Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2008

OR

For the transition period from              to             

Commission file number: 0-30428

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.     Yes   x       No   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. (Check one):

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

There were 34,282,574 shares of the Registrant’s Common Stock outstanding on April 30, 2008

FORM 10-Q

MIVA, Inc.

Table of Contents

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MIVA, Inc.

The accompanying notes are an integral part of these consolidated statements.

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The accompanying notes are an integral part of these consolidated statements.

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MIVA, Inc.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation of results for the interim periods have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the entire year.

The unaudited consolidated financial statements include the accounts and operations of MIVA, Inc. and all of our subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less.  We did not maintain a balance in short-term investments as of March 31, 2008 or December 31, 2007.  As of March 31, 2008 substantially all of our cash and cash equivalents were managed by a number of financial institutions and included certain offshore overnight sweep accounts.

Allowance for Doubtful Accounts

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

Comprehensive Loss

Total comprehensive loss is comprised of net loss and net foreign currency translation adjustments.  Total comprehensive loss for the three months ended March 31, 2008 and 2007, was $4.8 million and $5.3 million, respectively.

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Cost of Services

The Company’s cost of services consists of revenue-sharing or other payments to our MIVA Media distribution partners and other directly related expenses associated with the production and usage of MIVA Media including our third party patent license royalty payments.

Advertising Costs

Advertising costs are expensed as incurred, and are included in Marketing, Sales and Service expense. We incurred advertising costs of approximately $8.3 million and $8.1 million for the three months ended March 31, 2008 and 2007, respectively.  The majority of these costs were spent by MIVA Direct to promote its desktop consumer software products.

Income Taxes

Income taxes are accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” Under SFAS 109, deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities, loss carry-forwards, and tax credit carry-forwards for which income tax benefits are expected to be realized in future years. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact SFAS 141(R) will have on adoption on our accounting for future acquisitions. Previously, any release of valuation allowances for certain deferred tax assets would serve to reduce goodwill, whereas under the new standard any release of the valuation allowance related to acquisitions currently or in prior periods will serve to reduce our income tax provision in the period in which the reserve is released.  Additionally, under SFAS 141(R) transaction related expenses, which were previously capitalized as “deal cost”, will be expensed as incurred.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require (i) noncontrolling interests to be reported as a component of equity, (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited.  We do not expect the adoption of SFAS 160 to have a material effect on our financial position or results of operations.

In February 2007, the Statement of Financial Accounting Standards (“SFAS”) No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”) was issued. Under SFAS 159,

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entities may elect to measure eligible items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. On January 1, 2008, we adopted SFAS 159. This adoption of SFAS 159 did not apply to any existing contracts nor have a material effect on our financial position or results of operations.

In September 2006, SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) was issued.  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged with the exception of certain nonfinancial assets and liabilities, for which the effective date has been deferred by one year.  Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption.  On January 1, 2008, we adopted the provisions of SFAS No. 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed one year.  The adoption of SFAS 157 did not have a material effect on our financial position or results of operations.  The book values of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments.

NOTE C — DISCONTINUED OPERATIONS

On August 1, 2007, we sold the assets, net of liabilities assumed, of our MIVA Small Business division for $0.2 million.  Our decision to divest our MIVA Small Business division was due primarily to inconsistencies between the division’s products and services and the Company’s current and future strategic plan.  A gain of approximately $0.16 million was recorded as a result of the sale.

In accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”) the financial data for MIVA Small Business has been accounted for as discontinued operations and, accordingly, its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations in all periods presented.  The results of operations of MIVA Small Business for the three months ended March 31, 2008 and 2007, are as follows:

NOTE D — IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

In accordance with SFAS No. 142, “ Goodwill and Other Intangible Assets ,” goodwill and other intangible assets with indefinite lives are tested for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  In performing this assessment, we compare the carrying value of our reporting

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units to their fair value.  Quoted market prices in active stock markets are often the best evidence of fair value; therefore a significant decrease in our stock price could indicate that an impairment of goodwill exists.  We have experienced significant impairment losses in 2007, 2006, and 2005.  At March 31, 2008, the total remaining carrying value of the Company’s goodwill and other intangible assets of $19.5 million are those of our U.S. operations.

