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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------

Commission file number 000-50507



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KINTERA, INC.

(Exact name of
Registrant as specified in its charter)



|                                                 |  |                                     
|------------------------------------------------ |  | ------------------------------------
|Delaware                                         |  | 74-2947183                          
|(State or other jurisdiction of incorporation or |  | (I.R.S. Employer Identification No.)
|organization)                                    |  |                                     
|                                                 | 
|9605 Scranton Road, Suite 200                    |  |                                     
|San Diego, California                            |  | 92121                               
|(Address of principal executive offices)         |  | (Zip Code)                          

Registrants telephone number, including area code: (858) 795-3000

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 such filing requirements for the past 90 days.

Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large
accelerated filer ̈Accelerated filer  x
        Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

As of May 3, 2006 there were 36,446,018 shares of the registrants common stock outstanding.



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KINTERA, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

INDEX



|                              |  |                                                                                                                |  |   
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                               
|                              |  |                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                           |  |   
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 (unaudited)                      |  | 3 
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (unaudited) |  | 4 
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited) |  | 5 
|                              |  |                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 6 
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 14
|                              |  |                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 20
|                              |  |                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                        |  | 20
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                               
|                              |  |                                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                                              |  | 21
|                              |  |                                                                                                               
|Item 1A.                      |  | Risk Factors                                                                                                   |  | 21
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                       |  | 29
|                              |  |                                                                                                               
|                              |  | Signature                                                                                                      |  | 31
|                              |  |                                                                                                               
|                              |  | Exhibit 10.1                                                                                                   |  |   
|                              |  | Exhibit 31.1                                                                                                   |  |   
|                              |  | Exhibit 31.2                                                                                                   |  |   
|                              |  | Exhibit 32.1                                                                                                   |  |   
|                              |  | Exhibit 32.2                                                                                                   |  |   



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

KINTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                      |  | March 31,2006 |          |   | December 31,2005 |  
|ASSETS                                                                                                                                                                                |  |               |          |   |                  |   |         |  
|Current assets:                                                                                                                                                                       |  |               |          |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                             |  | $             | 9,426    |   |                  | $ | 19,612  |  
|Marketable securities                                                                                                                                                                 |  |               | 18,003   |   |                  |   | 21,869  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,188 and $1,382 at March 31, 2006 and December 31,
2005                                                              |  |               | 7,793    |   |                  |   | 5,984   |  
|Prepaid expenses and other current assets                                                                                                                                             |  |               | 1,810    |   |                  |   | 1,237   |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total current assets                                                                                                                                                                  |  |               | 37,032   |   |                  |   | 48,702  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Property and equipment, net                                                                                                                                                           |  |               | 3,167    |   |                  |   | 4,103   |  
|Software development costs, net                                                                                                                                                       |  |               | 2,141    |   |                  |   | 2,272   |  
|Other assets                                                                                                                                                                          |  |               | 136      |   |                  |   | 245     |  
|Intangible assets, net                                                                                                                                                                |  |               | 9,870    |   |                  |   | 10,647  |  
|Goodwill                                                                                                                                                                              |  |               | 11,815   |   |                  |   | 11,703  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total assets                                                                                                                                                                          |  | $             | 64,161   |   |                  | $ | 77,672  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|                                                                                                                                                                                      |  |              
|Liabilities and stockholders equity                                                                                                                                                  |  |               |          |   |                  |   |         |  
|                                                                                                                                                                                      |  |              
|Current liabilities:                                                                                                                                                                  |  |               |          |   |                  |   |         |  
|Accounts payable, trade                                                                                                                                                               |  | $             | 1,664    |   |                  | $ | 1,880   |  
|Accrued expenses                                                                                                                                                                      |  |               | 734      |   |                  |   | 1,128   |  
|Accrued employee benefits                                                                                                                                                             |  |               | 2,332    |   |                  |   | 2,410   |  
|Donations payable                                                                                                                                                                     |  |               | 5,243    |   |                  |   | 11,288  |  
|Short-term notes payable                                                                                                                                                              |  |               | 391      |   |                  |   |        |  
|Deferred revenue                                                                                                                                                                      |  |               | 12,498   |   |                  |   | 11,915  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total current liabilities                                                                                                                                                             |  |               | 22,862   |   |                  |   | 28,621  |  
|Deferred rent and other                                                                                                                                                               |  |               | 91       |   |                  |   | 111     |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total liabilities                                                                                                                                                                     |  |               | 22,953   |   |                  |   | 28,732  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Commitments and Contingencies                                                                                                                                                         |  |               |          |   |                  |   |         |  
|                                                                                                                                                                                      |  |              
|Stockholders equity                                                                                                                                                                  |  |               |          |   |                  |   |         |  
|Common stock, $0.001 par value, authorized 60,000,000 shares authorized 36,385,619 and 36,251,794 shares issued and outstanding at
March 31, 2006 and December 31, 2005, respectively |  |               | 36       |   |                  |   | 36      |  
|Additional paid-in capital                                                                                                                                                            |  |               | 145,574  |   |                  |   | 147,824 |  
|Deferred compensation                                                                                                                                                                 |  |               |         |   |                  |   | (3,874  | )
|Accumulated other comprehensive loss                                                                                                                                                  |  |               | (92      | ) |                  |   | (77     | )
|Accumulated deficit                                                                                                                                                                   |  |               | (104,250 | ) |                  |   | (94,969 | )
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                            |  |               | 41,208   |   |                  |   | 48,940  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                            |  | $             | 64,161   |   |                  | $ | 77,672  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



