Quarterly Report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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: 0-30428

MIVA, Inc.

(Exact name of registrant as specified in its charter)

Delaware		88-0348835
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5220 Summerlin Commons Blvd. Fort Myers, Florida 33907		(239) 561-7229
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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 34,648,716 shares of the Registrant’s Common Stock outstanding on October 31, 2008.

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FORM 10-Q

MIVA, Inc.

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		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Condensed Consolidated Balance Sheets
	September 30, 2008 (Unaudited), and December 31, 2007	3

	Unaudited Condensed Consolidated Statements of Operations
	For the three and nine months ended September 30, 2008 and 2007	4

	Unaudited Condensed Consolidated Statements of Cash Flows
	For the nine months ended September 30, 2008 and 2007	5

	Notes to Unaudited Interim Condensed Consolidated
	Financial Statements for the three and nine months ended
	September 30, 2008 and 2007	6

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations.	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	38

Item 4.	Controls and Procedures.	39

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings.	39

Item 1A.	Risk Factors.	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	45

Item 6.	Exhibits.	45

Signatures		46

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PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

MIVA, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	September 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	11,168		$	29,905
Accounts receivable, less allowances of $572 and $723 at September 30, 2008 and December 31, 2007.	12,029			14,421
Deferred tax assets	721			751
Prepaid expenses and other current assets	1,354			2,027

TOTAL CURRENT ASSETS	25,272			47,104

Property and equipment, net	5,277			2,745
Intangible assets
Goodwill	14,743			14,743
Vendor agreements, net	1,029			1,318
Other intangible assets, net	2,494			4,038
Other assets	748			1,109

TOTAL ASSETS	$	49,563		$	71,057

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	8,148		$	11,957
Accrued expenses	14,054			14,844
Current portion of long-term debt	816			—
Deferred revenue	2,462			3,427

TOTAL CURRENT LIABILITIES	25,480			30,228

Deferred tax liabilities long-term	721			751
Long-term debt	826			—
Other long-term liabilities	1,299			1,237

TOTAL LIABILITIES	28,326			32,216

STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value; authorized, 500 shares; none issued and outstanding	—			—
Common stock, $.001 par value; authorized, 200,000 shares; issued 34,393 and 33,934, respectively; outstanding 32,646 and 32,204, respectively	34			34
Additional paid-in capital	268,292			265,721
Treasury stock; 1,747 and 1,730 shares at cost, respectively	(6,714		)	(6,694		)
Accumulated other comprehensive income	8,253			6,294
Deficit	(248,628		)	(226,514		)

TOTAL STOCKHOLDERS’ EQUITY	21,237			38,841

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	49,563		$	71,057

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

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MIVA, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008				2007

Revenues	$	28,167		$	35,942		$	91,001			$	116,901
Cost of services	13,879			16,896			44,519				55,411
Gross profit	14,288			19,046			46,482				61,490

Operating expenses
Marketing, sales, and service	8,812			11,128			30,356				36,473
General and administrative	7,463			8,079			24,363				24,228
Product development	1,228			1,395			3,752				4,690
Amortization	680			1,196			2,115				3,656
Impairment loss on goodwill and other intangible assets	—			1,444			—				15,450
Litigation Judgment / Settlement	2,380			—			2,630				—
Restructuring Charges	2,736			(13		)	3,655				3,025

Total operating expenses	23,299			23,229			66,871				87,522

Loss from operations	(9,011		)	(4,183		)	(20,389			)	(26,032		)
Interest income, net	40			170			243				382
Exchange rate gain (loss)	(1,529		)	269			(1,579			)	517

Loss before provision for income taxes	(10,500		)	(3,744		)	(21,725			)	(25,133		)

Income tax expense (benefit)	(18		)	86			67				234

Loss from continuing operations	(10,482		)	(3,830		)	(21,792			)	(25,367		)

Income (loss) from discontinued operations	(44		)	514			(326			)	292

Net loss	(10,526		)	(3,316		)	(22,118			)	(25,075		)

Basic earnings (loss) per share
Continuing operations	$	(0.32	)	$	(0.12	)	$		(0.67	)	$	(0.80	)
Discontinued operations	$	(0.00	)	$	0.02		$	(0.01		)	$	0.01

Diluted earnings (loss) per share
Continuing operations	$	(0.32	)	$	(0.12	)	$		(0.67	)	$	(0.80	)
Discontinued operations	$	(0.00	)	$	0.02		$	(0.01		)	$	0.01

Weighted-average number of common shares outstanding
Basic	32,641			32,219			32,596				31,832
Diluted	32,641			32,219			32,596				31,832

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

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MIVA, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Nine Months
	Ended September 30,
	2008			2007
Cash Flows from Operating Activities

Net loss	$	(22,118	)	$	(25,075	)

Adjustments to reconcile net loss to net cash used in operating activities
Provision for (recoveries of) doubtful accounts	84			(161		)
Depreciation and amortization	3,578			7,346
Impairment loss on goodwill and other intangible assets	—			15,450
Equity based compensation	2,572			4,066
Gain on sale of assets	(76		)	(59		)
Gain on disposal of discontinued operations	—			(160		)
Changes in operating assets and liabilities
Accounts receivable	2,132			4,549
Prepaid and other current assets	967			(1,162		)
Income taxes receivable	72			1,706
Deferred revenue	(908		)	(113		)
Accounts payable, accrued expenses and other liabilities	(1,770		)	(10,004		)

Net Cash Used in Operating Activities	(15,467		)	(3,617		)

Cash Flows from Investing Activities

Proceeds from sale of property and equipment	—			120
Proceeds from sale of discontinued operations	—			200
Purchase of capital items including internally developed software	(4,233		)	(371		)

