to 1.0 for December 2012 and 1.50 to 1.0 for each measuring period thereafter beginning January 2013. Further, the Second Amendment waived the event of default caused by the non-compliance of the operating profit in July and August 2012. Additionally, pursuant to the Second Amendment, the Company issued Bridge Bank a warrant to purchase 51,724 shares of our own common stock exercisable at $0.87 per share exercisable until October 2017.

As of September 30, 2012, we were not in compliance with all terms of the amended Bridge Bank credit facility, however we regained compliance upon execution of the Second Amendment.

Note 7 - Stock-Based Compensation Plans

The stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our option programs critical to our operation and productivity. Currently, we grant options and restricted stock awards ("RSAs") from two shareholder approved plans, the 2005 Long-Term Incentive Plan ("2005 LTIP") and the 2010 Equity Compensation Plan (“2010 ECP”). Option and restricted stock unit vesting periods are generally zero to three years.

On September 23, 2011, all unexpired stock options had their expiration term extended by 5 years from the date of grant. The extension of the termination period for these stock options increased the expected life of the options by approximately one year and accordingly increased the fair market value of these stock options by approximately $283,000 of which $117,000 was related to fully vested stock options and was recorded as a charge to expense in the third quarter of 2011. We are amortizing $166,000 over the remaining vesting periods.

On January 1, 2012, the number of shares of our common stock issuable under the 2010 ECP was increased by 100,357 shares due to the ever-green provision as part of the 2010 ECP. Additionally, effective February 29, 2012, our shareholders increased the number of shares of our common stock issuable under the 2010 ECP by 2.5 million shares. As of March 31, 2012, we had reserved under our 2005 LTIP 1.0 million shares of common stock for issuance and another 3,385,945 shares under our 2010 ECP.

On July 31, 2012, the company granted 445,500 RSAs of which 296,505 were granted to our executive officers, certain of our senior management and our Board of Directors. These RSAs granted to our executive officers, certain of our senior management and our Board of Directors vest on February 1, 2013 provided a 2012 performance target is achieved. The remaining 148,995 RSAs were granted to the other members of the management team and vest on February 1, 2013 provided the grantee remains in the company’s employ on that date. Further, the company granted to non-management employees on July 31, 2012, 49,500 options to purchase the company’s common stock at $0.56 per share, the closing price of the stock on that day. The options fully vest on February 1, 2013 provided the grantee remains in the company’s employ on that date. None of the performance-based RSAs are expected to vest and are therefore valued at $0 at September 30, 2012.

The following table summarizes all stock based compensation grants as of September 30, 2012:

	Stock Options Outstanding		RSA's Outstanding		Options and RSA's Exercised		Available Shares		Total
2010 ECP		628,497		151,093		903,696		1,702,659		3,385,945
2005 LTIP		577,343		0		224,164		198,493		1,000,000
Total		1,205,840		151,093		1,127,860		1,901,152		4,385,945

The fair value of RSAs is determined using the market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes valuation model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation,” forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is currently estimated at a weighted average of 25% of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

We recorded stock-based compensation expense for all equity incentive plans of approximately $246,000 and $407,000 for the three months ended September 30, 2012 and 2011, respectively. Additionally, stock- based compensation for the nine months ended September 30, 2012 and 2011 was approximately $632,000 and $974,000, respectively.

At September 30, 2012, the aggregate intrinsic value of all outstanding options is $0 and has a weighted average remaining contractual term of 7.4 years. As of September 30, 2012, 837,902 of the outstanding options are exercisable and have an aggregate intrinsic value of $0, a weighted average exercise price of $2.81 and a weighted average remaining contractual term of approximately 7.1 years. The total compensation cost at September 30, 2012 related to non-vested awards not yet recognized was approximately $721,158 and has an average remaining expense recognition period of 1.02 years. As a result of the merger, we had 118,842 options outstanding as of September 30, 2012 that were not part of either plan.

The following table summarizes unaudited information about stock option activity during the nine months ended September 30, 2012 and 2011, respectively.

	2012					2011
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding, beginning of period		1,358,717		$	2.81		1,223,159		$	3.74
Granted		49,500		$	0.56		340,000		$	2.83
Forfeited or expired		(202,377	)		3.16		(132,458	)	$	6.08
Exercised		—		$	—		—		$	—
Outstanding, end of period		1,205,840		$	2.66		1,430,701		$	3.00
Exercisable, end of period		837,902		$	2.81		586,935		$	3.57

No option or warrant exercises occurred under any share-based payment arrangements for the three and nine months ended September 30, 2012 and 2011. As part of the merger with Vertro on March 1, 2012, 118,842 options were outstanding that are not part of the existing plans.

In accordance with ASC 718, the fair values of options granted are reflected in the table below for 2012 and 2011. There were 49,500 options granted during the nine months ended September 30, 2012. The fair value of options granted during the nine months ended September 30, 2012 and 2011 were estimated assuming the following weighted averages:

	2012		2011
Expected life in years	3.15		4.5
Volatility	174.2	%	141.1	%
Risk free interest rate	0.30	%	2.15	%
Dividend yield	—		—

Expected volatility is based on the historical volatility of our common stock over the period commensurate with, or longer than, the expected life of the options. The expected life of the options is based on the vesting schedule of the option in relation to the overall term of the option. The risk free interest rate is based on the market yield of the US Treasury Bill with a 5 year term. We do not anticipate paying any dividends so the dividend yield utilized in the model is zero.

Deferred Compensation

During the three and nine months ended September 30, 2011, our executive officers, certain of our senior management and our board of directors, voluntarily elected to defer a portion of their compensation. The amount of the deferred compensation was approximately $98,000 and $736,000 for the three and nine months ended September 30, 2011, respectively. As an incentive for officers, management and directors to participate in the elected deferrals, we granted them RSAs with a fair value equal to the amount of the deferred compensation. The number of RSAs granted in conjunction with the deferred compensation was 22,038 and 123,118 for the three and nine months ended September 30, 2011, respectively, and were granted at an exercise price ranging from $2.94 per share to $1.67 per share on the date of each grant. As of September 30, 2012, all RSAs granted in connection with elected deferrals were issued (see Note 8).

Warrants Outstanding

As of September 30, 2012, we have outstanding warrants for the potential issuance of 765,000 shares of common stock. Exercise price for these warrants ranges from $1.50 to $15.00. These warrants were primarily issued in connection with acquisitions, private placements and debt issuances. On October 11, 2012, pursuant to the Second Amendment to the Bridge Bank Business Financing Modification Agreement, the Company issued Bridge Bank a warrant to purchase 51,724 shares of our own common stock exercisable at $0.87 per share until October 2017.

Note 8 - Sale of Common Stock and Treasury Stock

In August 2011, we retired 164,869 shares of our common stock held in treasury valued at approximately $627,000. In February 2012, we retired 21,270 shares of our common stock valued at approximately $81,000.

The merger agreement with Vertro required that at closing of the merger, we pay outstanding obligations under our deferred compensation program and bonus agreements to our executive officers, board of directors and certain management employees with our common stock in lieu of cash. These obligations were satisfied by issuing 1,017,742 shares of our common stock. At the same time, 284,962 of the common stock issued to executives, board directors and managers were withheld by us at the same value as issued, to pay for the associated individual's income taxes, approximately $256,000. Those shares withheld were retired.

Note 9 - Income Taxes

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2008 through 2011. Our state income tax returns are also open to audit under the statute of limitations for the years ending December 31, 2008 through 2011.

As of September 30, 2012, we have accrued $506,453 for uncertain tax positions that we reported as discrete items in the other long-term liabilities section of the consolidated balance sheet (unaudited).

Due to the recent history of tax losses, the economic conditions in which we operate, recent organizational changes, and near term projections, we concluded that we are unable to support a conclusion that it is more likely than not that any of our deferred income tax assets will be realized. As a result, we have recorded a full valuation allowance for the net deferred tax assets at September 30, 2012 and December 31, 2011. We recorded a deferred tax liability of $4,543,000 as a result of the merger with Vertro on March 1, 2012.

Note 10 - Discontinued Operations

The table below summarizes unaudited financial results of discontinued operations which are comprised of the European operations acquired with the merger with Vertro in March 2012 and the favorable settlement of a lawsuit involving a lease with a discontinued operation which resulted in a one-time credit of approximately $257,000 in March 2011. The unaudited results for discontinued operations in the three and nine months ended September 30, 2012 and 2011 are:

	For the Three Months Ended September 30				For the Nine MonthsEnded September 30
	2012		2011		2012			2011
Revenue	$	—	$	—	$	—		$	—
Loss from discontinued operations before sale				—		(1,709	)		—
Income (loss) from discontinued operations from European operations acquired with Vertro merger		14,121				(141,112	)
Gain from litigation settlement in discontinued operations		—		—		—			257,136
Income (loss) from discontinued operations	$	14,121	$	—	$	(142,821	)	$	257,136

Note 11 - Net Loss Per Common Share

During the periods presented, we had securities, mainly stock options and warrants, which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect are anti-dilutive. Per share data is based on the weighted average number of shares outstanding.