In the fourth quarter of 2007, as a result of continued operating losses related to our MIVA Media US business, we performed an impairment analysis to determine recoverability of the recorded long-lived assets of this division.  As a result of this analysis, we determined that certain long-lived assets of our MIVA Media US division were impaired under the provisions of Financial Accounting Standards Board Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).”  During the fourth quarter of 2007, we recorded approximately $4.7 million in non-cash impairment charges to reduce the carrying value of certain long-lived tangible and intangible assets to their estimated fair value.

In the second quarter of 2007 our revenue and earnings forecasts were updated for each of our divisions to reflect events that occurred during the quarter that changed our expected business prospects.  Our MIVA Media Europe division’s forecasts were particularly negatively affected by: the continuation of reduced traffic generated by our distribution partners; slower than anticipated deployment of new services; and other factors.  As a result of these indicators, we performed a test to determine if the carrying amount of goodwill and other long-lived assets at MIVA Media Europe were impaired.

The fair value estimates used in the initial impairment test were based on market approaches and the present value of future cash flows. These tests indicated that the carrying amount of MIVA Media Europe exceeded its fair value, and led us to conclude that goodwill could be impaired. We then performed a preliminary impairment test of long-lived assets, and a preliminary second step of the impairment analysis. As part of the two step analysis required, the implied fair value of goodwill was determined through the allocation of preliminary estimates of the fair value to the underlying assets and liabilities, and an estimated non-cash impairment charge of $14.0 million was recorded to adjust the carrying value of goodwill to its preliminary estimated fair value.  This non-cash charge was recorded at MIVA Media Europe and after this impairment charge, MIVA Media Europe has no remaining goodwill.

At the time of the filing of our second quarter 2007 Form 10-Q, the second step of the analysis had not been finalized, therefore, as discussed above, we recorded our best estimate of the impairment, at the time, $14.0 million.  The finalization of the impairment test of long-lived assets and the second step of the impairment analysis was completed in the third quarter of 2007, resulting in an additional impairment charge of $1.4 million related to our long-lived assets in our MIVA Media Europe division.

The fair value of the reporting unit under step one and individual assets under step two were determined using methodologies that include both a market and an income approach. The market approach includes analysis of publicly traded companies comparable in terms of functions performed, financial strengths, and markets served, along with a survey of transactions involving similar public and non-public companies. The income approach was based on the economic benefit stream of discounted future cash flows.

As of October 1, 2007, our annual impairment cycle review date, we performed the necessary analysis and determined there was no additional impairment.  As part of this process we determined the fair values of each of the reporting units under the provisions of SFAS 142 using methodologies that include both a market and an income approach.  We performed these steps for the remaining three reporting units with recorded goodwill and indefinite lived intangible assets.  At March 31, 2008, the remaining goodwill and

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indefinite lived intangible assets recorded at our MIVA European division is $0, whereas the domestic goodwill and indefinite life intangible assets amounts to approximately $15.9 million.

We will continue to assess the potential of impairment for goodwill, intangibles assets, and other long-lived assets in future periods in accordance with SFAS 142 and 144. Should our business prospects change, and our expectations for acquired businesses be further reduced, or other circumstances that affect our business dictate, we may be required to recognize additional impairment charges.

NOTE E — ACCOUNTING FOR SHARE-BASED COMPENSATION

For the three month periods ending March 31, 2008 and 2007, our share-based employee compensation expense consisted of existing stock option expense of $0.2 million and $0.7 million, respectively, and restricted stock unit (“RSU”) expense of $0.5 million and $1.4 million, respectively.

Stock option activity under the plans during the three months ended March 31, 2008, is summarized below (in thousands, except per share amounts):

The following table summarizes information as of March 31, 2008, concerning outstanding and exercisable stock options under the plans (in thousands, except per share amounts):

As of March 31, 2008, unrecognized compensation expense related to stock options totaled approximately $1.0 million, which will be recognized over a weighted average period of 1.7 years.  The fair value of the stock options is estimated at the date of the grant using the Black-Scholes option-pricing model.  No stock options were granted during the three months ended March 31, 2008.