Net Cash Used in Investing Activities	(4,233		)	(51		)

Cash Flows from Financing Activities

Payments made on software license obligation	—			(1,050		)
Payments made on notes payable	(647		)	—
Proceeds received from exercise of stock options and warrants	—			462

Net Cash Used in Financing Activities	(647		)	(588		)

Effect of Foreign Currency Exchange Rates	1,610			(500		)

Decrease in Cash and Cash Equivalents	(18,737		)	(4,756		)

Cash and Cash Equivalents, Beginning of Period	29,905			29,588

Cash and Cash Equivalents, End of Period	$	11,168		$	24,832

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

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MIVA, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

NOTE A - NATURE OF BUSINESS

MIVA, Inc., together with its wholly-owned subsidiaries, collectively, the “Company”, “we”, “us” or “MIVA”, is an online media and advertising network company. We provide targeted and measurable online advertising campaigns for our advertiser and agency clients, generating qualified consumer leads and sales. The audiences for our advertisers’ campaigns are comprised of our multi-tiered ad network of third-party website publishers and our growing portfolio of consumer entertainment properties. 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 5.6 million computers worldwide enable millions of daily consumer interactions.

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 interactive toolbars and screensaver products. 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 5.6 million computers worldwide enable millions of daily consumer interactions.

MIVA Media

Our MIVA Media division is an auction based pay-per-click advertising network that operates across North America and in 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.

The majority of our MIVA Direct revenue is generated through toolbar products. MIVA Direct’s toolbar products offer consumers direct links to what we believe is relevant content and provide search functionality, utilizing ad listings serviced primarily through our contractual relationship with our third-party ad provider.

For our MIVA Media division, which comprises a majority of our overall revenue, we derive our revenue primarily from online advertising by delivering relevant contextual and search ad listings to our third-party ad network and our consumer audiences on a performance basis. Marketers only pay for advertising when a predetermined action occurs, such as when an Internet user clicks on an ad.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.

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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 and nine months ended September 30, 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.

Liquidity

Despite the Company’s negative operating performance in 2007, and into the first nine months of 2008, we currently anticipate that our cash and cash equivalents as of September 30, 2008 of approximately $11.2 million, in combination with a line of credit agreement with Bridge Bank, National Association (“Bridge Bank”) of up to $10.0 million (See NOTE P – Subsequent Event), will be sufficient, at a minimum, to meet our liquidity needs for working capital and capital expenditures over at least the next 12 months. Availability under the Bridge Bank line of credit is based on a number of factors including eligible accounts receivable balances. Using eligible accounts receivable balances as of September 30, 2008, we would have been eligible to draw down approximately $6.5 million under this line of credit. In connection with establishing the line of credit, the Company incurred fees payable to the bank and to the Company’s financial advisor and placement agent totaling approximately $0.8 million. However, if we breach any of our covenants or are unable to comply with the required financial ratios under our Loan Agreement, the lenders could elect to declare all borrowings outstanding under the Loan Agreement, together with any accrued interest and other fees, to be due and payable, as well as require us to apply all available cash to repay the amounts outstanding. See Part II, Item 1A, Risk Factors for a discussion of the risks associated with our credit facility.

In the future, we may seek additional capital through the issuance of debt or equity to fund working capital, expansion of our business and/or acquisitions, or to capitalize on market conditions. Our future liquidity and capital requirements will depend on numerous factors including the pace of expansion of our operations, competitive pressures, and acquisitions of complementary products, technologies or businesses. As we require additional capital resources, we may seek to sell additional equity or debt securities or look to enter into a new revolving loan agreement. The sale of additional equity or convertible debt securities could result in additional dilution to existing stockholders. There can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties and actual results could vary materially as a result of the factors described above.

Use of Estimates

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

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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 September 30, 2008 or December 31, 2007.

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 and nine months ended September 30, 2008, was $8.9 million and $20.2 million, respectively. Total comprehensive loss for the three and nine months ended September 30, 2007, was $3.1 million and $24.8 million, respectively. The difference between total comprehensive loss and net loss is the direct result of foreign currency translation adjustments.

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 for the three and nine months ended September 30, 2008, of $6.7 million and $22.6 million, respectively. Advertising costs for the three and nine months ended September 30, 2007, were $8.2 million and $25.8 million, 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 the Statement of Financial Accounting Standards (“SFAS”) No. 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.

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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, 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, 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. We adopted SFAS 159 on January 1, 2008, but fair value accounting in accordance with SFAS 159 was not applied to any existing contracts and accordingly there was no 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 equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments.

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NOTE C – CHANGE IN COMPANY EXECUTIVE

On August 5, 2008, Sebastian Bishop, our former President and Chief Marketing Officer, resigned these positions to pursue other interests. Mr. Bishop retains his seat on the Board of Directors. Peter A. Corrao, our Chief Executive Officer, assumed the additional title of President, effective August 5, 2008. Under the terms of Mr. Bishop’s resignation, the vesting of restricted stock units for 278,308 shares of the Company’s common stock and of options for the purchase of 733 shares of the Company’s common stock held by Mr. Bishop were accelerated. We recorded approximately $0.6 million of stock-based compensation related to this acceleration of vesting.

NOTE D – DISCONTINUED OPERATIONS

June 2008 MIVA Media – Italy

On June 17, 2008, we initiated a restructuring plan in order to maximize efficiencies within the Company, eliminate certain unprofitable operations, and better position the Company for the future. In accordance with this restructuring, the Company has closed the MIVA Media Italian operations and eliminated other redundant positions within the Company. As a result of this restructuring plan, we recorded in the quarter ended June 30, 2008, a total of $0.2 million related to termination benefits and one-time charges in connection with winding down our Italian operations.