3



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)



|                                           |  |                             |        |   |      |   |         |  
|------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                           |  | Three Months EndedMarch 31, |       
|                                           |  | 2006                        |        |   | 2005 |  
|Net revenues                               |  | $                           | 10,660 |   |      | $ | 9,334   |  
|Cost of revenue                            |  |                             | 3,115  |   |      |   | 2,730   |  
|                                           |  |                             |        |   |      |   |         |  
|Gross profit                               |  |                             | 7,545  |   |      |   | 6,604   |  
|                                           |  |                             |        |   |      |   |         |  
|Operating expenses:                        |  |                             |        |   |      |   |         |  
|Sales and marketing                        |  |                             | 7,025  |   |      |   | 11,111  |  
|Product development and support            |  |                             | 2,896  |   |      |   | 4,010   |  
|General and administrative                 |  |                             | 6,444  |   |      |   | 3,264   |  
|Amortization of purchased intangibles      |  |                             | 777    |   |      |   | 119     |  
|                                           |  |                             |        |   |      |   |         |  
|Total operating expenses                   |  |                             | 17,142 |   |      |   | 18,504  |  
|                                           |  |                             |        |   |      |   |         |  
|Operating loss                             |  |                             | (9,597 | ) |      |   | (11,900 | )
|                                           |  |                             |        |   |      |   |         |  
|Other income (expense):                    |  |                             |        |   |      |   |         |  
|Interest income (expense) and other, net   |  |                             | 316    |   |      |   | 226     |  
|                                           |  |                             |        |   |      |   |         |  
|Net loss                                   |  | $                           | (9,281 | ) |      | $ | (11,674 | )
|                                           |  |                             |        |   |      |   |         |  
|Loss per common share - basic and diluted  |  | $                           | (0.26  | ) |      | $ | (0.39   | )
|                                           |  |                             |        |   |      |   |         |  
|Weighted average common shares outstanding |  |                             | 35,494 |   |      |   | 29,777  |  
|                                           |  |                             |        |   |      |   |         |  

The amounts included in the three months ended March 31, 2006, reflect the adoption of Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2006.

See accompanying notes to unaudited condensed consolidated financial statements.



4



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(shares and dollars in thousands, except per share data)

(Unaudited)



|                                                                                 |  |                              |         |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                 |  | Three Months ended March 31, |        
|                                                                                 |  | 2006                         |         |   | 2005 |  
|OPERATING ACTIVITIES                                                             |  |                              |         |   |      |   |         |  
|Net loss                                                                         |  | $                            | (9,281  | ) |      | $ | (11,674 | )
|Adjustments to reconcile loss to net cash used in operating activities:          |  |                              |         |   |      |   |         |  
|Bad debt expense                                                                 |  |                              | (234    | ) |      |   | 115     |  
|Depreciation                                                                     |  |                              | 422     |   |      |   | 421     |  
|Amortization of software development costs                                       |  |                              | 230     |   |      |   | 119     |  
|Amortization of intangible assets                                                |  |                              | 777     |   |      |   | 824     |  
|Amortization of premium on securities                                            |  |                              | 2       |   |      |   |        |  
|Stock-based compensation                                                         |  |                              | 1,333   |   |      |   | 4,079   |  
|Impairment of software development costs                                         |  |                              | 415     |   |      |   |        |  
|Changes in assets and liabilities:                                               |  |                              |         |   |      |   |         |  
|Accounts receivable                                                              |  |                              | (1,575  | ) |      |   | (466    | )
|Prepaid expense and other current assets                                         |  |                              | 468     |   |      |   | (156    | )
|Accounts payable and accrued expenses                                            |  |                              | (607    | ) |      |   | (1,696  | )
|Accrued employee benefits                                                        |  |                              | (78     | ) |      |   | 564     |  
|Donations payable to customers                                                   |  |                              | (6,045  | ) |      |   | (2,289  | )
|Deferred revenue                                                                 |  |                              | 583     |   |      |   | 572     |  
|Deferred rent                                                                    |  |                              | (20     | ) |      |   | 3       |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash used in operating activities                                                |  |                              | (13,610 | ) |      |   | (9,584  | )
|                                                                                 |  |                              |         |   |      |   |         |  
|INVESTING ACTIVITIES                                                             |  |                              |         |   |      |   |         |  
|Purchase of marketable securities                                                |  |                              | (1,882  | ) |      |   | (1,503  | )
|Sales and maturities of marketable securities                                    |  |                              | 5,730   |   |      |   | 7,848   |  
|Acquisition costs, net of cash acquired                                          |  |                              |        |   |      |   | (614    | )
|Purchase of property and equipment                                               |  |                              | (84     | ) |      |   | (741    | )
|Additions to software development costs                                          |  |                              | (368    | ) |      |   | 27      |  
|Other assets                                                                     |  |                              | 109     |   |      |   | (86     | )
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash provided by investing activities                                            |  |                              | 3,505   |   |      |   | 4,931   |  
|                                                                                 |  |                              |         |   |      |   |         |  
|FINANCING ACTIVITIES                                                             |  |                              |         |   |      |   |         |  
|Payment under financing arrangement                                              |  |                              | (189    | ) |      |   |        |  
|Proceeds from issuance of common stock options and ESPP                          |  |                              | 108     |   |      |   | 192     |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash (used in) provided by financing activities                                  |  |                              | (81     | ) |      |   | 192     |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                        |  |                              | (10,186 | ) |      |   | (4,461  | )
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, beginning of period                                   |  |                              | 19,612  |   |      |   | 20,862  |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                         |  | $                            | 9,426   |   |      | $ | 16,401  |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                |  |                              |         |   |      |   |         |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Cash paid for interest                                                           |  | $                            | 9       |   |      | $ |        |  
|                                                                                 |  |                              |         |   |      |   |         |  
|Supplemental disclosure for non-cash investing and financing activities:         |  |                              |         |   |      |   |         |  
|Value of shares released from escrow in connection with contingent consideration |  | $                            | 123     |   |      |   |        |  
|Unrealized gain (loss) on investments                                            |  |                              | (16     | ) |      |   | (23     | )
|Issuance of common stock and options for acquisition                             |  |                              |        |   |      | $ | 655     |  