Note 12 - Impact of Recent Accounting Pronouncements

ASU 2011-08- In September 2011, the Financial Accounting Standards Board ("FASB") issued “Intangibles-Goodwill and Other: Testing Goodwill for Impairment” to simplify the goodwill impairment test. The change allows companies to first decide whether they need to do the two-step test by allowing companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This amendment also includes examples of how the amended test should be carried out. This amendment is effective for annual and interim tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.

ASU 2011-05 - In June 2011, the FASB issued “Presentation of Comprehensive Income”. For annual periods, an entity has the option to present the components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For interim periods, total comprehensive income is required to be disclosed either below net income on the income statement or as a separate statement. The Accounting Standards Update ("ASU") does not change the items that must be reported as other comprehensive income. Whether presenting two separate statements or one continuous statement in annual periods, the ASU required entities to present reclassifications from other comprehensive income in the statement reporting net income. In December 2011, however, the FASB deferred this requirement when it issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which has the same effective date as ASU 2011-05. Companies must continue to disclose reclassifications from other comprehensive income on the statement that reports other comprehensive income, or in the notes to the financial statements. We adopted this guidance effective January 1, 2012, and disclosed total comprehensive income below net income on the income statement in our interim financial statements. The effect of adopting this statement is not expected to have an impact on our financial position or results of operations.

Other recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants (AICPA), and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements.

Note 13 - Segment Analysis

In the third quarter of 2012, management reorganized the operations combining the former three operating segments - Publisher Network, Software Search and Partner Programs into the two operating segments; Publisher Network and Software Search. Partner Programs were merged into the two remaining segments. Prior to 2012, we operated with two segments classified as Performance Marketing and Web Properties. For presentation purposes, our prior period results included herein have been reclassified for the new segment structure.

Listed below is an unaudited presentation of net revenue and gross profit for all reportable segments for the three and nine months ended September 30, 2012 and 2011. We currently only track certain assets at the segment level and therefore assets by segment are not presented below.

Net Revenue by Industry Segment

(in thousands)

	Three Months Ended September 30										Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			2012 ($)		% of Revenue			2011 ($)		% of Revenue
Publisher Network		7,605		49.1	%		8,153		99.4	%		19,429		52.3	%		29,160		99.8	%
Software Search		7,876		50.9	%		50		0.6	%		17,694		47.7	%		50		0.2	%
Total net revenue		15,481		100.0	%		8,203		100.0	%		37,123		100.0	%		29,210		100.0	%

Gross Profit by Industry Segment

(in thousands)

	Three Months Ended September 30,										Nine Months Ended September 30,
	2012 ($)		% of Net Revenue			2011 ($)		% of Net Revenue			2012 ($)		% of Net Revenue			2011 ($)		% of Net Revenue
Publisher Network		1,895		12.2	%		3,517		42.9	%		4,326		11.7	%		13,054		44.7	%
Software Search		6,841		44.2	%		50		0.6	%		14,606		39.3	%		50		0.2	%
Total gross profit		8,736		56.4	%		3,567		43.5	%		18,932		51.0	%		13,104		44.9	%

Note 14 - Merger with Vertro, Inc.

Effective March 1, 2012, we merged with Vertro. Pursuant to the terms and conditions of the merger agreement, Vertro became a wholly owned subsidiary of Inuvo and we issued to the Vertro stockholders 12,713,552 shares of our common stock for all the outstanding shares of Vertro common stock. Upon closing of the merger, all the shares of Vertro common stock, which traded under the symbol “VTRO,” were delisted from the NASDAQ Capital Market and ceased trading.

The following summarizes the net assets received and liabilities assumed in the merger with Vertro:

Total consideration paid in common stock	$	11,442,196
Fair value of assets acquired:
Accounts receivable, net		(2,093,845	)
Other current assets		(520,342	)
Property and equipment		(2,059,729	)
Other assets		(283,911	)
Goodwill		(4,234,371	)
Intangible assets		(11,857,537	)
Fair value of liabilities assumed:
Accounts payable		3,753,613
Outstanding balance on credit facility		1,000,000
Accrued expenses		2,782,361
Deferred tax liability		4,543,000
Other long-term liabilities		709,991
Cash received in merger	$	3,181426
Stock issuance costs		(710,671	)
Net cash received in merger	$	2,470,755

Unaudited Pro Forma Results of Operations

As a result of the merger with Vertro, effective March 1, 2012 the unaudited pro forma consolidated operating results for the nine months ended September 30, 2012 and 2011, would have been revenue of $40,907,356 and $51,385,708, respectively; net (loss) income of $(8,369,820) for 2012 and a gain of $6,326,092 for 2011, and basic diluted loss per share of $(0.41) for 2012 and basic and diluted earnings per share of $0.37 and $0.36 for 2011. The pro forma results do not include any anticipated synergies which may occur subsequent to the acquisition date. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of our future combined operating results.

Note 15 - Litigation and Settlements

From time to time we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following litigation which is not incidental to its business:

Shareholder Class Action Lawsuits. In 2005, five putative securities fraud class action lawsuits were filed against Vertro and certain of its former officers and directors in the United States District Court for the Middle District of Florida, which were subsequently consolidated. The consolidated complaint alleged that Vertro and the individual defendants violated Section 10(b) of the Exchange Act and that the individual defendants also violated Section 20(a) of the Exchange Act as “control persons.” Plaintiffs sought unspecified damages and other relief alleging that, during the putative class period, Vertro 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. Plaintiffs appealed the summary judgment ruling and the court's prior orders dismissing certain claims. On September 30, 2011, the Court of Appeals for the Eleventh Circuit affirmed the dismissal of 9 of the 11 alleged misstatements and reversed the court's prior order on summary judgment and the case has been remanded to the District Court. In October 2012 the District Court entered an order maintaining the existing stay on discovery and setting forth a schedule for briefing by the parties on the defendants' renewed motion for summary judgment.

Beth Tarczynski v. Inuvo, Inc. d/b/a Blog Tool Kit, Home Biz Ventures, LLC, and John Doe Defendants; Case No. 11-5111-CI-7, in the Circuit Court for the Sixth Judicial Circuit of Florida. On June 10, 2011, a putative class action complaint was filed alleging violations of the Florida statute prohibiting misleading advertisements, violation of Florida's Deceptive and Unfair Trade Practices Act, fraud in the inducement, conspiracy to commit fraud, restitution/unjust enrichment, and breach of contract. This case was settled in August 2012 pursuant to an agreement whereby Inuvo agreed, among other things, to pay $75,000.

Litigation Relating to the Merger. On October 27, 2011, a complaint was filed in the Supreme Court of the State of New York, County of New York against Vertro, its directors, Inuvo, and Anhinga Merger Subsidiary, Inc. on behalf of a putative class of Vertro shareholders (the “New York Action”). Two other complaints, also purportedly brought on behalf of the same class of shareholders, were filed on November 3 and 10, 2011, against these same defendants in Delaware Chancery Court and were ultimately consolidated by the Court (the “Delaware Action”). The plaintiffs in both the New York and the Delaware Actions alleged that Vertro's board of directors breached their fiduciary duties regarding the merger with Inuvo and that Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. aided and abetted the alleged breach of fiduciary duties. The plaintiffs asked that the merger be enjoined and sought other unspecified monetary relief.

Defendants in the Delaware Action moved to dismiss plaintiffs' complaint, but before the briefing of that motion was complete the plaintiffs filed a notice and proposed order of voluntary dismissal without prejudice, which was entered by the Delaware Court on March 20, 2012. The defendants in the New York Action also moved to dismiss the complaint, or in the alternative to stay proceedings. The New York Court granted Defendants' motion to stay on February 22, 2012 and, as a result of this ruling, the Court denied without prejudice defendants' motion to dismiss and the plaintiff's pending request for expedited discovery. Plaintiffs in the New York action then filed a Second Amended Complaint on June 19, 2012 and, on July 9, 2012, Defendants moved to dismiss that complaint for failure to state a claim.