August 2007 — MIVA Small Business

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 our Italian and MIVA Small Business Operations have been accounted for as discontinued operations and, accordingly, these operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations in all periods presented:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2008			2007		2008			2007

Revenues	$	117		$	777	$	714		$	2,569

Loss before provision for income taxes	(44		)	515		(326		)	293

Income tax expense (benefit)	—			1		—			1

Income (loss) from discontinued operations	$	(44	)	$	514	$	(326	)	$	292

NOTE E – 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 impairment charges are required to be recorded. In performing this assessment, we compare the carrying value of our reporting units to their fair value.

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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 September 30, 2008, the total remaining carrying value of the Company’s goodwill and other intangible assets of $18.3 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 September 30, 2008, the remaining goodwill and indefinite lived intangible assets recorded at our MIVA Media Europe division is $0, whereas the domestic goodwill and indefinite life intangible assets amounts to approximately $15.9 million.

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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 F – ACCOUNTING FOR SHARE-BASED COMPENSATION

For the three and nine months ended September 30, 2008, our share-based employee compensation expense consisted of stock option expense of $0.2 million and $0.5 million, respectively, and restricted stock unit (“RSU”) expense of $1.1 million and $2.1 million, respectively. The RSU expense totals include approximately $0.6 million in accelerated stock-based compensation expense resulting from the vesting of certain RSUs related to a former officer’s resignation in August 2008. For the three and nine months ended September 30, 2007, our share-based employee compensation expense consisted of existing stock option expense of $0.4 million and $1.6 million, and restricted stock unit expense, net of adjustment, of $0.6 million and $2.4 million, respectively. Included within these totals is a net $0.3 million in restricted stock unit expense and $0.2 million in stock option expense that was recorded in the restructuring line item as it relates to terminated employees.

Stock option activity under the plans during the three and nine months ended September 30, 2008, is summarized below (in thousands, except per share amounts):

			Weighted-
			Average
			Exercise
	Options		Price

Options outstanding at December 31, 2007	1,939		$	9.85

Granted	—		—
Exercised	—		—
Forfeited	(19	)	2.97
Expired	(50	)	12.01

Options outstanding at March 31, 2008	1,870		$	9.86

Granted	—		—
Exercised	—		—
Forfeited	(23	)	5.32
Expired	(3	)	3.08

Options outstanding at June 30, 2008	1,844		$	9.93

Granted	—		—
Exercised	—		—
Forfeited	(194	)	18.70
Expired	—		—

Options outstanding at September 30, 2008	1,650		$	8.90

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The following table summarizes information as of September 30, 2008, concerning outstanding and exercisable stock options under the plans (in thousands, except per share amounts):

		Weighted
		Average	Weighted			Weighted
		Remaining	Average			Average
	Number	Contractual	Exercise		Number	Exercise
Range of Exercise Prices	Outstanding	Life (Years)	Price		Exercisable	Price

$1.00 - $3.00	116	7.0	$	2.75	66	$	2.62
$3.01 - $6.00	1,079	6.7	4.86		845	4.87
$6.01 - $14.00	46	6.0	11.05		43	10.99
$14.01 - $23.14	409	5.7	21.08		408	21.08
	1,650	6.4	$	8.90	1,362	$	9.81

As of September 30, 2008, unrecognized compensation expense related to stock options totaled approximately $0.4 million, which will be recognized over a weighted average period of 1.29 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 nine months ended September 30, 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.

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 and nine months ended September 30, 2008 and 2007, are summarized below (in thousands):

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007

Stock options granted - new	—		—		—		—
Stock option expense - new	$	—	$	—	$	—	$	—
Restricted stock units - new	40		107		1,963		1,992
Restricted stock unit expense - new	$	248	$	28	$	919	$	1,138

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For the three and nine months ended September 30, 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:

	For the Three and Nine
	Months Ended September 30,
	2008	2007
Volatility	70.5%	69.3%
Expected life	10 yrs	10 yrs
Risk-free rate	4.03%	4.41% - 5.16%

The restricted stock unit (“RSU”) activity for the three and nine months ended September 30, 2008, is summarized below (in thousands):

					Performance based RSUs
	Total		Service Based		with Market based conditions
	RSUs		RSUs		$4.00		$8.00		$10.00		$12.00
Balance, December 31, 2007	1,589		1,325		—		88		88		88

Granted	1,913		1,560		353		—		—		—
Vested	(301	)	(301	)	—		—		—		—
Forfeited	(87	)	(68	)	(10	)	(3	)	(3	)	(3	)
Expired	—		—		—		—		—		—

Balance, March 31, 2008	3,114		2,516		343		85		85		85

Granted	10		8		2		—		—		—
Vested	(8	)	(8	)	—		—		—		—
Forfeited	(221	)	(177	)	(38	)	(2	)	(2	)	(2	)
Expired	—		—		—		—		—		—

Balance, June 30, 2008	2,895		2,339		307		83		83		83

Granted	40		32		8		—		—		—
Vested	(329	)	(329	)	—		—		—		—
Forfeited	(146	)	(61	)	(49	)	(12	)	(12	)	(12	)
Expired	—		—		—		—		—		—

Balance, September 30, 2008	2,460		1,981		266		71		71		71

NOTE G – RESTRUCTURING AND MASTER SERVICES AGREEMENT

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

On August 21, 2008, the Company initiated a restructuring plan that further consolidated the MIVA Media EU operations primarily in one office. The restructuring plan has evolved to include a workforce reduction of approximately 40 employees, which is expected to involve cash payments totaling approximately $2.1 million that is expected to be completed by April 2009. The restructuring plan resulted in the closure of our offices in Germany, reductions in headcount in our offices in Paris, Madrid and London, and exiting certain contractual relationships with third party contracts. We recorded a restructuring charge of approximately $2.7 million related to this restructuring program, which includes severance and related costs, legal fees, and other costs specific to the execution of this program.