See accompanying notes to unaudited condensed consolidated financial statements.



5



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of
Significant Accounting Policies

Description of Business

Kintera, Inc. (the Company) was incorporated in the state of Delaware on February 8, 2000. The Company is a provider of software and services that enable nonprofit organizations to use the
Internet to increase donations, reduce fundraising costs, manage complex finances for nonprofit organizations and governments, and build awareness and affinity for an organizations cause by bringing their employees, volunteers and donors
together in online, interactive communities.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain amounts in the 2005 unaudited condensed consolidated financial statements have been
reclassified to conform with the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenue and expenses in the financial statements and accompanying notes. Estimates are used for, but not limited to, receivable valuations, depreciable lives of fixed assets, internally developed software, valuation of
acquired intangibles, stock-based compensation, accruals and contingencies. Actual results could differ materially from those estimates.

Cash and
Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.

Concentration of Credit Risk and Significant Customers

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents and investments with high credit quality financial institutions. In general, the Company does not require collateral on its
arrangements with customers. The Company has accounts receivable related to upfront and monthly maintenance fees as well as service and licensing fees which typically provide for credit terms of 30-60 days. The Company provides reserves against
accounts receivables for estimated losses that may result from customers inability to pay. The amount of the reserve is determined by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers
industry, historical losses and changes in customer creditworthiness.

Fair Value of Financial Investments

The carrying amounts shown for the Companys cash and cash equivalents, marketable securities, accounts receivable, prepaid expenses and other
current assets, accounts payable, accrued expenses, accrued employee benefits and donations payable approximate their fair value due to the short-term maturities of these instruments.

Purchase Equipment

Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the
terms of the related lease.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of Disposable Long-Lived Assets, the Company will record impairment losses on
long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company
recorded impairment of $415,000 on software development costs for the three months ended March 31, 2006 relating to terminated



6



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



projects identified. There was no impairment loss recorded on its long-lived assets used in operations for the three-month periods ending March 31,
2005.

Impairment of Goodwill

Goodwill is evaluated for potential impairment during the fourth quarter by comparing the fair value of a reporting unit to its carrying value, including recorded goodwill. If the carrying value exceeds the fair value, impairment is
measured by comparing the derived fair value of goodwill to its carrying value, and any impairment determined would be recorded in the current period. To date there has been no impairment of the Companys recorded goodwill.

Revenue Recognition

The Company derives
revenues from fees paid by nonprofit organizations related to the use of Kintera Sphere as well as from the Companys service offerings for wealth profiling and screening, advocacy campaigns and directed giving, from licenses of the
Companys prepackaged accounting software and from multiple element arrangements that may include any combination of these items.

For
arrangements with multiple elements, revenues are allocated to each element of the transaction based upon its fair value. Fair value for all elements of an arrangement is determined when the delivered items have value to the customer on a
stand-alone basis, evidence of the fair value of the undelivered items exists based on the price of regular sales on a stand-alone basis, and delivery or performance of the undelivered items is considered probable and substantially in our control.
Items are considered to have stand-alone value if the Company has sold that item separately on a regular basis in the past. When the fair value of a delivered element has not been established or the Company is unable to establish stand-alone value,
as currently is the case for the upfront payments for activation, maintenance, and use of Kintera Sphere, the revenues for the elements are recognized on a straight-line basis over the entire term of the contract.

To date, the arrangements that contain multiple elements have been contracts that include upfront payments for activation fees received, data screening
arrangements, monthly fees for the maintenance and use of the Companys software and transaction fees tied to the donations and purchases that are processed. Revenue associated with the upfront payments is deferred and recognized on a
straight-line basis over the entire term of the contract which in general ranges from twelve to thirty-six months. Revenue related to monthly maintenance and transaction fees for donations made through the website are recognized as services are
provided. Credit card fees directly associated with processing customer donations and billed to customers are excluded from revenues in accordance with Emerging Issues Task Force (EITF) consensus on Issue 99-19. Reporting Revenue
Gross as a Principal verses Net as an Agent.

The Company receives revenues related to Kintera Sphere and other non-software licensed
products for upfront fees, monthly maintenance fees, consulting services, data screening, and transaction fees tied to the donations and purchases that we process. Revenue is recognized when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from the customer); (2) delivery has occurred (upon performance of services in accordance with contract specifications); (3) customer
payment is deemed fixed or determinable and free of contingencies or significant uncertainties (credit terms extending beyond twelve months or significantly longer than is customary are deemed not to be fixed and determinable); and
(4) collection is reasonably assured (there are no indicators of non-payment based upon history with the customer and/or upon completion of credit procedures, if completed). Billings made or payments received in advance of providing services
are deferred until the period these services are provided.