Scott Mitchell v. Inuvo. In January 2012 we were named as a defendant in an action styled Scott Mitchell versus Inuvo, Inc., f/k/a Think Partnership Inc. and Kowabunga! Inc., Does I-X , Case No. A-11-653956-C in the District Court, Clark County, Nevada. The complaint is related to our alleged failure to fully indemnify Mr. Mitchell, our former chief executive officer and member of the board of directors, pursuant to the terms of an indemnification agreement entered into in connection with his employment agreement, for attorneys' fees and costs incurred by him related to an investigation of insider trading brought against Mr. Mitchell by the Securities and Exchange Commission. The complaint alleges that Mr. Mitchell has subsequently received correspondence from the staff of the Securities and Exchange Commission that the Commission does not intend to make any recommendation for an enforcement action against him. This case was settled in September 2012 pursuant to an agreement whereby Inuvo agreed to pay a total of $255,803.22 in ten quarterly payments. There is no material impact to the company’s performance due to this settlement because the cost was already accrued in a prior period.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain statements in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management's intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate” “intend,” “estimate,” “may,” “will,” “should,” and “could.” These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our lack of profitable operating history, changes in our business, potential need for additional capital and the other additional risks and uncertainties that are set forth in this Quarterly Report on Form 10-Q, as well as in our Annual Report on Form 10-K for the year ended December 31, 2011 and as filed with the Securities and Exchange Commission and our subsequent filings with the SEC. The risk factors described in our filings with the SEC are not the only risks we face. Additional risks and uncertainties not currently known to us or that we deem immaterial also may materially adversely affect our business, financial condition and/or operating results. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Overview

Inuvo® is an Internet marketing and technology company that manages a network of websites and builds and markets browser based consumer applications. We develop software and analytics technology that is accessible over the Internet for use by consumers, online advertisers and website publishers.

On March 1, 2012 we completed the acquisition of Vertro, Inc. (“Vertro”), an Internet company that owns and operates the ALOT product portfolio. After seven months of combined operations, management has reduced the number of reporting segments from three to two. The new segments are Software Search and the Publisher Network. The Partner Programs segment from the previous reporting segments has been absorbed into the other two segments with consumer focused initiatives going to Software Search and all other business going to the Publisher Network. For presentation purposes, prior period results included herein have been reclassified for the new segment structure.

The former Vertro's operations are now part of the Software Search segment. Our Publisher Network segment consists of the technology and analytics platforms that provide advertisers and publishers the capability to facilitate performance-based advertising. This segment also consists of websites we own and operate. The Software Search and Publisher Network segments represent approximately 50.9% and 49.1% respectively, of our total net revenue for the quarter ending September 30, 2012. Prior to 2012, we were organized under two segments; Web Properties and Performance Marketing.

The Company's consolidated financial statements as of September 30, 2012 include the operations and financial results of the Vertro subsidiary for only seven months. For presentation purposes, our prior period results included herein have been reclassified for our new segment structure.

Software Search

The BargainMatch consumer product shopping, comparison and rewards application is a browser-based application where consumers can earn cashback on purchases made online through sponsored merchants.

Publisher Network

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The owned and operated websites including the Yellowise.com™ directory search website at www.yellowise.com and the recently launched Local.ALOT.com website. Both websites are local search and review sites powered by the LocalXML service which allows publishers the ability to make real-time calls to the LocalXML database and have users receive a listing of all local businesses that meet the search criteria. Users may also post reviews of their favorite and not-so-favorite businesses making the reviews available to all other users of the site.

●

The MyAP® Affiliate Platform at www.MyAP.com. MyAP is a complete affiliate tracking and management software solution providing advertisers the ability to sign up, manage and track the activities of their publishers through a reliable, easy-to-use, and privately-branded platform with full data transparency. Where the Inuvo Platform is an open platform where many advertisers and publishers interact, the MyAP platform is designed specifically to allow merchants to build private affiliate networks. Each advertising customer of MyAP is supported by a unique implementation of the software, customized to suit their individual needs and populated by publishers.

NYSE MKT

On May 9, 2011, we received notice from the NYSE MKT, LLC (formerly NYSE Amex) (the exchange) that we did not meet certain of the exchange's continued listing standards due to stockholders' equity of less than $4.0 million and losses from continuing operations and/or net losses in three of our four most recent fiscal years as set forth in Section 1003(a) (ii) of the NYSE MKT Company Guide. The exchange accepted our plan to regain compliance with the continued listing standards and on September 11, 2012, we received notification from the exchange that the continued listing deficiencies were resolved. However, due to of the company's continuing net losses, the exchange’s minimum requirement for continued listing becomes a minimum stockholders’ equity of $6.0 million. At September 30, 2012, our stockholders’ equity was $5.1 million and we did not meet the exchange’s minimum listing requirement. We believe we will achieve the exchange’s minimum stockholders’ requirement and regain compliance with the continued listing standard in 2013 due to cost containment and revenue growth.

●

Cost Containment. With the Vertro merger we anticipated that we would save approximately $2.9 million in operating expense synergies on an annualized run rate. As of September 30, 2012 we were on a run rate of approximately $0.9 million ahead of that expectation and we expect these savings to flow through to our bottom line throughout the fourth quarter of 2012 and beyond.

●

Revenue Growth. Our Publisher Network segment had a revenue growth rate of 40% in the third quarter of 2012 compared to the second quarter of 2012. Our Software Search segment had a revenue growth rate of 6% for the third quarter of 2012 compared to the second quarter of 2012. In September 2012, we attained revenue growth leading to a higher revenue share from Yahoo! for our Publisher Network segment and in July 2012, revenue growth in our Software Search Segment reached a level that yielded a higher revenue share from Google. We expect these higher revenue share rates to continue into the fourth quarter of 2012 and the higher percentage revenue share with each advertising partner is substantial and a meaningful component of our revenue growth. Our Yellowise and Local.alot owned and operated sites are contributing meaningful incremental revenues on a quarter by quarter basis and we expect their growth to continue. In addition we expect to see meaningful revenue coming from our BargainMatch.com product.

In aggregate, we believe the continued cost containment described above and the growth in revenue will allow us to satisfy the NYSE/MKT listing requirements for shareholder equity in 2013.

Hurricane Sandy

Our corporate headquarters and a significant portion of our operations are located in New York City. Our office was closed for a week due to the impact of Hurricane Sandy. One of our data centers in New York City has been without power since the hurricane and we have been operating a portion of our Software Search segment business out of a redundant data center. Our business and operating systems were not materially impacted by the office closure and our employees were able to work remotely.

Results of Operations for the Three months and Nine Months ended September 30, 2012 and 2011

The following table sets forth selected information concerning our results of operations for the three months and nine months ended September 30, 2012 and 2011 (unaudited and in thousands):

	Three Months ended September 30												Nine Months ended September 30
	2012			% of Revenue			2011			% of Revenue			2012			% of Revenue			2011			% of Revenue
Net revenues	$	15,481			100	%	$	8,203			100	%	$	37,123			100	%	$	29,210			100	%
Cost of revenue		6,745			43.6	%		4,636			56.5	%		18,190			49	%		16,106			55.1	%
Gross Profit		8,736			56.4	%		3,567			43.5			18,933			51	%		13,103			44.9	%
Total operating expenses		9,860			63.7	%		4,803			58.6			24,404			65.7	%		17,136			58.7	%
Operating Loss		(1,124	)		(7.3	%)		(1,236	)		(15.1	%)		(5,471	)		(14.7	%)		(4,032	)		(13.8	%)
Other expenses		(202	)		(1.3	%)		(132	)		(1.6	%)		(474	)		(1.3	%)		(817	)		(2.8	%)
Income tax expense		( 9	)		(0.1	%)		—			--			(71	)		(0.2	%)		—			—
Net loss from continuing operations		(1,335	)		(8.6	%)		(1,368	)		(16.7	%)		(6,016	)		(16.2	%)		(4,850	)		(16.6	%)
Discontinued operations		14			0.1	%		—			—			(143	)		(0.4	%)		257			0.9	%
Net loss	$	(1,321	)		(8.5	%)	$	(1,368	)		(16.7	%)	$	(6,159	)		(16.6	%)	$	(4,592	)		(15.7	%)

In the three months ended September 30, 2012, net revenues increased 88.7% from the same period of 2011. Additionally, gross profit also increased 144.9% in the three months ended September 30, 2012 compared to the same period of 2011. These increases were due primarily from revenue from our Software Search segment as a result of our merger with Vertro. In the three months ended September 30, 2012, our operating expenses increased by approximately 105.3% over the same period in 2011 due primarily to customer acquisition costs from our Software Search segment as a result of our merger with Vertro.

Our net loss from continuing operations for the three months ended September 30, 2012 decreased by approximately $33,000 or 2.4% from the same period in 2011 due to improved gross profit and the cost synergies derived from the merger with Vertro.

The financial results for the nine months ended September 30, 2012 include only seven months of combined financial results of the merger with Vertro on March 1, 2012. In the nine months ended September 30, 2012, net revenues increased 27.1% from the same period of 2011. Additionally, gross profit also increased by 44.5% in the nine months ended September 30, 2012 compared to the same period of 2011. These increases were due primarily from revenue from our Software Search segment as a result of our merger with Vertro. In the nine months ended September 30, 2012, our operating expenses increased by approximately 42.4% over the same period in 2011 due primarily to customer acquisition costs from our Software Search segment as a result of our merger with Vertro.