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Restructuring – June 2008

On June 17, 2008, the Company initiated a restructuring plan in order to maximize efficiencies within the Company, eliminate certain unprofitable operations, and better position the Company for the future. The Company recorded a total of $0.8 million in restructuring charges related to this action, excluding the approximate $0.2 million included in the discontinued operations category related to the closure of our Italian operations. We have closed our MIVA Media Italian operations and eliminated other redundant positions within the Company. Management developed a formal plan that included the identification of a workforce reduction totaling 30 employees, which is expected to involve cash payments totaling approximately $1.0 million that is expected to be completed by February 2009.

Restructuring – February 2008

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 June 30, 2008.

Master Services Agreement and Transformation Project

On May 11, 2007, the Company entered into a master services agreement (the “Master Services Agreement”) with Perot Systems Corporation (“Perot”), 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 were expected to be approximately $41.8 million, but as a result of the August 2008 amendment to the Master Services Agreement described below the total is approximately $37.9 million. As of September 30, 2008, the Company incurred approximately $11.1 million of operating expenses for services received under the agreement since the agreement’s inception.

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.

On April 10, 2008, we entered into an approximate $2.4 million software development statement of work with Perot, pursuant to which the Company 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 the Company in migrating MIVA Media’s advertisers and distribution partners to the newly developed system.

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As of September 30, 2008, in connection with the Transformation Project, we have incurred approximately $2.0 million of costs, including $1.5 million of cost with Perot, and $0.5 million of internal development costs, all of which has been capitalized and will be amortized over the five year estimated useful life of the software once it is placed in service.

On August 26, 2008, we entered into an amendment to the Master Services Agreement with Perot, which, among other things, allowed us to “in-source” certain functions (MIVA EU Information Technology functionality and administration and finance and accounting support). These changes took effect immediately and eliminated the related charges for those services without termination fees as called for in the original contract. In return, we agreed to a reduction in certain service level agreement (“SLA”) requirements, the elimination of benchmarking pricing, a modified termination payment schedule, and a 10 day payment cycle for invoices.

Restructuring – February 2007

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 made 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 September 30, 2008 (in thousands):

	Employee			Other
	Severance			Charges			Total

Balance as of January 1, 2007	—			—			—

Restructuring charges in 2007	$	2.4		$	0.4		$	2.8
Adjustments in 2007	(0.3		)	—			(0.3		)
Cash payments in 2007	(2.0		)	(0.4		)	(2.4		)

Balance as of December 31, 2007	$	0.1		$	—		$	0.1

Restructuring charges in Q1 2008	$	0.1		$	—		$	0.1
Cash payments in Q1 2008	(0.1		)	—			(0.1		)

Balance as of March 31, 2008	$	0.1		$	—		$	0.1

Restructuring charges in Q2 2008	$	0.8		$	—		$	0.8
Cash payments in Q2 2008	(0.2		)	—			(0.2		)

Balance as of June 30, 2008	$	0.7		$	—		$	0.7

Restructuring charges in Q3 2008	$	2.1		$	0.6		$	2.7
Cash payments in Q3 2008	(0.9		)	(0.1		)	(1.0		)

Balance as of September 30, 2008	$	1.9		$	0.5		$	2.4

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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. All actions under the June 17, 2008, restructuring plan are expected to be completed by February 2009. All actions under the August 21, 2008, restructuring plan are expected to be completed by April 2009.

NOTE H – INTANGIBLE ASSETS

The balance in intangible assets as of September 30, 2008, consists of the following (in thousands, except years):

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Economic Life
								(Years)
Vendor agreements	$	2,707	$	(1,678	)	$	1,029	3
Developed technology	8,776		(7,745		)	1,031		4
Customer relationships	100		(100		)	—		—
Other definite-lived intangibles	926		(597		)	329		4
Indefinite-lived intellectual property	1,134		—			1,134		Indefinite
Goodwill	14,743		—			14,743		Indefinite

	$	28,386	$	(10,120	)	$	18,266

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

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Economic Life
								(Years)
Vendor agreements	$	2,707	$	(1,389	)	$	1,318	3
Developed technology	8,776		(6,245		)	2,531		4
Customer relationships	100		(100		)	—		—
Other definite-lived intangibles	961		(588		)	373		4
Indefinite-lived intellectual property	1,134		—			1,134		Indefinite
Goodwill	14,743		—			14,743		Indefinite

	$	28,421	$	(8,322	)	$	20,099

There were no changes in the carrying amount of goodwill for the three and nine months ended September 30, 2008.

As more fully described in Note E, 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.

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As of September 30, 2008, expected future intangible asset amortization is as follows (in thousands):

Fiscal Years:

2008	$	611
2009	980
2010	446
2011	221
2012	60
Thereafter	71
	$	2,389

NOTE I – EQUITY AND PER SHARE DATA

We incurred a net loss for the nine months ended September 30, 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 1.65 million shares with a range of exercise prices between $1.49 and $23.14 for the nine months ended September 30, 2008.

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

	For the Three Months ended		For the Nine Months ended
	September 30,		September 30,
	2008	2007	2008	2007

Weighted-average number of common shares outstanding basic and diluted	32,641	32,219	32,596	31,832

NOTE J – LEGAL PROCEEDINGS

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.

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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, 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.

Comet Systems, Inc.