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

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Additionally, in January 2007, we issued restricted stock units with service based vesting provisions (4 year vesting in equal increments), and market condition performance based restricted stock units that: vest in equal tranches upon the Company’s common stock reaching, and closing, at share prices at or exceeding $6.00, $8.00, $10.00, and $12.00, respectively, for ten consecutive trading days.  In June 2007, all criteria was satisfied for the $6.00 tranche level of restricted stock units and accordingly 86,412 shares attributable to the achievement of the $6.00 performance criteria were issued.

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

New stock options granted and new restricted stock units granted with related expenses for the three months ended March 31, 2008 and 2007, are summarized below (in thousands):

For the three months ended March 31, 2008 and 2007, the following assumptions were used to estimate the fair value and compensation expense of our performance based restricted stock units with market based conditions:

The restricted stock unit (“RSU”) activity for the three months ended March 31, 2008, is summarized below (in thousands):

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NOTE F — RESTRUCTURING AND MASTER SERVICES AGREEMENT

February 2008 Restructuring

On February 19, 2008, the Company announced a restructuring plan aimed at continued reduction of the overall cost structure of the Company. The Company recorded $0.1 million in restructuring charges related to this action, which was designed to align the cost structures of our U.S. and U.K. operations with the operational needs of these businesses. Management developed a formal plan that included the identification of a workforce reduction totaling 8 employees, all of which involved cash payments of approximately $0.1 million made in the quarter ended March 31, 2008.

May 2007 Master Services Agreement and Restructuring

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

The Master Services Agreement has a term of 84 calendar months commencing June 1, 2007, unless earlier terminated or extended pursuant to its terms. Aggregate fees payable by the Company to Perot Systems under the Master Services Agreement are expected to be approximately $41.8 million.  As of March 31, 2008, the Company incurred approximately $7.6 million of operating expenses for services received under the agreement since the agreement’s inception.  See Note O — Subsequent Events.

As a result of the Master Services Agreement, the Company’s active employee base declined by approximately 50 employees and the full workforce reduction was completed in September 2007. Approximately 29 Company employees transitioned to become employees of Perot Systems as a result of this agreement.

With respect to the workforce reductions, the Company incurred total restructuring charges related to one-time employee severance ($0.2 million) and related costs ($0.3 million) of approximately $0.5 million in the quarter ended June 30, 2007.  These related costs were attributed to legal fees incurred as part of both the February 2007 and May 2007 restructuring plans.

February 2007 Restructuring

On February 8, 2007, the Company announced a restructuring plan aimed at reducing the overall cost structure of the Company. The Company initially recorded $3.1 million (adjusted to $2.8 million in the quarter ended June 30, 2007) in restructuring charges related to this action, which was designed to align the cost structures of our U.S. and U.K. operations with the operational needs of these businesses. Management developed a formal plan that included the identification of a workforce reduction totaling 56 employees, all of which involved cash payments of approximately $0.5 million made in April 2007 and approximately $0.5 million which was to be paid by the end of April 2008.

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

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All actions under the February 8, 2007, restructuring plan, other than cash payments, were completed by May 31, 2007.  All cash payments with respect to the May 11, 2007, restructuring plan were completed by April 30, 2008.   All actions under the February 19, 2008, restructuring plan were completed by March 31, 2008.

The balance in intangible assets as of December 31, 2007, consisted of the following (in thousands, except years):

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There were no changes in the carrying amount of goodwill for the three months ended March 31, 2008.

As more fully described in Note D, we performed impairment tests in the quarter ended June 30, 2007, as well as our annual impairment assessment as of October 1, 2007, and recorded impairment charges of $14.0 million (goodwill) and $4.7 million (long-lived tangible and intangible assets), respectively.  The June 30, 2007 impairment charge removed all recorded goodwill within our MIVA Media Europe division.

Should operating results for the remainder of 2008 or future periods fall short of the updated projections, further impairments of the remaining domestic based goodwill and other intangible assets could be required.

As of March 31, 2008, expected future intangible asset amortization is as follows (in thousands):

NOTE H — EQUITY AND PER SHARE DATA

We incurred a net loss for the three months ended March 31, 2008.   As a result, potentially dilutive shares are not included in the calculation of Earnings per Share because to do so would have an anti-dilutive effect on the loss per share. Had we not recorded a loss, certain exercisable stock options would have been excluded from the calculation of Earnings per Share because option prices were greater than average market prices for the periods presented. The number of stock options that would have been excluded from the calculations was 1.6 million shares with a range of exercise prices between $4.37 and $23.14 for the three months ended March 31, 2008.