Our net loss from continuing operations for the nine months ended September 30, 2012 increased by approximately $1,166,000 from the same period in 2011 due to higher operating expenses.

Net Revenue

Total net revenue from our Publisher Network and Software Search segments for the three months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Three Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		7,605		49.1	%		8,153		99.4	%		(548	)		(6.7	)%
Software Search		7,876		50.9	%		50		0.6	%		7,826			15,652.0	%
Total net revenue		15,481		100.0	%		8,203		100.0	%		7,278			88.7	%

Net revenue from our Publisher Network segment decreased 6.7% for the three months ended September 30, 2012 compared to the same period of 2011 primarily due to the decrease in the number of transactions driven through our owned and operated websites and through third party affiliates using the ValidClick platform. In December 2011, Yahoo! provided preliminary notice that it had identified certain traffic irregularities across its publisher network, to which Inuvo is a contributor. While this irregular traffic did not originate within the Inuvo network, it passed through some websites the company manages and in some cases owns and operates. Yahoo! made advertiser refunds as a result of identified traffic irregularities that it charged back to us. In the first quarter of 2012, the chargeback was approximately $238,000. This amount was a reduction of our revenue in the first quarter 2012 and most of this amount has been charged back to our vendors. In the third quarter of 2012, we charged revenue a reserve of $170,000 in anticipation of an additional chargeback from Yahoo! We have reduced traffic to some websites we manage in response to these irregularities. While growing, these websites have not yet achieved the traffic levels reached in 2011. There can be no assurance that we will be able to successfully return these campaigns to their previous levels. We have also restructured the ValidClick business to focus on smaller publishers rather than larger ones where traffic origin is less certain. The revenue of this segment has been volatile due to the decrease in transactions as described above and though we expect the volatility to continue in the near future, we believe the focus on smaller publishers will improve traffic quality and promote a steady growth of the segment. In September 2012, the revenue growth had attained a contractual level yielding a higher revenue share from Yahoo! The recent trend in the Publisher Network segment is a revenue growth rate of 40% in the third quarter of 2012 over the most recent sequential quarter, the second quarter of 2012.

Net revenue from our Software Search segment is primarily a result of the merger with Vertro on March 1, 2012. Net revenue from the Software Search segment is derived from the ALOT users conducting searches that produce both algorithmic results and sponsored listings. Both the algorithmic results and sponsored listings are provided by third parties with whom we have contractual relationships. When 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. This segment also includes the non-search revenue generated from the ALOT products. The largest portion of non-search revenue is derived from display ads presented on the Alot homepage. Recently we have seen a decline in Display advertising due to implementation changes made by our display advertising provider. The recent trend in the Software Search segment is an increase of net revenue of 6% for the three months ended September 30, 2012 compared to the most recent sequential quarter, ended June 30, 2012. In July 2012, for the first time in over a year, revenue growth had attained a contractual level yielding a higher commission rate from Google.

One provider of paid search results for our Software Search segment accounted for approximately 49.2% of our consolidated revenues for the three months ended September 30, 2012. No revenue from that paid search provider was included in our consolidated revenue for the three months ended September 30, 2011. Additionally, one provider of paid search results for our Publisher Network segment accounted for approximately 42.4% and 88.8% of consolidated revenues for the three month periods ended September 30, 2012 and 2011, respectively. The lower percentage this year is due to the diversification of the revenue streams achieved by merging with Vertro in March 2012.

Total net revenue from our Publisher Network and Software Search segments for the nine months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		19,429		52.3	%		29,160		99.8	%		(9,731	)		(33.4	)%
Software Search		17,694		47.7	%		50		0.2	%		17,644			35,288	%
Total net revenue		37,123		100.0	%		29,210		100.0	%		7,913			27.1	%

Net revenue from our Publisher Network segment decreased 33.4% for the nine months ended September 30, 2012 compared to the same period of 2011 primarily due to the decrease in the number of transactions driven through our owned and operated websites and through third party affiliates using the ValidClick platform as described above.

Net revenue from our Software Search segment is entirely a result of the merger with Vertro on March 1, 2012 as described above.

One provider of paid search results for our Software Search segment accounted for approximately 41.8% of our consolidated revenues for the nine months ended September 30, 2012. No revenue from that paid search provider was included in our consolidated revenue for the nine months ended September 30, 2011. Additionally, one provider of paid search results for our Publisher Network segment accounted for approximately 44.7% and 86.4% of consolidated revenues for the nine month periods ended September 30, 2012 and 2011, respectively. The lower percentage this year is due to the diversification of the revenue streams achieved by merging with Vertro in March 2012.

Cost of Revenue and Gross Profit

Cost of revenue for the three months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Three Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change		% Change
Affiliate expenses		5,472		35.4	%		3,922		47.8	%		1,550		39.5	%
Data acquisition		1,054		6.8	%		688		8.4	%		366		53.2%	%
Merchant processing fees and product costs		219		1.4	%		26		0.3	%		193		742.3	%
Total cost of revenue		6,745		43.6	%		4,636		56.5	%		2,109		45.5	%

The lower affiliate payments as a percentage of revenue in the three months ended September 30, 2012 compared to the same period in 2011 is due primarily to restructuring the ValidClick business to focus on smaller publishers to host advertising.

The increase in data acquisition costs for the three months ended September 30, 2012 as compared to the same period of 2011 is due primarily to acquiring bundled downloads to drive revenue through our ALOT Appbar which was acquired in the Vertro acquisition in March 2012. We do not expect these costs to increase in the future.

Cost of revenue for the nine months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change		% Change
Affiliate expenses		14,119		38.0	%		14,090		48.2	%		29		0.2	%
Data acquisition		3,572		9.7	%		1,943		6.7	%		1,629		83.8	%
Merchant processing fees and product costs		500		1.3	%		73		0.3	%		427		584.9	%
Total cost of revenue		18,191		49.0	%		16,106		55.1	%		2,085		12.9	%

The affiliate payments in the nine months ended September 30, 2012 compared to the same period in 2011 were nearly the same. The lower affiliate payments as a percentage of revenue for the nine months ended September 30, 2012 compared to the same period in 2011 is primarily due to restructuring the ValidClick business to focus on smaller publishers to host advertising.

The increase in data acquisition costs both in dollars and as a percentage of revenue for the nine months ended September 30, 2012 as compared to the same period of 2011 is due primarily to acquiring bundled downloads to drive revenue through our ALOT Appbar which was acquired in the Vertro acquisition in March 2012.

We do not expect these costs to increase in the future.

The following table provides information on gross profit by operating segment for each of the periods presented (unaudited and in thousands):

	Three Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		1,894		12.9	%		3,517		42.9	%		(1,623	)		(46.1	)%
Software Search		6,842		50.9	%		50		0.2	%		6,792			13,584.0	%
Total gross profit		8,736		63.8	%		3,567		43.1	%		5,169			144.9	%

Gross profit from our Publisher Network segment decreased 46.1% for the three months ended September 30, 2012 compared to the same period of 2011 primarily due to lower revenue of owned and operated websites associated with reducing traffic as described above in “Net Revenue”.

Gross profit from the Software Search segment increased as a result of the ALOT operations acquired in the merger with Vertro in March 2012.

The following table provides information on gross profit by operating segment for each of the periods presented (unaudited and in thousands):

	Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		4,326		11.7	%		13,053		44.7	%		(8,727	)		(66.9	)%
Software Search		14,606		39.3	%		50		0.2	%		14,556			29,112	%
Total gross profit		18,932		51.0	%		13,103		44.9	%		5,829			44.5	%

Gross profit from our Publisher Network segment decreased 66.9% for the nine months ended September 30, 2012 compared to the same period of 2011 primarily due to lower revenue from owned and operated websites associated with reducing traffic as described above in “Net Revenue”.

Gross profit from the Software Search segment is resulted from the ALOT operations acquired in the merger with Vertro in March 2012.

Operating Expenses

Operating expenses for the three months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Three Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change		% Change
Search costs		5,832		37.7	%		1,959		23.9	%		3,873		197.7	%
Compensation and telemarketing		1,649		10.7	%		1,481		18.1	%		168		11.3	%
Selling, general and administrative		2,379		15.4	%		1,363		16.6	%		1,016		74.5	%
Total operating expenses		9,860		63.7	%		4,803		58.6	%		5,057		105.3	%

Our operating expenses by segment were as follows for the periods presented (unaudited and in thousands):

	Three Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		718		4.6	%		2,379		29.0	%		(1,661	)		(69.8	)%
Software Search		5,427		35.1	%		92		1.1	%		5,335			5,798.9	%
Corporate		3,715		24.0	%		2,332		28.4	%		1,383			59.3	%
Total operating expenses		9,860		63.7	%		4,803		58.6	%		5,057			105.3	%

Search costs increased 197.7% for the three months ended September 30, 2012 compared to the same period of 2011 primarily due to the advertising spend to create download traffic for the ALOT appbar. This expense is expected to increase, though not significantly in the future as we grow the ALOT user base and revenue.