The agent for the former shareholders of Comet Systems, Inc., a company that merged with and into one of our subsidiaries in March 2004, filed a lawsuit against us in Delaware Chancery Court on March 13, 2007. In the suit the shareholders’ agent contended that our calculation and payment of contingent amounts payable under the merger agreement were not correct and we contended that we calculated and paid the contingent amounts correctly. On October 22, 2008, the Court granted summary judgment to the plaintiff in the amount of $1.7 million, pre-judgment interest in the amount of $0.6 million, and reimbursement of attorney fees of $0.1 million. Therefore, we reserved approximately $2.4 million for this judgment as accrued expenses in our condensed consolidated balance sheet as of September 30, 2008. We are evaluating our appellate options regarding this matter. We believe our accruals established for this matter are adequate.

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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 alleged that Bid For Position, LLC is the owner of U.S. Patent No. 7,225,151, which was issued on May 29, 2007, entitled “Online Auction Bid Management System and Method,” (“the ‘151 patent”) and further alleged that we infringed this patent. We settled the case in June 2008 without admitting any liability, and the case was dismissed on July 15, 2008.

Lane’s Gifts and Collectibles Litigation

As previously disclosed 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 established a settlement fund of $3,936,812, of which $1,312,270 was accrued as litigation settlement expense as of December 31, 2007 and paid, in June 2008, for plaintiffs’ attorneys’ fees and class representative incentive awards, and the balance is in advertising credits relating to the class members’ advertising spending with us during the class period. Advertising credits will be recorded as reductions to revenues in the periods they are redeemed. For the nine months ended September 30, 2008, approximately $15,000 in advertising credits were redeemed.

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 for the Comet Systems, Inc. judgment, no other accruals for potential losses for litigation are recorded as of September 30, 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 SFAS 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 K– COMMITMENTS AND CONTINGENCIES

In July 2005, we received payment of approximately $1.3 million following our receipt of a favorable court judgment in a dispute with a Media EU distribution partner. The amount received, net of legal fees, was recorded as a deferred liability pending the appeal process. On May 22, 2008, we received notification the original court’s decision was reversed. This decision calls for MIVA to refund the $1.3 million payment to the MIVA Media EU distribution partner. During the three months ended September 30, 2008, we entered into negotiations with this distribution partner in order to negotiate a reduced payment amount. We expect these negotiations and final payment to be concluded within the fourth quarter of 2008.

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 September 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 and the Transformation Project as described in Note G.

The amounts of the above commitments as of September 30, 2008 are as follows (in thousands):

	2008		2009		2010		2011		2012		beyond	Total
Operating Leases	671		2,243		1,894		1,846		1,677		1,641	9,972
Sublease Income	(131	)	(448	)	(454	)	(468	)	(442	)	—	(1,943	)
Distribution Partner Payments	241		62		—		—		—		—	303
Guaranteed Royalty Agreement	200		800		600		—		—		—	1,600
Perot Master Services Agreement	1,242		4,970		4,900		4,880		4,840		6,860	27,692
Transformation Project	507		365		—		—		—		—	872
Capital Leases	197		835		419		191					1,642

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 provided for a 45% reduction in space with a proportionate reduction in rent, effective as of January 1, 2008. The Lease Amendment also provided 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 was 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. We exercised this termination right and provided notice of our intent to terminate the lease as of December 31, 2008. In accordance with this action, we expect to receive a one-time payment of approximately $0.7 million in the fourth quarter of 2008.

During the three months ended September 30, 2008, we entered into non-cancelable leases with unrelated third parties for software and related maintenance, and hardware, for our new Transformation Project. The total fair market value of this software was approximately $1.0 million with a lease term of nineteen months. The total fair market value of the hardware was approximately $1.1 million with a lease term of three years. These leases were classified as capital lease obligations, reported as long-term debt in our condensed consolidated balance sheet, and represent non-cash investing and financing activities related to the condensed consolidated statements of cash flows for the nine months ended September 30, 2008. During the three months ended September 30, 2008 we made cash payments of approximately $0.6 million related to these lease obligations.

On September 10, 2008, we entered into an operating lease agreement with an unrelated third party to lease work space for our London office for the term of 12 months commencing on December 1, 2008. The agreement includes a right to three month renewals. Base rent is approximately $0.3 million per year.

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

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NOTE L – 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 D, 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 September 30, 2008.

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

	Revenues		Long-Lived assets
Three Months ended September 30, 2008
United States	$	22,192	$	23,795
United Kingdom	2,385		312
Other International	3,590		184
Total	$	28,167	$	24,291

	Revenues		Long-Lived assets
Nine Months ended September 30, 2008
United States	$	68,755	$	23,795
United Kingdom	9,003		312
Other International	13,243		184
Total	$	91,001	$	24,291

	Revenues		Long-Lived assets
Three Months ended September 30, 2007
United States	$	25,178	$	28,976
United Kingdom	3,736		1,536
Other International	7,028		209
Total	$	35,942	$	30,721

	Revenues		Long-Lived assets
Nine Months ended September 30, 2007
United States	$	81,548	$	28,976
United Kingdom	14,133		1,536
Other International	21,220		209
Total	$	116,901	$	30,721

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, and Spain that are subsidiaries of MIVA Media (UK) Ltd. In addition, activity from Sweden, Denmark, Norway, and Finland is included to the extent of a 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 M – INCOME TAXES

Income Tax Expense

Income tax expense (benefit) for the three and nine months ended September 30, 2008, was approximately $(0.02) million and $0.07 million, respectively. Income tax expense (benefit) for the three and nine months ended September 30, 2007 was approximately $(0.09) million and $0.2 million, respectively. The income tax expense for these periods relates to the state income taxes associated with our US based entities located in New Jersey and Georgia and FIN 48 interest expense, which is reported as a discrete item.