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

NOTE I — LEGAL PROCEEDINGS

Lane’s Gifts and Collectibles Litigation

On February 17, 2005, a putative class action was filed in Miller County Circuit Court, Arkansas, against us and others in our sector by Lane’s Gifts and Collectibles, LLC, U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4 Merchants, Inc. and Max Caulfield d/b/a

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Caulfield Investigations, on behalf of themselves and all others similarly situated.  The Complaint names eleven search engines, web publishers, or performance marketing companies as defendants, including us, and alleges breach of contract, unjust enrichment, and civil conspiracy.  All of the plaintiffs’ claims are predicated on the allegation that the plaintiffs have been charged for clicks on their advertisements that were not made by bona fide customers.  The lawsuit is brought on behalf of a putative class of individuals who allegedly “were overcharged for [pay per click] advertising,” and seeks monetary damages, restitution, prejudgment interest, attorneys’ fees, and other remedies.

An industry participant is a co-defendant in the lawsuit and has asserted an indemnification claim against us arising as a result of a contract between the companies.  We have agreed to defend and indemnify the co-defendant in accordance with the terms of our contract with them.

We entered into an agreement with the plaintiffs to settle this case in January 2008 and received court approval in April 2008.  Under the settlement agreement all claims against us, including our indemnification obligations to a co-defendant, were dismissed without presumption or admission of any liability or wrongdoing.  Pursuant to the agreement, we are establishing a settlement fund of $3,936,812, of which up to $1,312,270 would be in cash for payment of plaintiffs’ attorneys’ fees and class representative incentive awards and the balance would be in advertising credits relating to the class members’ advertising spending with us during the class period.  At December 31, 2007 we accrued the $1,312,270 of plaintiffs’ attorneys’ fees and class representative incentive awards as litigation settlement expense, which is included in accrued expenses in the accompanying March 31, 2008 and December 31, 2007 condensed consolidated balance sheets.  Advertising credits will be recorded as reductions to revenues in the periods they are redeemed.  For the three months ended March 31, 2008, no such advertising credits were redeemed.

Shareholder Class Action Lawsuits

Beginning on May 6, 2005, five putative securities fraud class action lawsuits were filed against us and certain of our former officers and directors in the United States District Court for the Middle District of Florida.  The complaints allege that we and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual defendants also violated Section 20(a) of the Act as “control persons” of MIVA.  Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between September 3, 2003 and May 4, 2005.

Plaintiffs allege generally that, during the putative class period, we made certain misleading statements and omitted material information.  Plaintiffs seek unspecified damages and other relief.

On July 27, 2005, the Court consolidated all of the outstanding lawsuits under the case style In re MIVA, Inc. Securities Litigation, selected lead plaintiff and lead counsel for the consolidated cases, and granted Plaintiffs leave to file a consolidated amended complaint, which was filed on August 16, 2005.  We and the other defendants moved to dismiss the complaint on September 8, 2005.

On December 28, 2005, the Court granted Defendants’ motion to dismiss.  The Court granted Plaintiffs leave to submit a further amended complaint, which was filed on January 17, 2006.  On February 9, 2006, Defendants filed a renewed motion to dismiss.  On March 15, 2007, the Court granted in large part Defendants’ motion to dismiss.  On March 29,

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2007, Defendants filed a motion for amendment to the March 15, 2007 order to include certification for interlocutory appeal or, in the alternative, for reconsideration of the motion to dismiss.  On July 17, 2007, the Court (1) denied the motion for amendment to the March 15, 2007 order to include certification for interlocutory appeal and (2) granted the motion for reconsideration as to the issue of whether Plaintiffs pled a strong inference of scienter in light of intervening precedent.  The Court requested additional briefing on the scienter issue,  and on February 15, 2008, entered an Order dismissing one of the individual defendants from the lawsuit and limiting the claims that could be brought against another individual defendant.  In addition, Plaintiffs previously had moved the Court to certify a putative class of investors, and Defendants had filed briefs in opposition thereto.   On March 12, 2008, the Court entered an Order certifying a class of those investors who purchased the Company’s common stock from February 23, 2005 to May 4, 2005.  The Court also dismissed two of the proposed class representatives for lack of standing.  Plaintiffs have served discovery requests on Defendants, and the discovery phase of the lawsuit is presently underway.

