This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements, the accuracy of which involves risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "estimates," "projects," and similar expressions to identify forward-looking statements. This management's discussion and analysis of financial condition and results of operations also contains forward-looking statements attributed to certain third-parties relating to their estimates regarding the growth of the Internet, Internet advertising, and online commerce markets and spending.

Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section entitled "Risk Factors" included within this report.

MIVA, Inc., together with its wholly-owned subsidiaries, collectively, the "Company", "we", "us" or "MIVA", is an online advertising network company.

MIVA Direct

We offer a range of products and services through our MIVA Direct division. MIVA Direct offers home page, desktop application and Internet browser toolbar products under the ALOT brand. Our customizable ALOT Home Page, ALOT Desktop and ALOT Toolbar are designed to make the Internet easy for consumers by providing direct access to affinity content and search results. These products generate over 2 million Internet searches per day.

MIVA Media

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

Recent Developments

Asset Sale - MIVA Media Business

On March 12, 2009, we completed the MIVA Media Sale. The MIVA Media Sale further streamlined our operations and is another step in our overall strategy of developing and expanding our high margin, consumer-oriented toolbar, homepage and desktop search-related products. As a result of the transaction, we have reduced our total headcount from 129 on December 31, 2008, to approximately 50 at March 31, 2009. This includes transferring approximately 75 MIVA Media and certain corporate staff to the buyer. Our remaining employees will work predominantly out of the Company's New York offices, with a small number of our employees based in our Fort Myers, Florida office.

We incurred approximately $1.2 million legal and financial advisory fees in connection with the sale of the MIVA Media business.

Perot Master Services Agreement

On February 1, 2009, we entered into an amendment ("Amendment") to the Perot Master Services Agreement with Perot Systems, pursuant to which we had outsourced certain of its information technology infrastructure services, application development, and customer services functions.

Under the terms of the amendment, the Master Services Agreement will expire on April 30, 2009, and certain other provisions of the Master Services Agreement have either been modified or terminated. The Amendment was entered as part of our ongoing cost reduction measures and to facilitate the streamlining of our MIVA Media operations and the anticipated operational efficiencies resulting from our new technology platform.

We expect Perot Systems to continue to provide application development services for our new technology platform and to work with us and the buyer of our MIVA Media assets on the transition of services related to the expiration of the Master Services Agreement. It is also expected that Perot Systems will continue to provide certain network operations monitoring and after-hours support services to us and the buyer of the MIVA Media assets on an ad hoc basis.

In connection with the Amendment, the Company has issued a letter of credit to Perot Systems for approximately $1.0 million for a portion of the remaining application development costs related to the Company's new technology platform, which was included in the assets sold as part of the MIVA Media Sale. As of March 31, 2009, Perot Systems has drawn approximately $0.7 million on this letter of credit. It is expected the balance will be drawn in the quarter ended June 30, 2009.

Bridge Bank Loan and Security Agreement

On March 12, 2009, we entered into a Consent and Amendment to Loan and Security Agreement (the "Amendment") with Bridge Bank, which amends certain terms and conditions of the Loan Agreement. Pursuant to the Amendment, MIVA Direct became a borrower under the Loan Agreement and granted a general security interest in its assets to Bridge Bank. The Amendment further provides Bridge Bank's consent to the MIVA Media Sale, provided that the Company was required to repay immediately, out of the proceeds of the MIVA Media Sale, all outstanding advances plus any accrued interest under the Loan Agreement in the amount of approximately $4.4 million. In addition, no further advances will be made under the Loan Agreement until the parties have agreed upon new terms and conditions for borrowing. The Amendment also provides that the letter of credit for the benefit of Perot Systems in the remaining amount of $0.7 million issued by Bridge Bank be secured by a cash deposit. Perot Systems had drawn $0.4 million as of March 31, 2009. The cash deposit for the remaining $0.3 million to be drawn is included in restricted cash in the accompanying condensed consolidated balance sheet.