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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 N – TREASURY STOCK

During the nine months ended September 30, 2008, the Company’s shares held in treasury increased by a total of 16,088 shares or approximately $0.02 million. This increase in treasury shares resulted from shares withheld to pay the withholding taxes upon the vesting of restricted stock units during the period.

NOTE O – RELATED PARTY TRANSACTIONS

Sebastian Bishop, our former President and Chief Marketing Officer and current board member 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 and nine months ended September 30, 2008, were approximately $60,430 and $190,368, respectively. For the comparable periods in 2007 the amounts invoiced to Steakmedia was $94,609 and $313,017, 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 (“Racepoint”). The Company entered into an agreement in November 2005 with Racepoint for public relations professional services. In 2007, we incurred $62,305 in total fees related to services rendered, which were incurred in the first three months of 2007. We have incurred approximately $15,000 in services rendered by Racepoint through September 30, 2008.

NOTE P – SUBSEQUENT EVENT

On November 7, 2008, we entered into a Loan and Security Agreement (“Loan Agreement”) with Bridge Bank. The Loan Agreement provides a revolving credit facility to the Company of up to $10 million (“Facility”). Subject to the terms of the Loan Agreement, the borrowing base used to determine loan availability under the Facility is equal to 80% of the our eligible U.S. accounts receivable plus the lesser of $3.5 million or 65% of eligible U.K. accounts receivable, with account eligibility measured in accordance with standard determinations. All amounts borrowed under the facility are secured by a general security interest on the assets of the Company, including the Company’s intellectual property, and a pledge of 65% of the outstanding shares of the Company’s UK subsidiary, MIVA (UK) Limited. In addition, MIVA (UK) Limited and certain of the Company’s domestic subsidiaries are guarantying the Company’s obligations under the facility, to be secured by general security interests in the assets of such Companies. Except as otherwise set forth in the Loan Agreement, borrowings made pursuant to the Loan Agreement will bear interest at a rate equal to (i) 6.5% or (ii) the Prime Rate (as announced by Bridge Bank) plus 1.5%. The Facility expires on November 7, 2010, at which time all outstanding loan advances become due and payable.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements, the accuracy of which involves risks and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “estimates,” “projects,” and similar expressions to identify forward-looking statements. This management’s discussion and analysis of financial condition and results of operations also contains forward-looking statements attributed to certain third-parties relating to their estimates regarding the growth of the Internet, Internet advertising, and online commerce markets and spending. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons.

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Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled “Risk Factors” included within this report.

Executive Summary

We are an online media and advertising network company. We provide targeted and measurable online advertising campaigns for our advertiser and agency clients, generating qualified consumer leads and sales. The audiences for our advertisers’ campaigns are comprised of our multi-tiered ad network of third-party website publishers and our growing portfolio of consumer entertainment properties.

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 interactive toolbars and screensaver products. 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 5.6 million computers worldwide, enable millions of daily consumer interactions.

The majority of MIVA Direct’s revenue is generated through the toolbar products. MIVA Direct’s toolbar products offer consumers direct links to what we believe is relevant content and provide search functionality, utilizing ad listings serviced primarily through our contractual relationship with a third-party ad provider. When consumers conduct their search through our toolbars, and subsequently click-through relevant ad listings, MIVA Direct earns a percentage of the total click-through revenue recorded by the third-party ad provider that serviced the ad. During the past few years, we have invested, and we intend to continue to invest, more significantly in MIVA Direct, which is a key part of our strategy for transitioning our business model to more of an online consumer-oriented direct marketer.

MIVA Media

MIVA Media derives their revenue primarily from online advertising by delivering relevant contextual and search ad listings to our third-party ad network and our consumer audiences on a performance basis. Marketers only pay for advertising when a predetermined action occurs, such as when an Internet user clicks on an ad.

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Recent Developments

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

· Liquidity and capital resources

· Use of estimates and critical accounting policies

· Special note regarding forward-looking statements

RESULTS OF OPERATIONS

Revenue

During the three months ended September 30, 2008, we recorded revenue of $28.2 million, a decrease of approximately 21.4% from the $35.9 million recorded in the same period in 2007. For the nine months ended September 30, 2008, we recorded revenue of $91.0 million compared with $116.9 million for the nine months ended September 30, 2007, a decline of 22.2%. 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 September 30, 2008, MIVA Media recorded revenue of $17.8 million, a decrease of approximately 24.9% from the $23.7 million recorded in the same period in 2007. For the nine months ended September 30, 2008, MIVA Media recorded revenue of $58.3 million compared with $77.7 million for the nine months ended September 30, 2007, a decline of 25.0%. Revenue at MIVA Media Europe declined $4.8 million and $13.1 million, or 44.5% and 37.1% for the three and nine months ended September 30, 2008 compared to the same periods in the prior year. Revenue at MIVA Media US declined $1.1 million and $6.3 million, or 8.7% and 14.9% for the three and nine months ended September 30, 2008 compared to the same periods in 2007.

MIVA Direct recorded revenue of $10.4 million and $32.7 million for the three and nine months ended September 30, 2008, decreases of approximately 15.2% and 16.5% from the $12.2 million and $39.2 million recorded in the same periods in 2007.

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MIVA Direct, as a percentage of total revenue, has increased from approximately 34.0% for the three months ended September 30, 2007 to approximately 36.8% in the same period in 2008. MIVA Direct, as a percentage of total revenue, has increased from approximately 33.5% for the nine months ended September 30, 2007 to approximately 36.0% in the same period in 2008.

A portion of the revenue decline at MIVA Media is a result of the restructuring actions we have undertaken to exit unprofitable revenue streams and operations in Europe. Additionally, some of the revenue decline at MIVA Media across both US and EU is also 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: (i) our overall mix of traffic sources; (ii) the bid prices submitted by our advertisers for a keyword advertisement; (iii) the bid prices of the more frequently clicked keyword terms; (iv) delayed updates to the MIVA Media technology platform; (v) general economic conditions; and the nexus between the five.