Revenue from software licenses and related services is recognized in accordance
with the American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2, Software Revenue Recognition, as modified by SOP 98-4. For other offerings, the Company follows Staff Accounting Bulletin
No. 104, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists; the product has been shipped or the service has been performed or, in the case of certain agreements, when the
products are delivered to resellers; the fee is fixed or determinable and collectibility is probable. Consulting services are recognized separately from the software license and database as well as post contract support as they have value to the
customer on a stand-alone basis and there is a vendor-specific objective evidence (VSOE) of fair value for each of the remaining deliverables. VSOE of fair value is based on the normal pricing practices for those products and services
when sold separately by the Company and customer renewal rates for post-contract support services. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those
elements occurs or when fair value can be established. The Company offers technical support plans and recognizes support revenue over the life of the plan. For arrangements where undelivered services are essential to the functionality of delivered
software, the Company recognizes



7



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



both the product license revenues and service revenues under the percentage of completion contract method in accordance with the provisions of SOP 81-1,
Accounting for Performance of Construction Type and Certain Production Type Contracts. To date, license and service revenues recognized pursuant to SOP 81-1 have not been significant.

In accordance with the Financial Accounting Standard Boards Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Product, the Company accounts for cash consideration (such as sales incentives) that is given to customers or resellers as a reduction of revenue rather than as an
operating expense unless the Company receives a benefit that can be identified and for which the fair value can be reasonably estimated.

Software licenses are sold together with consulting services in the wealth profiling, advocacy campaign businesses and Fundware software products. When this occurs, license fees are recognized upon delivery provided that the revenue
recognition criteria discussed above are met. The more significant factors considered in determining whether revenues should be accounted for separately include nature of the services (i.e. consideration whether services are essential to the
functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Payment of the license fees is
not dependent upon the performance of the services, and the services do not provide significant customization or modification of the software products and are not essential to the functionality of the software that was delivered. For arrangements
with services that are essential to the functionality of the software, the license and related service revenues are recognized upon completion of the delivery of the license and the services with the residual method utilized for the remaining
elements in the contract.

If at the outset of an arrangement it is determined that the arrangement fee is not fixed or determinable,
revenue is deferred until the arrangement fee becomes due. If at the outset of an arrangement it is determined that collectibility is not probable, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of
payment.

Revenues from post-contract customer support services, such as software maintenance, are recognized on a straight-line basis over
the term of the support period. The majority of software maintenance agreements provide technical support as well as unspecified software product upgrades and releases when and if made available during the term of the support period.

The Company enters into transactions that exchange either advertising for advertising (Advertising Barter) or advertising for other products
and services (Non-advertising Barter). Advertising Barter transactions are recorded at the lesser of estimated fair value of the advertising received or given in accordance with the provisions of EITF Issue No. 99-17,
Accounting for Barter Transactions. Revenue from barter transactions is recognized when advertising is provided, and services received are charged to expense when used. Revenues for Non-advertising Barter transactions are
recognized at the estimated fair value when the advertising spots received under such contracts are either used or sold to third parties. During the three months ended March 31, 2006 and 2005, the Company recognized approximately $213,000 and
$200,000, respectively, of revenue in connection with advertising.

Software Development Costs

The Company accounts for Internal Use Software Development costs in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use(SOP 98-1). In accordance with SOP 98-1, costs to develop internal use computer software during the application development stage are capitalized. Internal use capitalized software costs are amortized on
a straight-line basis over the estimated useful lives of the related software applications of up to three years and are included in depreciation and amortization. The Company reviews the software that has been capitalized for impairment on a yearly
basis, or otherwise as conditions might arise that would require a review. For the three months ended March 31, 2006 and 2005, the Company recognized $167,000 and $0 impairment loss for projects terminated, respectively. The impairment loss is
included in cost of sales in the accompanying statement of operations.

The Company accounts for the development cost of software that is
marketed to customers in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86). SFAS 86 requires product development
costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when software has completed a detail program design for its intended use. Capitalized costs of software to be sold,
licensed or otherwise marketed are amortized on a straight-line basis over the estimated useful lives of the related software applications of up to three years and are included in depreciation and amortization. The Company reviews the software that
has been capitalized for impairment on a yearly basis, or otherwise as conditions might arise that would require a review. For the three months



8



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



ended March 31, 2006 and 2005, the Company recognized $274,000 and $0 impairment loss for projects terminated during the first quarter, respectively.
The impairment loss is included in operating expenses in the accompanying statement of operations.