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 March 31, 2009, we recorded revenue of $6.2 million, a decrease of approximately 48.8% from the $12.1 million recorded in the same period in 2008. The decrease in our revenue is due to a combination of a decline in our active installed product base and a decrease in revenue rates per user. We believe the decline in our total active installed base is due primarily to a lower active installed base at the beginning of the quarter, 7.1 million at December 31, 2007 compared to 4.6 million at December 31, 2008, a 35% decrease, coupled with reduction in advertising spend from approximately $7.6 million in the first three months of 2008 to approximately $4.3 million in the same period in 2009, a 43.4% decrease. We believe our decline in revenue rates per user is due to the following reasons: (i) reductions in revenue sharing rates and available services from certain advertising partners; (ii) reductions in the number of revenue generating events on our installed product base;
(iii) reductions in search volume triggering lower revenue sharing rates in a tiered rate structure; and (iv) general adverse economic conditions broadly affecting the value of search advertising. We believe the foregoing factors will have a dampening effect on the level of MIVA Direct's revenue in 2009.

Distribution of our new ALOT branded products during the three months ended March 31, 2009, was at a rate sufficient to grow our active ALOT live user count from 3.1 million on December 31, 2008, to 3.3 million as of March 31, 2009; at March 31, 2008, the active A LOT live user count was 2.1 million. This growth, however, was offset by decreased revenue per user performance metrics for all products. Live user count for our legacy brands declined from 1.6 million at December 31, 2008, to 1.1 million at March 31, 2009, and revenue rates per user declined, leading to an overall decline in revenue contributed by legacy branded products; at March 31, 2008, the active legacy brand user count was 4.4 million. During the quarter ended March 31, 2009, the decline in the installed base from legacy brands outpaced the growth rate of ALOT branded products, leading to a net decline in total MIVA Direct users.

We are actively seeking to stop the decline in our active product 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 an approximately 100% higher revenue per user rate than our legacy brands. Examples of on-going initiatives to expand distribution of ALOT products include: (i) diversifying our product line to include new platforms like Desktop, (ii) adding widget content to our products to expand the number of marketable verticals, (iii) optimizing landing pages for our advertisements, and
(iv) seeking new distribution relationships. 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.

For the three months ended March 31, 2009 and 2008, one customer of our MIVA Direct division, Google, accounted for approximately 92.6% and 92.1% of our consolidated revenue, respectively.

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

We plan to continue our efforts to invest in our business and seek additional revenue through branded toolbars and other initiatives. We cannot assure you that any of these efforts will be successful.

Cost of Services

Cost of services consists of revenue sharing or other arrangements with our MIVA Direct distribution partners, 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 to $0.5 million for the three months ended March 31, 2009, compared with $0.7 million in the same periods in the previous year. This decrease is primarily related to a reduction in the depreciation charge between the two periods relating to the impairment charge in the quarter ended December 31, 2008. Cost of services for the three month period ended March 31, 2009, compared to the same period in 2008, increased as a percentage of revenue from 6.2% to 7.3%. This increase in cost of services as a percentage of revenue is primarily attributed to a decrease in revenue.

Operating Expenses



Operating expenses for the three months ended March 31, 2009 and 2008, were as
follows (in millions):



                                  For the Three Months      2009
                                    Ended March 31,         vs.
                                  2009          2008        2008
Marketing, sales, and service   $     4.7    $       8.2     (3.5 )
General and administrative            3.1            4.2     (1.1 )
Product development                   0.7            0.8     (0.1 )
Subtotal                              8.5           13.2     (4.7 )

Amortization                            -            0.5     (0.5 )
Total                           $     8.5    $      13.7   $ (5.2 )

Operating expenses, as a percent of revenue, for the three months ended March 31, 2009 and 2008, were as follows:

                                  For the Three Months     2009
                                    Ended March 31,        vs.
                                   2009          2008      2008
Marketing, sales, and service         75.4 %        67.7 %  7.7 %
General and administrative            49.4 %        34.8 % 14.6 %
Product development                   11.2 %         7.0 %  4.2 %
Subtotal                             136.0 %       109.5 % 26.5 %

Amortization                           0.0 %         4.1 % -4.1 %
Total                                136.0 %       113.6 % 22.4 %

Marketing, Sales, and Service

Marketing, sales, and service expense consists primarily of advertising spend for toolbar acquisitions and also includes payroll expense and benefits related to individuals within this category.