Compensation and telemarketing expense increased 11.3% for the three months ended September 30, 2012 compared to the same period of 2011 primarily due to the merger with Vertro. At September 30, 2012, we had a headcount of 45 employees compared to 28 employees at September 30, 2011.

Selling, general and administrative expense increased approximately $1 million or 74.5% for the three months ended September 30, 2012 compared to the same period of 2011 primarily due to higher depreciation and amortization expense ($544,000), IT services expense of ($205,000), rent expense ($91,000), professional fees ($89,000), and other related to the acquired operations from the merger with Vertro in March 2012.

Operating expenses for the nine months ended September 30, 2012 and 2011 were as follows (unaudited and in thousands):

	Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Search costs		13,098		35.3	%		6,749		23.1	%		6,349			94.1	%
Compensation and telemarketing		4,571		12.3	%		6,367		21.8	%		(1,796	)		(28.2	)%
Selling, general and administrative		6,735		18.1	%		4,019		13.8	%		2,716			67.6	%
Total operating expenses		24,404		65.7	%		17,135		58.7	%		7,269			42.4	%

Our operating expenses by segment were as follows for the periods presented (unaudited and in thousands):

	Nine Months Ended September 30
	2012 ($)		% of Revenue			2011 ($)		% of Revenue			$ Change			% Change
Publisher Network		1,696		4.6	%		9,769		33.4	%		(8,073	)		(82.6	)%
Software Search		12,649		34.1	%		193		0.7	%		12,456			6,453.9	%
Corporate		10,059		27.1	%		7,174		24.6	%		2,885			40.2	%
Total operating expenses		24,404		65.7	%		17,136		58.7	%		7,268			42.4	%

Search costs increased 94.1% for the nine months ended September 30, 2012 compared to the same period of 2011 primarily due to the advertising spend to create download traffic for the ALOT appbar. This expense is expected to increase, though not significantly in the future as we grow the ALOT user base and revenue.

Compensation and telemarketing expense decreased 28.2% for the nine months ended September 30, 2012 compared to the same period of 2011 primarily due to discontinuing the telemarketing operations in the 2011.

Selling, general and administrative expense increased approximately $2.7 million or 67.6% for the nine months ended September 30, 2012 compared to the same period of 2011 primarily due to increases in depreciation and amortization expense of ($1,020,000), rent of ($584,000), IT services of ($298,000), consulting expense of ($205,000), and other general expenses of ($639,000) due to the infrastructure growth related to the Vertro merger in March 2012.

Other Income (Expense), Net

During the third quarter of 2012, we settled a lawsuit resulting in a $75,000 charge. In the third quarter of 2011, we wrote off approximately $78,000 of capital development associated with delays in launching a new business line.

Interest expense, net which is primarily associated with our borrowings from Bridge Bank, increased by 142% during the three months ended September 30, 2012 to approximately $128,000 as compared to approximately $53,000 for the same period in 2011. This increase in interest expense is primarily is due to the larger outstanding balance in the 2012 period compared to the same period in 2011, and to the amortization of fees to acquire the credit facilities.

During the nine month period ended September 30, 2012, we settled a lawsuit resulting in a $75,000 charge. In the same nine month period of 2011, we incurred a charge to litigation settlements of approximately $374,000 associated with settlements of lawsuits brought by two former employees. In addition, we wrote-off a note receivable of approximately $101,000 as a result of the cancellation of our outsourced call center contract during the second quarter of 2011. In the third quarter of 2011, we wrote off approximately $78,000 of capital development associated with delays in launching a new business line.

Interest expense, net which is primarily associated with our borrowings from Bridge Bank, increased by 51.1% during the nine months ended September 30, 2012 to $399,000 as compared to $264,000 for the same period in 2011. This higher interest expense in 2012 is primarily due to higher outstanding loan balances and the write-off of $100,743 of fees related to the February 2011 Bridge Bank credit facility that was superseded by a March 2012 Bridge Bank credit facility.

Income (Loss) from Discontinued Operations, Net of Tax Expense

The gain from discontinued operations for the three months ended September 30, 2012 was approximately $14,000 and is primarily attributed to Vertro's European operations.

The loss from discontinued operations for the nine months ended September 30, 2012 was approximately $143,000 and is primarily attributed to the denial by European authorities to hear our appeal for refunding of Value Added Taxes in Germany. In the same nine month period of 2011, we reported a gain from discontinued operations of approximately $257,000 due to a favorable litigation settlement of a lease.

Liquidity and Capital Resources

Liquidity is our ability to generate adequate amounts of cash to meet the company's needs for cash. At September 30, 2012 and December 31, 2011, we had working capital deficit of approximately $3.0 million and $2.0 million, respectively. Our principal sources of liquidity are cash from operations, cash on hand and the Bridge Bank credit facility.

While we do not have any commitments for capital expenditures which come due within the next 12 months, in the past our liquidity had been negatively affected, as a result of a reduction in search marketing revenue. In response, we implemented a cost reduction plan throughout 2011 to offset the reduced revenue which included a reduction in employees and related expenses. We also delayed payments to publishers and vendors in the management of our cash flows. Additionally in 2011, our directors, executive officers and certain senior managers agreed to a deferral of cash compensation which was ultimately converted to common shares.

Upon merging with Vertro on March 1, 2012 we eliminated duplicate costs in public company expense, and in the accounting, legal, and IT functions. The program to reduce duplicate costs continues beyond the third quarter. We also entered into a new Business Financing Agreement with our bank (see below). At September 30, 2012 cash increased $3.2 million from the end of 2011 and bank debt correspondingly increased from $2.9 million at December 31, 2011 to $7.9 million at the end of the third quarter 2012.

On March 1, 2012, we entered into a new Business Financing Agreement with Bridge Bank for a revolving credit facility with a maximum limit of $10 million (the “Revolving Credit Line”) and a term loan with a maximum limit of $5 million (the “Term Loan”). The Revolving Credit Line replaced the Company's then existing $8 million revolving credit facility with Bridge Bank. The new credit facility will be used primarily to satisfy our working capital needs. As of September 30, 2012, there was approximately $1.1 million credit available on the Revolving Credit Line and $0 on the Term Loan. Subject to the terms of the new agreement, we are entitled to obtain advances against the Revolving Credit Line up to 80% of eligible accounts receivable balances, which are generally those balances owed by U.S. based customers that are less than 90 days from the date of invoice plus $1 million up to the maximum limit of $10 million. In addition, subject to the terms of the agreement, we are entitled to borrow up to $5 million under the Term Loan portion of the credit facility, which is repayable in 45 equal monthly installments beginning June 2012. The Revolving Credit Line portion of the credit facility expires on February 28, 2014, at which time all loan advances under the Revolving Credit Line become due and payable. The Term Loan expires in February 2016. Under the terms of the new agreement, we must maintain certain depository, operating and investment accounts at Bridge Bank; provide Bridge Bank a first priority perfected security interest in all of our accounts and personal property; provide various monthly, quarterly and annual reports; and limit additional indebtedness to $500,000 of purchase money including capital leases and an additional $500,000 of all other indebtedness. In addition, the new agreement required that we maintain through May 2012 an “operating profit” of net income plus interest and taxes plus non-cash expenses for amortization, depreciation, stock based compensation, discontinued operations, non-recurring non-cash items and certain closing costs associated with the Merger Transaction with Vertro of not less than $200,000 for the immediate proceeding three month period; after May 2012 a Debt Service Coverage Ratio of at least 1.50 to 1.0 tested on the immediate proceeding three month period; and an Asset Coverage Ratio of not less than 1.10 to 1.0 at all times until September 30, 2012 and 1.25 to 1.0 thereafter. Interest on the Revolving Credit Line is payable monthly at prime plus 0.5% (3.75% at September 30, 2012) plus a monthly maintenance fee of 0.125 percentage points on the average daily account balance. Interest on the Term Loan bears interest at prime plus 1% (4.25% at September 30, 2012). In connection with establishing the credit facility, the Company incurred fees payable to Bridge Bank of approximately $100,000. The agreement calls for a termination fee until the first anniversary and prepayment fee on the Term Loan until the first anniversary.

On October 11, 2012 we entered into the Second Business Financing Modification Agreement with Bridge Bank (the "Second Amendment") changed the minimum asset coverage ratio to 0.9 to 1.0 for September 2012 and October 2012, 1.0 to 1.0 for November and December 2012 and 1.15 to 1.0 for each measuring period thereafter beginning January 2013. It also changed the minimum operating profit measured monthly on a trailing 3 month basis to not less than $600,000 for the September 2012 measuring period and $1,000,000 for the October 2012 measuring period. Also changed was the minimum debt service ratio, measured monthly on a trailing 3 month basis, to not less than 1.1 to 1.0 for November 2012 measuring period, 1.25 to 1.0 for December 2012 and 1.50 to 1.0 for each measuring period thereafter beginning January 2013. Further, the Second Amendment waived the event of default caused by the non-compliance of the operating profit in July and August 2012. Additionally, pursuant to the Second Amendment, the Company issued Bridge Bank a warrant to purchase 51,724 shares of our own common stock exercisable at $0.87 per share until October 2017.