Capitalized Software Development Costs

The following table summarizes the total amount of capitalized software for the three months ended March 31, 2006 and 2005,
respectively.



|                                                                    |  |                              |     |   |      |   |      |  
|------------------------------------------------------------------- |  | ---------------------------- | --- | - | ---- | - | ---- | -
|                                                                    |  | Three months ended March 31, |    
|                                                                    |  | 2006                         |     |   | 2005 |  
|SOP 98-1                                                            |  |                              |     |   |      |   |      |  
|Software Development Costs                                          |  | $                            | (2  | ) |      | $ | (102 | )
|SFAS 86                                                             |  |                              |     |   |      |   |      |  
|Costs of Computer Software to be Sold, Leased or Otherwise Marketed |  | $                            | 370 |   |      | $ | 129  |  

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for employee stock option plans under the intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. Under APB No.25, generally no compensation expense was recorded when
the terms of the award were fixed and the exercise price of the employee stock option equaled or exceeds the fair value of the underlying stock on the date of the grant. Additionally, in periods prior to January 1, 2006, the Company followed
the disclosure-only requirements of SFAS No.123, Accounting for Stock-Based Compensation (SFAS 123) which allowed entities to continue to apply the provisions of APB No. 25 for transactions with employees and provide pro
forma net income and pro forma earnings per share disclosures for employee stock grants made as if the fair value based method of accounting in SFAS 123 had been applied to these transactions.

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (SFAS 123(R)) and related
interpretations which superseded APB No. 25. SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was
adopted using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting
compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro-forma disclosures in prior periods.

Prior to the adoption of SFAS 123R, the Company accounted for share-based payment awards to employees in accordance with APB 25 and related
interpretations, and had adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.In accordance with APB 25, stock-based compensation expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or greater than the
fair market value of the Companys common stock on the date of grant, unless certain modifications were subsequently made. The Company recorded deferred compensation in connection with stock options granted, as well as stock options assumed in
acquisitions, with exercise prices less than the fair market value of the common stock on the date of grant or assumption in the case of acquisitions. The amount of such deferred compensation per share was equal to the excess of the fair market
value over the exercise price on such date. Recorded deferred compensation was recognized as stock-based compensation expense ratably over the applicable vesting periods. In accordance with the provisions of SFAS 123R, all deferred compensation
previously recorded has been eliminated with a corresponding reduction in additional paid in capital.



9



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Comprehensive Income (Loss)

Comprehensive loss is the total of net loss and all other non-owner changes in stockholders equity. The Companys other comprehensive income
(loss) consists of unrealized gains or losses on available-for-sale investments and foreign currency translation. The components of comprehensive income (loss) are as follows:



|                                                |  |                              |        |   |      |   |         |  
|----------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -
|                                                |  | Three months ended March 31, |       
|                                                |  | 2006                         |        |   | 2005 |  
|Net loss                                        |  | $                            | (9,281 | ) |      | $ | (11,674 | )
|Other comprehensive income (loss)               |  |                              |        |   |      |   |         |  
|Change in unrealized gain (loss) on investments |  |                              | (16    | ) |      |   | (23     | )
|                                                |  |                              |        |   |      |   |         |  
|Total comprehensive (loss)                      |  | $                            | (9,297 | ) |      | $ | (11,697 | )
|                                                |  |                              |        |   |      |   |         |  

Net Loss Per Share

In accordance with SFAS No. 128, Earnings Per Share (SFAS 128), basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. Potentially dilutive securities are not considered in the calculation of net loss per common share, as their inclusions would be anti-dilutive.

In accordance with SAB No. 98, Common Shares Issued for Nominal Consideration (SAB 98) these shares, if any, would be included in
the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share is as follows:



|                                                    |  |                              |            |   |      |   |            |  
|--------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                    |  | Three Months Ended March 31, |           
|                                                    |  | 2006                         |            |   | 2005 |  
|Numerator                                           |  |                              |            |   |      |   |            |  
|Net Loss                                            |  | $                            | (9,281     | ) |      | $ | (11,674    | )
|Denominator                                         |  |                              |            |   |      |   |            |  
|Basic and Diluted:                                  |  |                              |            |   |      |   |            |  
|Weighted average common shares                      |  |                              | 36,318,293 |   |      |   | 31,204,251 |  
|Less: Weighted Average shares subject to repurchase |  |                              | (824,767   | ) |      |   | (1,427,739 | )
|                                                    |  |                              |            |   |      |   |            |  
|Denominator on basic Calculation                    |  |                              | 35,493,526 |   |      |   | 29,776,512 |  
|                                                    |  |                              |            |   |      |   |            |  
|Basic and Diluted net loss per share                |  | $                            | (0.26      | ) |      | $ | (0.39      | )
|                                                    |  |                              |            |   |      |   |            |  

The following table summarizes potential common shares that are not included in the denominator
used in the diluted net loss per share calculation because to do so would be antidilutive:



|                                     |  |                              |  |          
|------------------------------------ |  | ---------------------------- |  | ---------
|                                     |  | Three Months Ended March 31,
|Common Stock Equivalents             |  | 2006                         |  | 2005     
|Common stock subject to repurchase   |  | 796,213                      |  | 1,083,280
|Warrants to purchase common stock    |  | 1,820,000                    |  | 20,000   
|Authorized for future options grants |  | 715,242                      |  |         
|Employee Stock Purchase Plan         |  | 833,779                      |  | 911,377  
|                                     |  |                              |  |          
|Total                                |  | 4,165,234                    |  | 2,014,657
|                                     |  |                              |  |          

Segment Information

In accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information(SFAS 131),the Company is required to report financial and
descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. The
Company believes it operates in a single business segment.

Contingent Consideration

In connection with certain of the Companys acquisitions, if certain future internal performance goals are later satisfied, the aggregate
consideration for the respective acquisition may be increased. Such additional consideration, if earned, will be paid in the form of additional shares of the Companys common stock, which were reserved for that purpose.