Marketing, sales, and service expense decreased approximately $3.5 million for the three months ended March 31, 2009, to $4.7 million compared to $8.2 million for the same period in 2008. Advertising spend used primarily to attract users of our alot.com brand decreased approximately $3.3 million to $4.3 million in the three months ended March 31, 2009, compared to $7.6 for the same period in the prior year. The decrease in advertising spend was implemented primarily to conserve cash and cash equivalents. Additionally, salaries and benefits expense decreased $0.1 million.

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; 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 $1.1 million in the three months ended March 31, 2009, to $3.1 million compared to $4.2 million for the same period in the previous year. Decreases contributing to this variance include: rent and office related expense ($0.1 million); consulting services ($0.5 million); finance expenses ($0.1 million); salaries, benefits, and other employee expenses including share-based compensation ($0.4 million). Included in salaries expense $(0.4) million and share-based compensation expense $(0.4) million were amounts related to severance expenses of a former executive upon termination.

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 $0.1 million for the three months ended March 31, 2009, 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 ($0.1 million) associated with the 2008 employee restructuring initiatives.

Amortization

Amortization expense recorded for the three months ended March 31, 2009, was $0.0 million compared to $0.5 million in the same period in the prior year. This decrease was 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.

Interest Income (expense), net

We had net interest expense of approximately $(0.1) million for the three months ended March 31, 2009 compared to net interest income of approximately $0.1 million in the same period in the prior year. The current year net expense relates to interest incurred related to our capital lease obligations and interest expense incurred through our secured line of credit arrangement with Bridge Bank. In the prior year we earned net interest income through our cash and cash equivalent balances, and as of March 31, 2008, had not yet entered our capital lease obligations or secured line of credit with Bridge Bank.

Gain on Sale of Discontinued Operations

On March 12, 2009, we sold the assets, net of liabilities assumed, of our MIVA Media business for cash consideration of approximately $11.6 million, and subject to certain retained assets and liabilities, including assets and liabilities of the MIVA Media division in France, and post-closing adjustments, estimated at approximately $0.7 million, which resulted in a gain on sale of approximately $6.9 million during the quarter ended March 31, 2009. We incurred approximately $1.2 million of legal and financial advisory fees in connection with the sale of the MIVA Media division, which are included in the net gain on sale. Our decision to divest our MIVA Media business was due primarily to inconsistencies between the division's products and services and the Company's current and future strategic plan.

Loss from these discontinued operations was $(5.2) million and $(2.8) million, respectively for the three months ended March 31, 2009 and 2008. Included in the loss from discontinued operations for the three months ended March 31, 2009, is approximately $0.7 million of stock compensation and severance expense resulting from the termination of our Senior Vice President of MIVA Media, and approximately $1.0 million of minimum royalty payment expense accrued as result of the MIVA Media Sale, as described in Notes F and M to our condensed consolidated financial statements as of and for the three months ended March 31, 2009.

There is an estimated corresponding consolidated tax loss on this transaction, the difference in the book gain and tax loss is estimated to be approximately $10.7 million and is predominately related to basis differences in goodwill, which was impaired at December 31, 2008, for book purposes, other intangible assets also impaired at December 31, 2008, and fixed assets, all of which the Company had tax basis in excess of book basis.

Income Taxes

The income tax expense for the three months ended March 31, 2009 and 2008, of $0.014 million and $0.013 million, respectively are primarily due to the FIN48 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.

Net Loss from Continuing Operations

As a result of the factors described above, we generated a net loss from continuing operations of $(2.8) million and $(2.3) million for the three months ended March 31, 2009 and 2008, respectively, which represents: a loss per weighted average outstanding share of $(0.08) and $(0.07), respectively.