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

Derivative Stockholder Litigation

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

Payday Advance Plus, Inc.

On March 10, 2006, a putative class action was filed in the U.S. District Court for the Southern District of New York against us and Advertising.com, Inc. by Payday Advance Plus, Inc.  The Complaint alleges that Advertising.com, a MIVA Media distribution partner, has engaged in click fraud to increase revenues to themselves with our alleged knowledge and participation.  The lawsuit is brought on behalf of a putative class of individuals who have allegedly been overcharged by the defendants and seeks monetary damages, restitution, prejudgment interest, attorneys’ fees, injunctive relief, and other remedies.   On May 12, 2006, we moved to dismiss the Complaint.  In an order dated March 12, 2007, the Court denied our motion to dismiss the plaintiff’s breach of contract claim but granted the motion as it related to the remainder of the plaintiff’s claims.  On April 2, 2007, the plaintiff filed an amended complaint in which it dropped its claims against Advertising.com.  The amended complaint asserts only a claim for breach of contract claim against us.  The plaintiff filed a motion for class certification on September 11, 2007.  We filed our response on October 15, 2007, and the motion is currently pending.  At the request of the plaintiff, the Court stayed the litigation on April 2, 2008 pending resolution of the class action settlement in the Lane’s Gifts and Collectibles case in Arkansas.  The plaintiff in this case is a party to the settlement agreement in the Lane’s Gifts case, and, pursuant to the agreement, the plaintiff has agreed to move to dismiss with prejudice all claims it has asserted against us in this litigation such that this litigation would be settled and resolved in its entirety.  Dismissal of the case is subject to approval of the court in New York.

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Comet Systems, Inc.

The agent for the former shareholders of Comet Systems, Inc., a company that merged with and into one of our subsidiaries in March 2004, filed a lawsuit against us in Delaware Chancery Court on March 13, 2007.  In the suit the shareholders’ agent contends that our calculation and payment of contingent amounts payable under the merger agreement were not correct. However, we contend that we calculated and paid the contingent amounts correctly.  The agent for the shareholders has filed a motion for partial summary judgment and we have cross-moved for summary judgment.  The parties are currently briefing the summary judgment motions.  We intend to defend the claim vigorously.  Regardless of the outcome, the litigation could have a material adverse impact on our results because of defense costs, diversion of management’s attention and resources, and other factors.

Bid For Position, LLC

On December 13, 2007, a patent infringement case was filed in the United States District Court for the Eastern District of Virginia against AOL, Google, Microsoft, and us by Bid For Position, LLC.  The complaint alleges that Bid For Position, LLC is the owner of U.S. Patent No. 7,225,151, which was issued on May 29, 2007 and is entitled “Online Auction Bid Management System and Method ,”  (“the ‘151 patent”)  and further alleges that we infringe this patent.  In an Answer filed on February 14, 2008, we denied infringement of the ‘151 patent and have asserted that the claims of this patent are invalid.   The Court has scheduled the trial to commence on September 8, 2008.  We believe we do not infringe any valid and enforceable claim of plaintiff’s patent and intend to defend the case vigorously.  Regardless of the outcome, the litigation could have a material adverse impact on our results because of defense costs, diversion of management’s attention and resources, and other factors.

Other Litigation

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

Except for the accrual described above regarding the Lane’s Gifts and Collectibles Litigation, no other accruals for potential losses for litigation are recorded as of March 31, 2008, and although losses are possible in connection with the above litigation, we are unable to estimate an amount or range of possible loss, in accordance with FAS 5, but if circumstances develop that necessitate a loss contingency being disclosed or recorded, we will do so.  We expense all legal fees for litigation as incurred.

NOTE J — COMMITMENTS AND CONTINGENCIES

We have ongoing contractual cash payment obligations to our distribution partners. These payments are funded by payments from our advertisers for the paid click-through (visitors), delivered to them via our distribution partners. Agreements with certain distribution partners contain guaranteed minimum payments through April 2009.

We have minimum contractual payments as part of our royalty bearing non-exclusive license to certain Yahoo! patents payable quarterly through August 2010.  In addition, we have ongoing royalty payments based on our use of those patents.