10



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Any additional consideration paid will be allocated between goodwill, stock-based compensation expense and deferred compensation. The measurement,
recognition and allocation of contingent consideration is accounted for using the following principles:

Measurement and Recognition

In accordance with SFAS No. 141, Business Combinations (SFAS 141) which superseded APB No. 16, Business
Combinations (APB 16) as of July 1, 2001, contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. The Company records the additional consideration issued
or issuable in connection with the relevant acquisition when a specified internal performance goal is met. For additional consideration paid in stock, the Company calculates the amount of additional consideration using the closing price of its
common stock on the date the performance goal is satisfied.

Amount Allocated to Goodwill

In accordance with EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination (EITF 95-8) and FIN 44, the portion of additional consideration issuable to holders of unrestricted common stock and fully vested options as of the acquisition date is recorded as additional purchase price, as
the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill. The Company recorded $123,000 in additional contingent consideration in goodwill during the three months ended March 31, 2006
relating to an earnout provision for Prospect Information Network acquisition that occurred in February 2004.

3. Employee Benefit Plans

Stock Incentive Plans

In October 2000,
the Company adopted the Kintera, Inc. 2000 Stock Option Plan (2000 Plan). As amended following the initial public offering in December 2003, the Board of Directors determined that no further options would be granted under the 2000
Plan. A committee designated by the Board of Directors fixed the terms and vesting of all options; however, in no event did the contractual term exceed 10 years. Generally, options vest 25% one year from the grant date and 1/1,460 per day
thereafter until the options are fully vested.

In December 2003, the Company adopted the 2003 Equity Incentive Plan (2003
Plan). Under the 2003 Plan, as amended in 2005, the Company may grant various stock awards, including but not limited to stock options, up to 8,600,000 shares of common stock. The total number of awards which may be granted under the 2003 Plan
is reduced, at all times by the number of stock options outstanding under the 2000 Plan. The 2003 Plan contains provisions which limit the number of stock awards granted to any individual employee in a fiscal year.

The 2004 Equity Incentive Plan (Fundware) (2004 Plan) was adopted by the Company in December 2004 and provides for stock awards as an
inducement for an individual to enter into service with the Company. The maximum number of awards which may be granted under the 2004 Plan is 500,000 shares.

Options granted under the 2004 Plan and 2003 Plan become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Board
of Directors Compensation Committee, the maximum term of any option granted under the 2004 Plan is ten years. At March 31, 2006, approximately 715,000 shares remained available for future grant under the Plans.

Incentive Plan Information

Option activity
under the Companys stock incentive plans in the three months ended March 31, 2006 is set forth below:



|                                         |  |                       |               |                 |           |   |                               |   |     
|---------------------------------------- |  | --------------------- | ------------- | --------------- | --------- | - | ----------------------------- | - | ----
|                                         |  | Option PricePer Share |               | Number ofShares |           |   | WeightedAverageExercise Price
|Shares under option at December 31, 2005 |  | $                     | 0.06- $16.94  |                 | 7,036,693 |   |                               | $ | 4.48
|Granted                                  |  | $                     | 1.47- $  2.85 |                 | 720,750   |   |                               |   | 2.31
|Exercised                                |  | $                     | 2.09- $  2.81 |                 | (114,065  | ) |                               |   | 0.95
|Cancelled                                |  | $                     | 0.80- $  2.00 |                 | (499,356  | ) |                               |   | 3.60
|                                         |  |                       |               |                 |           |   |                               |   |     
|Shares under option at March 31, 2006    |  |                       |               |                 | 7,144,022 |   |                               | $ | 4.38
|                                         |  |                       |               |                 |           |   |                               |   |     



11



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



The aggregate intrinsic value for shares outstanding for the three months ended March 31, 2006,
was $190,000 and the aggregate intrinsic value for exercised shares for the three months ended March 31, 2006, was $189,000 representing the total pre-tax intrinsic value, based on the Companys closing stock price of $ 1.47 as of
March 31, 2006. The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2006 and 2005 was $4.38 and $6.35, respectively.



|                        |  |                              |  |                                          |  |                               |       |                         |           |                               |   |      
|----------------------- |  | ---------------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ----------------------- | --------- | ----------------------------- | - | -----
|                        |  | Options outstanding          |  | Options vested                          
|Range ofexercise prices |  | Number of optionsoutstanding |  | Weightedaverageremainingcontractual life |  | Weightedaverage exerciseprice |       | Number of optionsvested |           | Weightedaverageexercise price
|$0.06 - $2.00           |  | 1,298,230                    |  | 6.72                                     |  | $                             | 1.70  |                         | 923,081   |                               | $ | 1.63 
|$2.13 - $2.57           |  | 1,569,925                    |  | 9.68                                     |  |                               | 2.50  |                         | 1,068     |                               |   | 2.57 
|$2.59 - $2.92           |  | 1,259,297                    |  | 8.81                                     |  |                               | 2.87  |                         | 894,156   |                               |   | 2.90 
|$2.93 - $7.60           |  | 1,159,718                    |  | 9.06                                     |  |                               | 4.64  |                         | 155,183   |                               |   | 6.73 
|$7.66 - $7.70           |  | 1,146,217                    |  | 8.33                                     |  |                               | 7.70  |                         | 796,810   |                               |   | 7.70 
|$7.71 - $16.94          |  | 710,635                      |  | 8.35                                     |  |                               | 10.30 |                         | 627,326   |                               |   | 10.43
|                        |  |                              |  |                                          |  |                               |       |                         |           |                               |   |      
|                        |  | 7,144,022                    |  | 8.54                                     |  | $                             | 4.38  |                         | 3,397,624 |                               | $ | 5.25 
|                        |  |                              |  |                                          |  |                               |       |                         |           |                               |   |      