Additional factors negatively impacting our revenue at MIVA Media in the three and nine months ended September 30, 2008, include: (i) spending volatility from a segment of advertisers based on their needs and general economic conditions; (ii) the inability of certain advertisers to monetize large blocks of remnant keyword traffic; (iii) 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 (iv) increased advertiser dissatisfaction with the limited features and functionality available in our legacy 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 and nine months ended September 30, 2008, compared to the same periods in 2007, is due primarily to a decline in our active toolbar installed base partially offset by increased revenue per user. Distribution of our new ALOT branded toolbars during the three and nine months ended September 30, 2008 increased at a rate sufficient to grow our active ALOT live user count from 1.0 million on December 31, 2007 to 3.3 million as of September 30, 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 periods in our legacy brands declined from 6.1 million to 3.2 million, 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 MIVA Direct revenue in the first three quarters of 2008 as compared to the same periods in 2007. Additionally, we believe the decline in our total 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; (ii) challenges in obtaining display advertising that met our conversion criteria; and (iii) general adverse economic conditions.

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We are actively seeking to stop the decline in our active toolbar installed base. We are focusing on cost effective distribution of our ALOT branded products and limited distribution of our legacy brand because ALOT branded products deliver approximately 50% higher revenue per user rate than our legacy brands. Examples of on-going 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. In the second and third quarters of 2008 we began to see positive results from these efforts, as total active ALOT toolbars increased from May 2008 to September 2008. If our efforts to improve our active toolbars installed base is not successful, it will have a material adverse impact on our business, financial condition, and results of operations.

In the three and nine months ended September 30, 2008 one customer of our MIVA Direct division, Google, accounted for approximately 34.9% and 33.6% of our total consolidated revenue, respectively. In the three and nine months ended September 30, 2007 Google accounted for 30.7% and 29.3% of our total consolidated revenue, respectively. During these periods, we did not have any individually significant MIVA Media 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 efforts 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.

We have been named in certain litigation, the outcome of which could directly or indirectly impact our revenue. For additional information regarding pending litigation, refer to Note J – Legal Proceedings above.

We plan to continue our efforts to invest in our business and seek additional revenue from our MIVA Direct division and MIVA Media division, including the Precision Network and the new, single MIVA Media technology platform, 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.

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Cost of services decreased in both the three and nine month periods ended September 30, 2008, compared with the same periods in the previous year primarily due to an overall reduction in the total amounts paid for traffic acquisition costs of $2.2 million and $8.1 million, respectively. The traffic acquisition cost 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 and nine month periods ended September 30, 2008, compared to the same periods in 2007, increased as a percentage of revenue to 49.3% from 47.0% and to 48.9% from 47.4%, respectively. This increase in cost of services as a percentage of revenue is partially due to the reduction in revenue generated by our MIVA Direct division, which is at a higher gross margin percentage, compared to the same period in the prior year.

Operating Expenses

Operating expenses for the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

						Q3-2008
	For the Three Months Ended September 30,					vs.
	2008		2007			Q3-2007
Marketing, sales, and service	$	8.8	$	11.1		(2.3		)
General and administrative	7.5		8.1			(0.6		)
Product development	1.2		1.4			(0.2		)
Subtotal	17.5		20.6			(3.1		)

Amortization	0.7		1.2			(0.5		)
Litigation Judgment	2.4		—			2.4
Impairment Loss	—		1.4			(1.4		)
Restructuring Charges	2.7		(0.0		)	2.7
Total	$	23.3	$	23.2		$	0.1

					YTD-2008
	For the Nine Months Ended September 30,				vs.
	2008		2007		YTD-2007
Marketing, sales, and service	$	30.4	$	36.5	(6.1		)
General and administrative	24.4		24.2		0.2
Product development	3.7		4.7		(1.0		)
Subtotal	58.5		65.4		(6.9		)

Amortization	2.1		3.7		(1.6		)
Litigation Judgment / Settlement	2.6		—		2.6
Impairment Loss	—		15.4		(15.4		)
Restructuring Charges	3.7		3.0		0.7
Total	$	66.9	$	87.5	$	(20.6	)

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Operating expenses, as a percent of revenue, for the three and nine months ended September 30, 2008 and 2007, were as follows:

					Q3-2008
	For the Three Months Ended September 30,				vs.
	2008		2007		Q3-2007
Marketing, sales, and service	31.2	%	31.0	%	0.2	%
General and administrative	26.6	%	22.5	%	4.1	%
Product development	4.3	%	3.9	%	0.4	%
Subtotal	62.1	%	57.4	%	4.7	%

Amortization	2.4	%	3.3	%	-0.9	%
Litigation Judgment	8.5	%	0.0	%	8.5	%
Impairment Loss	0.0	%	4.0	%	-4.0	%
Restructuring Charges	9.7	%	0.0	%	9.7	%
Total	82.7	%	64.7	%	18.0	%

					YTD-2008
	For the Nine Months Ended September 30,				vs.
	2008		2007		YTD-2007
Marketing, sales, and service	33.4	%	31.2	%	2.2	%
General and administrative	26.8	%	20.7	%	6.1	%
Product development	4.1	%	4.0	%	0.1	%
Subtotal	64.3	%	55.9	%	8.4	%

Amortization	2.3	%	3.1	%	-0.8	%
Litigation Judgment / Settlement	2.9	%	0.0	%	2.9	%
Impairment Loss	0.0	%	13.2	%	-13.2	%
Restructuring Charges	4.1	%	2.6	%	1.5	%
Total	73.6	%	74.8	%	-1.2	%

Marketing, Sales, and Service

Marketing, sales, and service expense consists primarily of payroll and related expenses for personnel engaged in marketing, advertiser solutions, business development, sales functions, affiliate relations, business affairs, corporate development, and credit transactions. It also includes advertising expenditures, promotional expenditures such as sponsorships of seminars, trade shows and expos, referral fees, other expenses to attract advertisers to our services, and fees to marketing and public relations firms.