Weighted average common shares used in the earnings per share computation increased 0.6 million shares from 32.6 million shares for the year ended December 31, 2008 to approximately 33.2 million shares for the three months ended March 31, 2009. This increase is attributable to shares issued upon the vesting of restricted stock units.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2009, the Company had a total cash and cash equivalents of $11.6 million. This represents a $4.9 million or 73.2% increase from the total cash and cash equivalents of $6.7 million at December 31, 2008. The increase in cash was primarily due to the sale of the Media business on March 12, 2009, and offset by: payouts related to the June and August 2008 restructuring initiatives; expenses associated with Perot, our outsourcing partner; and repayment to Bridge Bank related to our outstanding line of credit.

Operating Activities

Net cash used in operations totaled $2.2 million in the three months ended March 31, 2009. Cash flow from operations can be understood by starting with the amount of net income or loss and adjusting that amount for non-cash items and variations in the timing between revenue recorded and revenue collected and between expenses recorded and expenses paid. The net income from operations ($1.1 million) included non-cash items of a provision for doubtful accounts ($1.5 million), depreciation and amortization ($0.3 million), and compensation expense based on equity grants rather than cash ($1.0 million).

Thus, the cash used in operations before the effect of timing differences was $1.7 million. With respect to revenue, the accounts receivable decreased $(7.1) million, but was offset by the net decrease in our deferred revenue of approximately $(1.2) million. With respect to expenses, the amount paid was more than the amount recorded by $2.7 million. Payments and other decreases associated with our accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($3.3) million, but were offset by the decrease in prepaid expenses and other items $(0.6) million.

With respect to the net income from operations, while we had a gain on sale of approximately $6.9 million related to the sale of the Media business, the related net proceeds of $10.4 million are classified as cash flow from investing activities.

Net cash used in operations totaled $7.3 million in the three months ended March 31, 2008. The net loss from operations ($5.1 million) included non-cash items including: a provision for doubtful accounts ($0.04 million), depreciation and amortization ($1.4 million), and compensation expense based on equity grants rather than cash ($0.7 million). Thus, the cash used in operations before the effect of timing differences was $3.0 million. With respect to revenue, the amount collected was approximately equal to the amount recorded; the amount collected was less than the amount recorded ($0.1 million increase in accounts receivable) but offset by a increase in the revenue collected but deferred to the future ($0.1 million increase in deferred revenue). With respect to expenses, the amount paid was more than the amount recorded by $4.3 million. Payments on accounts payable, accrued expenses and other liabilities were higher than the related amount of expenses ($4.1 million), as were the payments on prepaid expenses and other items ($0.2 million).

Investing Activities

Net cash provided by investing activities totaled approximately $12.0 million during the three months ended March 31, 2009. Cash was provided by: the net proceeds from the sale of the MIVA Media business ($11.6 million), less legal and financial advisory costs paid for the sale of approximately $1.2 million; and cash released from restriction ($2.0 million) as collateral for the secured line of credit agreement with Bridge Bank. Offsetting these two sources was cash used to purchase and develop capital assets, including internally developed software ($0.1 million), and $0.3 million of cash restricted under a cash account securing a letter of credit.

Net cash used in investing activities totaled approximately $0.9 million during the three months ended March 31, 2008. This use of cash was for the purchase of capital assets and the development of internally developed software

Financing Activities

Net cash used in financing activities totaled approximately $5.2 million during the three months ended March 31, 2009. This use of cash consisted of a one-time payment to satisfy the obligation associated with paying off the secured line of credit agreement with Bridge Bank ($4.4 million) and cash used to pay the quarterly payments on the capital lease obligations ($0.8 million).

In the three months ended March 31, 2008 we did not have any financing activities.

Liquidity

We currently anticipate that our working capital of approximately $3.4 million, including cash and cash equivalents of approximately $11.6 million as of March 31, 2009, along with cash flows from operations, will be sufficient to meet our liquidity needs for working capital and capital expenditures over at least the next 12 months.

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

We evaluate estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FIN 45. At this time, it is not possible to determine any potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our financial statements. If a need arises to fund any of these indemnifications, it could have an adverse effect on our liquidity.

Our forecast of the period of time through which our financial resources will be . . .