Employee Stock Purchase Plan

The 2003 Employee Stock Purchase Plan (the ESPP). Under the ESPP, the Company may issue up to 1,000,000 shares of common stock to eligible
employees who elect to participate in the plan. The participating employees will obtain a purchase right in shares of the Companys common stock at the lower of 85% of the common stock closing price on the first day of the offering period or
85% of the common stock closing price on the purchase date. The offering periods durations are six months in length and begin on May 1 and November 1 of each year. At March 31, 2006, there were 833,779 shares available for
future issuance under this plan. The Company did not issue any shares under this plan in the three months ended March 31, 2006. The Company recognized as stock-based compensation expense approximately $20,000 as the fair value of the potential
shares to be purchased under this plan.

Stock-Based Compensation Expense

The following table presents details of stock-based compensation expense by functional line item based on the fair value provisions of SFAS 123R for the
three months ended March 31, 2006 and based on the provision of APB 25 for the three months ended March 31, 2005.



|                                |  |                              |       |      |   |      
|------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                |  | Three Months Ended March 31,
|                                |  | 2006 (1)                     |       | 2005
|                                |  | (in thousands)              
|Sales and marketing             |  | $                            | 490   |      | $ | 3,719
|Product development and support |  |                              | 222   |      |   | 126  
|General and administrative      |  |                              | 621   |      |   | 220  
|                                |  |                              |       |      |   |      
|                                |  | $                            | 1,333 |      | $ | 4,065
|                                |  |                              |       |      |   |      



|(1) | The amounts included in the three months ended March 31, 2006 reflect the adoption of SFAS 123R.
|--- | ------------------------------------------------------------------------------------------------

The fair value of each option grant was estimated on the date of grant utilizing the Black-Scholes option-pricing model with the following assumptions:



|                                     |  |               |   |  |                       |   |  |           |   |  |           |  
|------------------------------------ |  | ------------- | - |  | --------------------- | - |  | --------- | - |  | --------- | -
|                                     |  | Stock Options |   |  | Stock Purchase Rights |  
|For the three months ended March 31, |  | 2006          |   |  | 2005                  |   |  | 2006      |   |  | 2005      |  
|Risk-free interest rate              |  | 4.55          | % |  | 4.2                   | % |  | 4.63      | % |  | 4.2       | %
|Expected term (years)                |  | 6 years       |   |  | 5 years               |   |  | 0.5 years |   |  | 0.5 years |  
|Expected volatility                  |  | 75            | % |  | 80                    | % |  | 54        | % |  | 47        | %
|Dividend yield                       |  | 0             | % |  | 0                     | % |  | 0         | % |  | 0         | %

With the adoption of SFAS 123(R) on January 1, 2006, the Company is required to record the
fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the



12



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Company utilizes the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life,
risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life
assumptions require a greater level of judgment which make them critical accounting estimates. The Company uses an expected stock-price volatility assumption that is primarily based on historical realized volatility of the underlying stock during a
period of time. For stock option grants issued during the three months ended March 31, 2006, the Company used an expected stock-price volatility of 75%. With regard to the weighted-average option life assumption, the Company evaluates the
exercise behavior of past grants as a basis to predict future activity. For stock option grants issued during the three months ended March 31, 2006, the Company used a weighted-average expected option life assumption of 6 years.

Prior to the Companys adoption of SFAS 123(R), SFAS 123 required that the Company provide pro forma information regarding net income and net
earnings per common share as if compensation cost for the Companys stock-based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure portion of SFAS
No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, requiring quarterly SFAS 123 pro forma disclosure. The pro forma charge for compensation cost related to stock-based awards granted was
recognized over the vesting period. The following table illustrates the effect on net loss and loss per common share as if the fair value method had been applied to all outstanding awards for the three months ended March 31, 2005:



|                                                                                                              |  |                                  |         |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | -
|                                                                                                              |  | Three Months EndedMarch 31, 2005 |        
|Net loss  as reported                                                                                        |  | $                                | (11,674 | )
|Add: Stock-based employee compensation expense included in reported net loss                                  |  |                                  | 1,124   |  
|Less: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                  | (2,390  | )
|                                                                                                              |  |                                  |         |  
|Pro forma net loss                                                                                            |  | $                                | (12,940 | )
|                                                                                                              |  |                                  |         |  
|Net loss per share:                                                                                           |  |                                  |         |  
|Basic and diluted  as reported                                                                               |  | $                                | (0.39   | )
|                                                                                                              |  |                                  |         |  
|Basic and diluted  pro forma                                                                                 |  | $                                | (0.43   | )
|                                                                                                              |  |                                  |         |  

As a result of adopting SFAS 123(R) on January 1, 2006, the Companys net loss for the
three months ended March 31, 2006, was increased by $676,000 over the share-based compensation under APB No. 25. Basic and diluted earnings per share for the three months ended March 31, 2006 were reduced by $0.02 per share as a
result of adopting SFAS 123(R).

4. Legal Proceedings

From time to time, the Company may be involved in litigation relating to claims arising out of our operations. As of the date of this Quarterly Report on Form 10Q, we are not a party to any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition, operating results or cash flows.