Marketing, sales, and service expense decreased $2.3 million for the three months ended September 30, 2008, as compared to the same period in 2007. Our advertising and marketing expenses decreased $1.4 million period over period as a result of lower advertising spend by our MIVA Direct division. Additionally, a decrease occurred in salaries, benefits, share-based compensation, and other costs ($0.9 million) primarily as a result of our 2007 and 2008 restructuring initiatives.

Marketing, sales and service expense decreased $6.1 million for the nine months ended September 30, 2008, as compared to the same period in 2007. Salaries, benefits, and share-based compensation and related costs decreased approximately $2.6 million compared to the same period in the prior year due primarily to the 2007 and 2008 restructuring initiatives as described in Note G. Additionally, advertising and marketing expenses decreased $3.2 million as a result of less advertising spend by our MIVA Direct division. Also, contributing to the decrease period over period is reductions in the following: public relations expense ($0.2 million), travel expense ($0.2 million), and consulting and outside services ($0.1 million). Offsetting these decreases were increases totaling approximately $0.2 million in technology related expenses ($0.1 million) and other miscellaneous expenses ($0.1 million).

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General and Administrative

General and administrative expense consists primarily of: payroll and related expenses for executive and administrative personnel; fees for professional services; costs related to leasing, maintaining, and operating our facilities; credit card fees; recruiting fees; travel costs for administrative personnel; insurance; depreciation of property and equipment not related to search serving or product development activities; expenses and fees associated with the reporting and other obligations of a public company; bad debts; and other general and administrative services. Fees for professional services include amounts due to lawyers, auditors, tax advisors, and other professionals in connection with operating our business, litigation, and evaluating and pursuing new opportunities.

General and administrative expenses decreased by $0.6 million in the three months ended September 30, 2008, compared to the same period in the previous year. Decreases contributing to this variance include: rent and office related expense ($0.4 million); consulting services ($0.5 million); travel expenses ($0.2 million); depreciation and amortization expense ($0.1 million); and telecom expenses ($0.1 million). Offsetting these decreases were increases in the following categories: salaries, benefits, and other employee expenses including share-based compensation ($0.5 million); loss on sale of assets ($0.1 million); and bad debt expense ($0.1 million).

General and administrative expenses increased by approximately $0.2 million in the nine months ended September 30, 2008, compared to the same period in the previous year. Increases contributing to this variance include: consulting and outside services ($4.2 million) that was primarily due to expenses associated with our on-going Perot relationship; and bad debt expense ($0.2 million). Offsetting these increases were decreases in the following categories: salaries, benefits, and other employee expenses including share-based compensation ($2.1 million) associated with the 2007 and 2008 employee restructuring initiatives; rent and office expense ($1.5 million) related to the sublease agreements; travel expense ($0.4 million); and depreciation and amortization ($0.3 million).

Product development

Product development expense consists primarily of: payroll and related expenses for personnel responsible for the development and maintenance of features, enhancements, and functionality for our proprietary services; and depreciation for related equipment used in product development.

Product development costs decreased $0.2 million for the three months ended September 30, 2008, as compared to the same period in the previous year. The primary reason for this decrease was a reduction in the following category: salaries, benefits and other employee expenses, including share-based compensation expense ($0.2 million) associated with the 2007 and 2008 employee restructuring initiatives.

Product development costs decreased $1.0 million for the nine months ended September 30, 2008, as compared to the same period in the previous year. The primary reasons for this decrease were reductions in the following categories: salaries, benefits and other employee expenses, including share-based compensation expense ($1.0 million) associated with the 2007 and 2008 employee restructuring initiatives; travel expenses ($0.1 million); and technology related expenses ($0.1 million). Offsetting these decreases was an increase in public relations expense of $0.2 million.

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Amortization

Amortization expense recorded for the three and nine months ended September 30, 2008, was $0.7 million and $2.1 million compared to $1.2 million and $3.7 million in the same periods in the prior year. These decreases were attributed to an overall reduction in our intangible asset base eligible for amortization, primarily as a result of the recorded impairment losses in prior periods.

Litigation Judgment

Interest Income, Net

Interest income, net, consists primarily of earnings on our cash and cash equivalents, net of interest expense. Net interest income for the three and nine months ended September 30, 2008, was $0.0 million and $0.2 million compared to $0.2 million and $0.4 million in the same periods in the prior year. These decreases were attributed to an overall reduction in our cash balances eligible for interest income, primarily as a result of the current year net losses.

Exchange Rate Gain (Loss)

Exchange rate losses for the three and nine months ended September 30, 2008 of $1.5 million and $1.6 million, respectively, resulted primarily from the weakening of the British Pound to the US Dollar during the first nine months of 2008 in connection with translation adjustments related to certain of our inter-company debt. Exchange rate gains for the three and nine months ended September 30, 2007 of $0.3 million and $0.5 million, respectively resulted from similar translation adjustments and the strengthening British Pound to the US dollar during the first nine months of 2007.

Income Taxes

During the three and nine months ended September 30, 2008 and 2007, the following tax expense (benefit) was recorded (in millions):

	For the Three Months ended September 30,
	2008		2007
Pretax Loss from continuing operations	(10.5	)	$	(3.7	)
Income Tax Expense (benefit)	(0.02	)	0.09
Effective tax rates	0.2	%