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We have minimum contractual payments as part of the Perot Master Services Agreement described in Note F, and the software development project as described in Note O.

We have contractual obligations regarding future minimum payments under non-cancelable operating leases, net of payments to be received under our sublease agreement, guaranteed distributor payments, a royalty agreement, and the Master Services Agreement, which consisted of the following at March 31, 2008 (in thousands):

We entered into a real estate sublease agreement with an unrelated party to sublease 20,171 square feet in our office located in Fort Myers, Florida.  The term of the sublease agreement commenced on August 17, 2007 and ends on November 30, 2012, unless certain conditions (as defined) are met for earlier termination.

On February 26, 2008, we entered into an agreement (the “Lease Amendment”) amending the April 15, 2005 operating lease agreement for our London office.  The Lease Amendment provides for a 45% reduction in space with a proportionate reduction in rent, effective as of January 1, 2008.  The Lease Amendment also provides that a portion of MIVA’s rent deposit in the amount of approximately $0.4 million will be returned to MIVA.  As a result of the Lease Amendment, the annual rent for the leased premises will be reduced from approximately $0.9 million to approximately $0.5 million.  Additionally, the Lease Amendment provides each party with an early termination right to terminate the underlying Lease Agreement on December 31, 2008.  In the event either party exercises the early termination right, we would receive a one-time payment of approximately $0.7 million.

NOTE K — SEGMENT INFORMATION

Historically, our merchant services segment did not meet the quantitative thresholds that required separate information to be reported.  However, we have previously reported our operating results in two operating segments, performance marketing and merchant services.  Further, as described in Note C, on August 1, 2007, we divested our merchant services division, resulting in performance marketing becoming our one remaining operating segment, therefore no separate segment disclosures are presented as of March 31, 2008.

Summarized information by geographical locations is as follows (in thousands):

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Amounts are attributed to the country of the legal entity that recognized the sale or holds the asset. Other international activity as reported in the table above relates to several European entities, including France, Germany, Spain, and Italy that are subsidiaries of MIVA Media (UK) Ltd.  In addition, activity from Sweden, Denmark, Norway, and Finland is included to the extent of the private label agreement with Eniro AB.  This private label agreement was signed in conjunction with the sale of substantially all of the assets of our indirect, wholly owned subsidiary Espotting Scandinavia AB, to Eniro AB during the third quarter of 2005.

NOTE L — INCOME TAXES

Income Tax Expense

Income tax expense for the three months ended March 31, 2008, was approximately $0.06 million compared to income tax expense of $0.2 million for the three months ended March 31, 2007.  The income tax expense recorded for the three months ended March 31, 2008 and 2007 relates to the state income taxes associated with our US based entities located in New Jersey and Georgia (state income tax) and FIN 48 interest expense, which is reported as a discrete item.

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

NOTE M — TREASURY STOCK

In the first quarter of 2008, the Company’s shares held in treasury increased by a total of 8,836 shares or approximately $0.01 million.  This increase in treasury shares resulted from shares withheld to pay the withholding taxes upon the vesting of restricted stock units during the quarter.

NOTE N — RELATED PARTY TRANSACTIONS

Sebastian Bishop, our President and Chief Marketing Officer, is also a Director of Steakmedia Limited and owns a 2.5% interest in Steakmedia.  Steakmedia is an advertising agency owned predominately by Oliver Bishop, Mr. Bishop’s brother.  We use this agency to generate advertisers onto our MIVA Media Networks and invoice them for all revenue generated on our networks through their advertisers.  Amounts invoiced to Steakmedia during the three months ended March 31, 2008 and 2007, were approximately $69,759 and $73,526, respectively.

Lawrence Weber, who joined our Board of Directors in June 2005, and was subsequently elected Chairman of the Board of Directors in April 2006, is also the Chairman and Founder of W2 Group Inc., which owns Racepoint Group, Inc.  The Company entered into an agreement in November 2005 with Racepoint for public relations professional services.  For the three months ended March 31, 2008 and 2007, we incurred fees from Racepoint $0 and $62,305, respectively, for its services.

