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For real-time applications running over hand-held mobile terminals in heterogeneous environments, efficient vertical handover (VH) algorithms are required in maintaining a seamless connectivity and an acceptable level of quality. While received signal strength-based methods have dominated this class of algorithms, we propose a thorough system analysis framework and perform rigorous analysis for packet-loss based algorithms for an interworking environment comprising the cellular network and the Wireless Local Area Network (WLAN). The basic VH algorithm analyzed here is based on the moving average of the packet loss rate and we employed both a simple packet loss and Gilbert packet loss pattern. Modifications to the analytical framework have been made by employing block-wise packet loss patterns in order to keep the computational burden within practical limits. Performance trends of call drop probabilities and WLAN usage efficiency are shown with varying system and handover thresholds, and analytical results are compared to that obtained from Monte Carlo simulations.