As of September 30, 2012, we were not in compliance with all terms of the amended Bridge Bank credit facility, however we regained compliance upon execution of the Second Amendment.

We may seek to raise additional capital through public or private equity financings in order to fund our operations, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets, sell certain of our operations or respond to competitive pressures in an effort to maintain our market position. We cannot be assured that additional financing will be available to us on favorable terms, or at all. If we issue additional equity, our existing stockholders may experience substantial dilution. If we continue to generate losses and are unable to comply with the continued listing standards of NYSE MKT, we could be delisted and be unable to raise additional capital at a reasonable cost. At September 30, 2012, we had a working capital deficit of approximately $3 million and availability under our revolving line of credit of approximately $1.1 million. We believe with the continued improvement in cash flow, the reduction of duplicate costs with respect to the merger with Vertro and the higher limit of the new bank facility, we will have sufficient cash for the next twelve months.

Cash flows

Net cash provided in operating activities for the nine months ended September 30, 2012 totaled approximately $541,000 compared to approximately $408,000 during the same period in 2011. The net cash provided in operating activities in 2012 is primarily due to stock compensation costs of $632,000, an increase in accounts receivable of $881,000 and prepaid expenses and other assets of $266,000. This was offset by uses of cash to decrease accounts payable ($263,000) and other accrued expenses and current liabilities ($842,000). The net cash provided by operating activities for the nine months ended September 30, 2011 was primarily due to a decrease in accounts receivable of approximately $1.5 million and the deferred compensation program instituted last year to preserve the company's cash reserves ($368,000) partially offset by a decrease in accounts payable of $1.3 million.

Net cash used in investing activities in 2012 of $1,254,000 was primarily due to the purchase of bundled downloads for the Alot AppBar and capitalized development costs. Net cash used in investing activities for the nine months ended September 30, 2011 of $2.6 million was primarily associated with the purchase of names for resale in the BabytoBee and lead generation businesses.

Net cash provided by financing activities during the nine months ended September 30, 2012 and 2011 were approximately $3.9 million and $3.2 million, respectively. The cash provided by financing activities for the period in 2012 resulted from the proceeds from the bank term note and draw downs from the bank credit facility. In the nine month period of 2011, the cash provided was primarily from the sale of our common stock in June 2011 and due to draw downs from the bank credit facility.

Off Balance Sheet Arrangements

As of September 30, 2012, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable to a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for us. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2012, the end of the period covered by this report, our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the evaluation date, our Chief Executive Officer and Chief Financial Officer, concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Scott Mitchell v. Inuvo. In January 2012 we were named as a defendant in an action styled Scott Mitchell versus Inuvo, Inc., f/k/a Think Partnership Inc. and Kowabunga! Inc., Does I-X , Case No. A-11-653956-C in the District Court, Clark County, Nevada. The complaint is related to our alleged failure to fully indemnify Mr. Mitchell, our former chief executive officer and member of the board of directors, pursuant to the terms of an indemnification agreement entered into in connection with his employment agreement, for attorneys' fees and costs incurred by him related to an investigation of insider trading brought against Mr. Mitchell by the Securities and Exchange Commission. The complaint alleges that Mr. Mitchell has subsequently received correspondence from the staff of the Securities and Exchange Commission that the Commission does not intend to make any recommendation for an enforcement action against him. This case was settled in September 2012 pursuant to an agreement whereby Inuvo agreed to pay a total of $255,803.22 in ten quarterly payments. There is no material impact to the company performance due to this settlement because the cost was already accrued.

ITEM 1A. RISK FACTORS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our Form 10-K filed with the Securities and Exchange Commission on March 29, 2012, subject to the new or modified risk factors appearing below that should be read in conjunction with the risk factors disclosed in our Form 10-K.

We depend on two customers for a significant portion of our revenues. Prior to the acquisition of Vertro, Inuvo received 86.6%, and 80.3%, respectively, of our net revenue for 2011 and 2010 from a single customer, Yahoo!. Vertro received approximately 81.0%, and 87.0%, respectively, of its net revenue for 2011 and 2010, from a different single customer, Google. Our current contract with Yahoo! expires in April 2014. Our current contract with Google expires December 31, 2012. During Q3, 2012 we received 49.2% of our revenue from Google and 42.4% of our revenue from Yahoo!

The amount of revenue we receive from these customers depends on a number of factors outside of our control, including the amount they charge for advertisements, the depth of advertisements available from them, and their ability of to display relevant ads in response to our end-user queries. We will likely experience a significant decline in revenue and our business operations could be significantly harmed if:

	●	We fail to have websites and applications approved;
	●	Our paid listings providers' performance deteriorates; or
	●	We violate our paid listings providers' guidelines or they change their implementation guidelines.

In addition, if any of these preceding circumstances were to occur, we may not be able to find a suitable alternate paid search results provider or otherwise replace the lost revenues. The loss of either of these customers or a material change in the revenue or gross profit generated by these customers will have a material adverse impact on our business, results of operations and financial condition in future periods.

Our business must keep pace with rapid technological change to remain competitive. Our business operates in a market characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, enhancements, and changing customer demands. We must adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of our services. For example, our Internet toolbar products are browser based plug-ins which must be supported by the Internet browser to function. The standards regarding support for browser based plug-ins are changing and Microsoft recently indicated that one setting of its new browser will not support plug-ins and we will have to adapt our product to this change. Furthermore, many of our products, including our toolbars, must operate across multiple operating systems. Introducing new technology into our systems involves numerous technical challenges, requires substantial amounts of capital and personnel resources, and often takes many months to complete. We may not successfully integrate new technology into our websites on a timely basis, which may degrade the responsiveness and speed of our websites. Technology, once integrated, may not function as expected. In addition, the number of people who access the Internet through devices other than desktop and laptop computers, including mobile telephones and other handheld computing devices, has increased dramatically in the past few years. Failure to modify our Internet toolbar product to keep pace with changes in underlying Internet browser specifications, and / or operating systems,attracting and retaining a substantial number of mobile device users to our services, or failure to develop services that are more compatible with mobile communications devices, or failure to generally keep pace with the rapid technological change could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

In the past Inuvo has been deficient in the continued listing standards of NYSE Amex and there are no assurances it will be able to maintain compliance in the future.

In May 2011, Inuvo was notified by the NYSE MKT, LLC (formerly NYSE AMEX) that it was below certain of the exchange's continued listing standards due to stockholders' equity of less than $4,000,000 and losses from continuing operations and/or net losses in three of its four most recent fiscal years as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. Inuvo was afforded the opportunity to submit a plan of compliance to the exchange by June 8, 2011, that demonstrated its ability to regain compliance with Section 1003(a)(ii) of the company guide within a maximum of 18 months from the submission of the plan. On July 6, 2011, Inuvo was notified by the exchange that it had made a reasonable demonstration of Inuvo's ability to regain compliance with the continued listing standards by December 8, 2012. The exchange continued the listing of Inuvo's common stock subject to certain conditions, including the requirement to provide updates on Inuvo's progress. Following the closing of the merger with Vertro, our stockholders' equity then exceeded the minimum requirement of the exchange and we regained compliance with the continued listing standards. The exchange has advised us it will monitor our continued compliance for several quarters as we integrate Vertro's operations into our company. NYSE MKT's current continued listing standard for stockholders' equity applicable to the Company is $6,000,000 and at September 30, 2012 Inuvo's stockholders' equity was $5,111,102. If Inuvo does not maintain compliance with the continued listing standards Inuvo's common stock will be subject to delisting procedures. In that event that Inuvo is delisted it is likely that Inuvo's common stock would be quoted in the over the counter market on the OTC Bulletin Board. The loss of Inuvo's exchange listing would adversely impact the future liquidity of Inuvo's common stock and may make it more difficult for its stockholders to resell those shares.

A significant portion of the traffic to our websites is acquired from other search engines, mainly google.com, and the loss of the ability to acquire traffic could have a material and adverse effect on our financial results.

We advertise on search engine websites to get downloads of our Appbars and to drive traffic to our owned and operated websites. Our keyword advertising is done primarily with google.com, but also yahoo.com, and MSN/bing.com. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will suffer.

If we are not successful with our owned and operated initiative, our future financial performance may be affected.

We own and operate a number of websites that we monetize with our partners. We have and expect to continue to invest significant amounts of time and resources in these websites and other similar initiatives. We cannot assure you that we will continue to sustain or grow our current revenue from these websites. We also cannot assure you that we will sustain or grow the number of consumers or advertisers that use our owned and operated offerings. If we are unable to sustain or grow the number of consumers using and/or advertisers advertising with our owned and operated websites, our financial performance may be adversely affected.