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We offer a range of products and services through the following divisions:

MIVA Direct

Our MIVA Direct division operates a growing portfolio of consumer destination websites as well as a range of consumer-oriented interactive products including toolbars, and screensavers. Our high traffic consumer destination websites organize audiences into marketable vertical categories and facilitate the distribution of our toolbar products. Our toolbars are designed to enhance consumers’ online experience by providing direct access to relevant content and search results. Our active toolbars installed on approximately 6.5 million computers worldwide enable millions of daily consumer interactions.

MIVA Media

Our MIVA Media division is an auction based pay-per-click advertising and publishing network that operates across North America and Europe.  MIVA Media connects millions of buyers and sellers online by displaying relevant and timely text ads in response to consumer search or browsing activity on select Internet properties.  Such interactions between online buyers and sellers result in highly targeted, cost-effective leads for MIVA’s advertisers and a source of recurring revenue for MIVA’s publisher partners.

Recent Developments

On April 10, 2008, we entered into an approximate $2.4 million software development statement of work with Perot Systems Corporation, our outsourcing partner, pursuant to which we will pay Perot to develop a new global advertiser and distribution partner application called the “Transformation Project”. The Transformation Project involves the development and implementation of one enhanced consolidated global system to replace MIVA Media’s existing Internet advertising management and distribution partner management systems. As part of the Transformation Project, Perot will assist us in migrating MIVA Media’s advertisers and distribution partners to the newly developed system.

Organization of Information

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

RESULTS OF OPERATIONS

Revenue

During the three months ended March 31, 2008, we recorded revenue of $33.0 million, a decrease of approximately 22.7% from the $42.7 million recorded in the same period in 2007.  The decrease in our revenue is primarily due to the performance of MIVA Media and, to a lesser degree, the performance of MIVA Direct.  For the three months ended March 31, 2008, MIVA Media recorded revenue of $20.9 million, a decrease of approximately 28.4% from the $29.2 million recorded in the same period in 2007.  Revenue at MIVA Media Europe declined $5.3 million, or 37.1%, and revenue at MIVA Media US declined $3.0 million or 20%  for the three

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months ended March 31, 2008 compared to the same period in 2007. Additionally, MIVA Direct recorded revenue of $12.1 million for the three months ended March 31, 2008, a decrease of approximately 10.4% from the $13.5 million recorded in the same period in 2007.  MIVA Direct, as a percentage of total revenue, has increased from approximately 31.6% for the three months ended March 31, 2007 to approximately 36.7% in the same period in 2008.

A portion of the revenue decline at MIVA Media is attributed to a decrease in our average revenue per click. Our average revenue per click in any given period is determined by dividing total click-through revenue by the number of paid clicks recorded during that same period.  We have experienced declines in our average revenue per click for both our MIVA Media US and MIVA Media Europe operations since 2004. The decline in our average revenue per click may be caused by a number of factors, including, among others: our overall mix of traffic sources; the bid prices submitted by our advertisers for a keyword advertisement; the bid prices of the more frequently clicked keyword terms; delayed updates to the MIVA Media technology platform; and the nexus between the four.

Additional factors negatively impacting our revenue at MIVA Media in the three months ended March 31, 2008, include: (i) reduced spending from a specific set of advertisers that we believe were affected by their inability to monetize large blocks of remnant keyword traffic, (ii) the impact of our on-going initiative to attempt to pro-actively screen Internet traffic sources to ensure that less desirable sources of Internet traffic are not sent to our advertiser base; and (iii) increased advertiser dissatisfaction with the limited features and functionality available in our MIVA Media platform.

We are actively seeking to stop the decline in revenue at MIVA Media and increase our average revenue per click by changing the overall mix of MIVA Media traffic sources to increase the click-to-conversion ratio for our advertisers, maximizing keyword efficiency for our advertisers, and seeking new implementations through which our advertisers’ keyword advertisements may be displayed.  We plan to continue our efforts to invest in our business and seek additional revenue from our media services.  Examples of these initiatives include: (i) expansion of our Precision Network, (ii) continued development of our product offering for Advertisers and Partners, and (iii) the planned rollout of a new, single MIVA Media technology platform (Transformation Project).  We cannot assure you that any of these efforts will be successful.  If we are unable to stop the revenue decline at MIVA Media, it will have a material adverse impact on our business, financial condition, and results of operations.