ITEM 2. UNREGISTERED SALES FO EQUITY SECURITIES AND USE OF PROCCEEDS.

On October 11, 2012, pursuant to the Second Amendment to the Bridge Bank Business Financing Modification Agreement described later in this report under Part II, Item 5., the Company issued Bridge Bank a warrant to purchase 51,724 of shares of our common stock exercisable at $0.87 per share until October 2017. The warrant, which is exercisable on a cashless basis, contains customary anti-dilution provisions in the event of stock splits, dividends and similar corporate events. The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act. This description of the terms of the warrant is qualified in its entirety by reference to the warrant which is filed as Exhibit 4.8 to this report.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable to our operations.

ITEM 5. OTHER INFORMATION.

On October 11, 2012, we entered into the Second Amendment to the Business Financing Modification Agreement with Bridge Bank (“Second Amendment”). The Second Amendment modified the minimum asset coverage ratio to 0.9 to 1.0 for September 2012 and October 2012, 1.0 to 1.0 for November and December 2012 and 1.15 to 1.0 for each measuring period thereafter beginning January 2013. It also changed the minimum operating profit measured monthly on a trailing 3 month basis to not less than $600,000 for the September 2012 measuring period and $1,000,000 for the October 2012 measuring period. Also changed was the minimum debt service ratio, measured monthly on a trailing 3 month basis, to not less than 1.1 to 1.0 for November 2012 measuring period, 1.25 to 1.0 for December 2012 and 1.50 to 1.0 for each measuring period thereafter beginning January 2013. Further, the Second Amendment waived the event of default caused by the non-compliance of the operating profit covenants by us in July 2012 and August 2012. In addition to the warrant issued to Bridge Bank described in Part II, Item 2. of this report, we paid Bridge Bank a fee of $2,500 in connection with this amendment. The description of the terms of the Second Amendment is qualified in its entirety by reference to the agreement which is filed as Exhibit 10.1 to this report. .

ITEM 6. EXHIBITS.

4.8	Form of warrant to purchase 51,724 shares pursuant to the Second Business Financing Modification Agreement with Bridge Bank, National Association, dated October 11, 2012
10.1	Second Business Financing Modification Agreement with Bridge Bank, National Association, dated October 11, 2012
31.1	Rule 13a-14(a)/15d-14(a) certificate of Chief Executive Officer 2002 (Sarbanes-Oxley)
31.2	Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer
32.1	Section 1350certification of Chief Executive Officer
32.2	Section 1350certification of Chief Financial Officer

101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*	To be filed by within the earlier of 30 days from the due date or filing date of this report pursuant to the grace period provided for the first filing of the first interactive data exhibit containing detailed note tagging.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INUVO, INC.

Date: November 8, 2012	By:	/s/ Peter A. Corrao
		Peter A. Corrao,
		Chief Executive Officer, principal executive officer



Date: November 8, 2012	By:	/s/ Wallace D. Ruiz
		Wallace D. Ruiz,
		Chief Financial Officer, principal financial and accounting officer

BORROWERS:		LENDER:

INUVO, INC.		BRIDGE BANK, NATIONAL ASSOCIATION



By:	/s/ Wallace D. Ruiz	By:	/s/ Sarah Schmidt
Name:	Wallace D. Ruiz	Name:	Sarah Schmidt
Title:	Chief Financial Officer	Title:	Vice President

3. Goodwill and Intangible Assets (Details Narrative) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Names Database
Amortization expenses	$ 244,000	$ 661,000	$ 1,350,000	$ 1,860,000
Customer List
Amortization expenses	151,000	0	351,000	0
Bundled Downloads
Amortization expenses	811,000	0	2,221,000	0
Exclusivity And Non Compete Agreements
Amortization expenses	30,000	0	70,000	0
Trade Names
Amortization expenses	$ 48,000	$ 0	$ 112,000	$ 0

1. Organization and Business and Accounting Policies (Details Narrative) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012	Sep. 30, 2011
Organization And Business And Accounting Policies Details Narrative
Gain Contingency	$ 14,000	$ (143,000)	$ 257,000

BABYTOBEE, LLC



By:	/s/ Wallace D. Ruiz
Name:	Wallace D. Ruiz
Title:	Chief Financial Officer

KOWABUNGA MARKETING, INC.



By:	/s/ Wallace D. Ruiz
Name:	Wallace D. Ruiz
Title:	Chief Financial Officer

VERTRO, INC.



By:	/s/ Wallace D. Ruiz
Name:	Wallace D. Ruiz
Title:	Chief Financial Officer

ALOT, INC.



By:	/s/ Wallace D. Ruiz
Name:	Wallace D. Ruiz
Title:	Chief Financial Officer

Date: November 8, 2012		/s/ Peter A. Corrao
		Peter A. Corrao
		President and Chief Executive Officer

November 8, 2012	/s/ Peter A. Corrao
	Peter A. Corrao
	President and Chief Executive Officer

3. Goodwill and Intangible Assets (Details) (USD $)	Sep. 30, 2012
Carrying Value	$ 30,195,385
Accumulated Amortization	(18,230,136)
Net Carrying Value	11,965,249
Names Database
Term	9 months
Carrying Value	15,848,688
Accumulated Amortization	(15,475,715)
Net Carrying Value	372,973
Customer List
Term	20 years
Carrying Value	8,820,000
Accumulated Amortization	(257,250)
Net Carrying Value	8,562,750
Customer List 1
Term	10 years
Carrying Value	1,610,000
Accumulated Amortization	(93,919)
Net Carrying Value	1,516,081
Bundled Downloads
Term	4 years 6 months
Carrying Value	2,446,697
Accumulated Amortization	(2,221,252)
Net Carrying Value	225,445
Exclusivity And Non Compete Agreements
Term	1 year
Carrying Value	120,000
Accumulated Amortization	(70,000)
Net Carrying Value	50,000
Trade Names
Term	5 years
Carrying Value	960,000
Accumulated Amortization	(112,000)
Net Carrying Value	848,000
Trade Names 1
Carrying Value	390,000
Net Carrying Value	390,000
Goodwill
Carrying Value	6,005,309
Net Carrying Value	$ 6,005,309

10. Discontinued Operations (Details) (USD $)	3 Months Ended		9 Months Ended
10. Discontinued Operations (Details) (USD $)	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Discontinued Operations Details
Revenue
Loss (income) from discontinued operations before sale			(1,709)
Income (loss) from discontinued operations from European operations acquired with Vertro merger	14,121		(141,112)
Gain from litigation settlement in discontinued operations				257,136
Loss (income) from discontinued operations	$ 14,121		$ (142,821)	$ 257,136

6. Term and Credit Note Payable (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Term And Credit Note Payable
Bridge Bank - term note; paid in full on March 1, 2012; Due Date February 2013; Interest Rate Prime + 2 percentage points		$ 475,000
Bridge Bank - term note; Due Date February 2016; Interest Rate Prime + 1 percentage points	4,555,555
Bridge Bank - credit facility; paid in full on March 1, 2012; Due Date February 2013; Interest Rate Prime + 2 percentage points		2,431,303
Bridge Bank - credit facility; Due Date February 2014; Interest Rate Prime + 0.5 percentage points	3,300,000
Totals	7,855,555	2,906,303
Less: term and credit facility payable - current portion	(1,333,333)	(452,000)
Term and credit facility - long-term	$ 6,522,222	$ 2,454,303

2. Property and Equipment (Details Narrative) (USD $)	3 Months Ended		9 Months Ended
2. Property and Equipment (Details Narrative) (USD $)	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Property And Equipment
Depreciation and amortization expense	$ 694,000	$ 379,000	$ 1,830,000	$ 1,184,000

13. Segment Analysis (Details) (USD $)	3 Months Ended		9 Months Ended
13. Segment Analysis (Details) (USD $)	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net Revenue	$ 15,481,425	$ 8,203,116	$ 37,122,558	$ 29,209,646
Publisher Network
Net Revenue	7,605,000	8,153,000	19,429,000	29,160,000
Percent of Revenue	49.10%	99.40%	52.30%	99.80%
Software Search
Net Revenue	7,876,000	50,000	17,694,000	50,000
Percent of Revenue	50.90%	0.60%	47.70%	0.20%
Total Net Revenue
Net Revenue	$ 15,481,425	$ 8,203,116	$ 37,122,558	$ 29,209,646
Percent of Revenue	100.00%	100.00%	100.00%	100.00%