Our revenue decline at MIVA Direct for the three months ended March 31, 2008, compared to the same period in 2007, is due primarily to a decline in our active toolbar installed base slightly offset by increased revenue per user.  Distribution of our new Alot branded toolbars during the three months ended March 31, 2008 increased at a rate sufficient to grow our active Alot live user count from 1.0 million on December 31, 2007 to 2.1 million as of March 31, 2008.  This growth combined with increased revenue per user performance metrics as compared to our legacy brands contributed to comparable growth in revenue contribution by the Alot branded products. Distribution during the same period in Q1 2008 of our legacy brands declined significantly, as did revenue per user rates, leading to an overall decline in revenue contributed by legacy branded products. The decline in distribution and revenue from legacy brands outpaced the growth rate of Alot branded products, leading to a net decline in total revenue in Q1 2008 as compared to Q1 2007.  Additionally, we believe the decline in our active toolbar installed base is due in part to the following reasons (i) in Q1 2008 we experienced problems with a toolbar advertising partner that negatively impacted our ability to distribute our products, and (ii) challenges in obtaining display advertising that met our conversion criteria.

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We are actively seeking to stop the decline in our active toolbar installed base by continuing to focus on cost effective distribution of our Alot branded products and continued limited distribution of our legacy brand. Because Alot branded products deliver higher revenue per user rate than our legacy brands, we continue to prioritize distribution of Alot over legacy brands.  Examples of initiatives to expand distribution of Alot products include (i) retaining a professional media buying agency, (ii) optimizing landing pages for our advertisements, and (iii) seeking new distribution relationships.  If we are unable to stop the decline in our active toolbars, it will have a material adverse impact on our business, financial condition, and results of operations.

In the first three months of 2008 and 2007, one customer of our MIVA Direct division, Google, accounted for approximately 33.7% and 21.3% of our total consolidated revenue.  During those periods, we did not have any individually significant distribution partner that represented the source of over 10% of our consolidated revenue.

Our industry, as a whole, deals with the receipt of fraudulent clicks or “click-fraud”, which occurs when a person or program clicks on an advertisement displayed on a website for the purpose of generating a click-through payment to MIVA and to the MIVA Media Networks partner, or to deplete the advertising account of a competitor, rather than to view the underlying content. We have proprietary automated screening applications and procedures to minimize the effects of these fraudulent clicks. Click-throughs received through the MIVA Media Networks are evaluated by these screening applications and procedures. We constantly evaluate the effectiveness of our efforts to combat click-through fraud, and may adjust our efforts for specific distribution partners or in general, depending on our ongoing analysis. These changes impact the number of click-throughs we record and bill to our advertisers, the bid prices our advertisers are willing to pay us for click-throughs, and the revenue we generate.

Additionally, we have been named in certain litigation, the outcome of which could directly or indirectly impact our revenue.  For additional information regarding pending litigation, reference Note I — Legal Proceedings above.

We plan to continue our efforts to invest in our business and seek increases from additional revenue from our MIVA Direct division and MIVA Media division, including the Precision Network, branded toolbars, and other initiatives.  We cannot assure you that any of these efforts will be successful.

Cost of Services

Cost of services consists of traffic acquisition costs (revenue sharing or other arrangements with our MIVA Media distribution partners), obligations under the royalty bearing non-exclusive patent license agreement with Yahoo!, costs associated with designing and maintaining the technical infrastructure that supports our various services, cost of third-party providers of algorithmic search results, and fees paid to telecommunications carriers for Internet connectivity. Costs associated with our technical infrastructure, which supports our various services, include salaries of related technical personnel, depreciation of related computer equipment, co-location charges for our network equipment, and software license fees.

Cost of services decreased $4.4 million between comparable periods ended March 31, 2008 and 2007, primarily as the result of a decrease in traffic acquisition costs of approximately $3.5 million.  The traffic acquisition costs are payments made to our distribution partners and are calculated as a percentage of the revenue generated on the Internet traffic we purchase, and as a result, as our revenues decline a corresponding decrease will be realized in our traffic acquisition costs.  Cost of services for the three month period ended March 31, 2008, compared to the same period in 2007 increased as a percentage of revenue from 47.6% to 48.1%.  This increase in cost of services as a percentage of revenue is partially due to a reduction in the revenue generated by our MIVA Direct