13. Segment Analysis (Details 1) (USD $)	3 Months Ended		9 Months Ended
13. Segment Analysis (Details 1) (USD $)	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Gross Profit	$ 8,736,397	$ 3,567,208	$ 18,932,438	$ 13,103,459
Publisher Network
Gross Profit	1,894,000	3,517,000	4,326,000	13,054,000
Percent of Gross Profit	12.90%	42.90%	11.70%	44.70%
Software Search
Gross Profit	6,842,000	50,000	14,606,000	50,000
Percent of Gross Profit	50.90%	0.20%	39.30%	0.20%
Total Net Revenue
Gross Profit	$ 8,736,397	$ 3,567,208	$ 18,932,438	$ 13,103,459
Percent of Gross Profit	63.80%	43.10%	51.00%	44.90%

2. Property and Equipment (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Notes to Financial Statements
Furniture and fixtures	$ 427,121	$ 427,121
Equipment	2,381,861	2,005,505
Software	7,971,097	5,469,804
Leasehold improvements	343,796	310,416
Subtotal	11,123,875	8,212,846
Less: accumulated depreciation and amortization	(8,452,598)	(6,622,835)
Total	$ 2,671,277	$ 1,590,011

7. Stock Based Compensation Plans (Details 1) (USD $)	9 Months Ended
7. Stock Based Compensation Plans (Details 1) (USD $)	Sep. 30, 2012	Sep. 30, 2011
Stock Based Compensation Plans Details 1
Number of Options Outstanding, Beginning	1,358,717	1,223,159
Number of Options Granted	49,500	340,000
Number of Options Forfeited	(202,377)	(132,458)
Number of Options Outstanding, Ending	1,205,840	1,430,701
Number of Options Excercisable, Ending	837,902	586,935
Weighted Average Exercise Price Outstanding, Beginning	$ 2.81	$ 3.74
Weighted Average Exercise Price Granted	$ 0.56	$ 2.83
Weighted Average Exercise Price Forfeited	$ 3.16	$ 6.08
Weighted Average Exercise Price Outstanding, Ending	$ 2.66	$ 3
Weighted Average Exercise Price Exercisable, Ending	$ 2.81	$ 3.57

CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2012	Dec. 31, 2011
Assets:
Cash	$ 3,200,464	$ 4,413
Restricted cash	301,083	475,586
Accounts receivable, net of allowance for doubtful accounts of $310,496 and $477,289, respectively	6,562,452	5,426,865
Unbilled revenue	35,350	49,196
Intangible assets - current, net of accumulated amortization	598,419	947,882
Prepaid expenses and other current assets	829,024	433,601
Total current assets	11,526,792	7,337,543
Property and equipment, net	2,671,277	1,590,011
Goodwill	6,005,309	1,776,544
Intangible assets, net of accumulated amortization	11,366,830	390,000
Other assets	164,187	2,243
Total other assets	17,536,326	2,168,787
Total assets	31,734,395	11,096,341
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
Term and credit note payable - current portion	1,333,333	452,000
Accounts payable	9,689,189	6,198,921
Accrued expenses and other current liabilities	3,535,417	1,611,831
Deferred Compensation		929,428
Current liabilities of discontinued operations		160,000
Total current liabilities	14,557,939	9,352,180
Long-Term Liabilities:
Deferred tax liability	4,543,000
Term and credit notes payable - long term	6,522,222	2,454,303
Other long-term liabilities	1,000,132	300,124
Total long-term liabilities	12,065,354	2,754,427
Stockholders' equity (deficit)
Preferred stock, $.001 par value: Authorized shares - 500,000 - none issued and outstanding	0	0
Common stock, $.001 par value: Authorized shares - 40,000,000, issued shares 23,497,123 and 10,422,617, respectively Outstanding shares - 23,497,123 and 10,035,790, respectively	23,862	10,422
Additional paid-in capital	127,282,457	115,096,953
Accumulated deficit	(120,806,925)	(114,648,037)
Accumulated other comprehensive income	505
Treasury stock, at cost - 365,557 and 386,827 shares, respectively	(1,388,797)	(1,469,604)
Total stockholders' equity (deficit)	5,111,102	(1,010,266)
Total liabilities and stockholders' equity (deficit)	$ 31,734,395	$ 11,096,341

14. Merger with Vertro, Inc. (Details) (USD $)	Mar. 01, 2012
Merger With Vertro Inc.
Total consideration paid in common stock	$ 11,442,196
Accounts receivable, net	(2,093,845)
Other current assets	(520,342)
Property and equipment	(2,059,729)
Other assets	(283,911)
Goodwill	(4,234,371)
Intangible assets	(11,857,537)
Accounts payable	3,753,613
Outstanding balance on credit facility	1,000,000
Accrued expenses	2,782,361
Deferred tax liability	4,543,000
Other long-term liabilities	709,991
Cash received in merger	3,181,426
Stock issuance costs	(710,671)
Net cash received in merger	$ 2,470,755

CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)	9 Months Ended
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)	Sep. 30, 2012	Sep. 30, 2011
Non-cash investing activities:
Retirement shares of treasury stock	164,869	164,869

4. Accrued Expenses and Other Current Liabilities (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Accrued Expenses And Other Current Liabilities Details
Search Costs	$ 1,714,209	$ 109,706
Taxes	145,315
Capital leases-current position	54,299	57,581
Payroll and commission liabilities	21,961	8,370
Affiliate expenses	5,873	16,570
All other expenses	1,593,760	1,419,604
Total	$ 3,535,417	$ 1,611,831

5. Other Long Term Liabilites (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Other Long Term Liabilites Details
Taxes payable	$ 506,453
Deferred rent	403,117	283,469
Capital leases-less current position	57,824	16,655
Long-term deposits	32,738
Total	$ 1,000,132	$ 300,124

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Assets
Allowance for Doubtful accounts	$ 310,496	$ 477,289
Stockholders Equity
Preferred Stock par value	$ 0.001	$ 0.001
Preferred stock shares authorized	500,000	500,000
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock shares authorized	40,000,000	40,000,000
Common stock shares issued	23,862,680	10,422,617
Common stock shares Outstanding	23,497,123	10,035,790
Treasury Stock	365,557	386,827

Document and Entity Information	9 Months Ended
Document and Entity Information	Sep. 30, 2012	Nov. 01, 2012
Document And Entity Information
Entity Registrant Name	INUVO, INC.
Entity Central Index Key	0000829323
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		23,497,123
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012

3. Goodwill and Intangible Assets (Details 1) (USD $)	Sep. 30, 2012
Goodwill And Intangible Assets Details 1
2012	$ 652,805
2013	988,113
2014	794,004
2015	794,004
2016	794,004
Thereafter	7,552,319
Total	$ 11,575,249

6. Term and Credit Payable (Details Narrative) (USD $)	Sep. 30, 2012
Term And Credit Payable Details Narrative
Credit Available on Revolving Credit Line	$ 1.1
Term loan	$ 0

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating activities:
Net loss	$ (6,158,888)	$ (4,592,400)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	5,933,754	3,203,147
Provision for doubtful accounts	77,245	45,520
Loss on write-off of note receivable		179,106
Loss on write-off of capitalized development costs		78,361
Deferred compensation		368,193
Stock based compensation	632,477	1,092,282
Change in operating assets and liabilities:
Restricted cash	174,503	140,083
Accounts receivable	881,013	1,582,911
Prepaid expenses and other assets	266,338	157,490
Accounts payable	(263,345)	(1,346,404)
Other accrued expenses and current liabilities	(842,159)	(43,951)
Net cash provided by operating activities from continuing operations	700,938	784,139
Net cash used in operating activities of discontinued operations	(160,000)	(376,424)
Net cash provided by operating activities	540,938	407,715
Investing activities:
Purchases of equipment and capitalized development costs	(851,299)	(430,610)
Net cash received from merger with Vertro, Inc., net of merger costs	2,470,755
Purchase of names database and bundled downloads	(2,873,822)	(2,143,370)
Net cash used in investing activities	(1,254,366)	(2,573,980)
Financing activities:
Proceeds from sale of common stock, net		2,635,796
Proceeds from term note	5,000,000
Deposit to collateralize letter of credit	(475,000)
Advances from credit note payable	3,808,742	4,631,144
Payments on term note payable and capital leases	(4,424,768)	(4,059,056)
Net cash provided by financing activities	3,908,974	3,207,884
Accumulated other comprehensive income	505
Net change - cash	3,195,546	1,041,619
Cash, beginning of year	4,413	118,561
Cash, end of year	3,200,464	1,160,180
Supplemental information:
Interest paid	238,501	312,912
Non-cash investing activities:
Issuance of stock as settlement of deferred compensation	915,750
Restricted advances on term note payable	300,000	475,000
Payment on litigation settlements with common stock		365,400
Retirement of 164,869 shares of treasury stock		$ 626,502

6. Term and Credit Note Payable (Details 1) (USD $)	Sep. 30, 2012
Term And Credit Note Payable Details 1
2012	$ 333,333
2013	1,333,333
2014	1,333,333
2015	1,333,333
2016	222,223
Total	$ 4,555,555