13



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Special Note About Forward-Looking Statements

This report contains forward-looking statements.
These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect,
plan, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the
forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our expectations.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other
financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including
(without limitation) the disclosures made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, under the caption Risk Factors, and the audited consolidated financial
statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2005 and other reports and filings made with the Securities and Exchange Commission. Risk factors that could cause actual results to
differ from those contained in the forward-looking statements, including but not limited to: our limited operating history; our history of losses; our dependence on increased acceptance by nonprofit organizations of online fundraising; lengthy sales
cycles for major customers; our need to manage growth; risks associated with accounting for and processing large amounts of donations; the rapidly changing technologies and market demands; and other risks identified in this Quarterly Report on Form
10-Q.

Overview

We are an
innovative provider of software that enables nonprofit organizations to use the Internet to increase donations, reduce fundraising costs, improve operations and build awareness and affinity for their causes by bringing employees, volunteers and
donors together in online, interactive communities. Our flagship product, Kintera Sphere, is managed as a single system and offered to nonprofit organizations as a service accessed with a web browser. Nonprofit organizations pay Kintera service fees
for access to Kintera Sphere and transaction-based fees tied to the donations and purchases.

Although our revenues have increased on a
year over year basis, we have experienced significant net losses and negative cash flows from operations in each fiscal period since inception, and as of March 31, 2006, we had an accumulated deficit of $104 million. Since inception, we have
increased our revenues through a combination of factors, including (i) obtaining new customers, (ii) expanding existing customer relationships, (iii) acquiring complementary businesses, (iv) expanding the features of Kintera
Sphere, (v) increasing the number and amount of donations we process that result in transaction-based fees and (vi) offering new and improved products and services.

Sources of Revenue

We generate the majority of our revenue from arrangements with nonprofit
organizations related to their use of Kintera Sphere to manage their websites, special events and membership, organize individuals, advocate causes, perform wealth screening, raise major gifts, deliver services and programs and execute personalized
marketing campaigns. We primarily enter into customer contracts for Kintera Sphere that are one year or more in duration. Our customers pay us upfront fees and monthly service fees for access to Kintera Sphere, and transaction-based fees tied to the
donations and purchases we process. Revenues from upfront service fees are deferred and recognized as revenue over the entire term of our contracts. Revenues from transaction processing fees are recognized as they are earned, and we have experienced
significant growth year over year. Total online donations for the first quarter of fiscal year 2006 were approximately $51.7 million as compared to the same period of 2005 of $82.2 million. Historically, the first quarter of the year results in
limited growth; however, during the first quarter of 2005 we experienced an increase for online donations directly attributed to the 2005 tsunami in southeast Asia. Revenue from service plan and maintenance associated with Kintera Sphere represented
approximately 45% and 41% of our total net revenue for the three months ended March 31, 2006 and 2005, respectively. Revenue from data and support services represented approximately 17.3% and 18.6% of our total net revenue for the three months
ended March 31, 2006 and 2005, respectively. We also enter into service contracts and implementation contracts related to Kintera Sphere that are 12 months or longer in duration.



14



---

We also generate revenues from our wealth profiling business, which provides a prospect-screening tool
designed for the fundraising community to find, profile, monitor and dynamically rank the wealth in a nonprofit organizations prospect database. Wealth profiling services are sold in connection with Kintera Sphere as well as on a stand-alone
basis. Revenues from the wealth profiling business arise from primarily three sources: (1) Kintera Sphere access or software licensing; (2) post contract support services of the software licenses; and (3) consulting services and
related data processing fees.

Our awareness campaign business specializes in melding offline and online strategies and tools to build
membership, affinity and impact for nonprofit organizations, political campaigns and unions. We recognize revenue from the awareness campaign business from primarily four sources: (1) Kintera Sphere access or software licensing;
(2) website development and customization; (3) messaging services (email/fax); and (4) consulting services.

Software
licenses are sold together with consulting services in our wealth profiling and awareness campaign products. Revenue allocated to the service element is recognized as the services are performed. If performance is not apparent, service revenue is
recognized on a straight-line basis over the period during which the services are performed unless the license has not been delivered, in which case the revenue is deferred until the license is delivered.

We also generate a significant amount of revenue through our accounting software. Revenues from this operation are derived from perpetual license fees
for the accounting software package, as well as related product support, professional services, outsourced payroll services and transaction fees.

Cost of Revenues. Cost of revenue includes salaries, benefits and related expenses of operations and database support and implementation and support services, as well as data costs and amortization of software. Gross profit
represents net revenue less the costs of revenue for personnel engaged in database support. Gross profit percentage is highly dependent on contract agreements, donation volume and overhead allocations. We do not believe that historical gross profit
margins are a reliable indicator of future gross profit margins. As our service and support costs continue to rise due to increased the increase in services activity relative to our other product lines, we anticipate that our overall gross margin
will decrease. During the first quarter of 2006, we implemented a new project accounting module that better tracks and records costs associated with each product line and customer. We anticipate this will improve our visibility into the factors that
cause margin fluctuations and our ability to achieve consistent, sustainable gross margins for each of our major revenue sources.

Sales
and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions, compensation expense associated with the adoption of SFAS 123R, benefits and related expenses of personnel engaged in selling, marketing and
customer support functions, as well as public relations, advertising and promotional costs.

Product Development and Support Expenses.Product development and support expenses consist primarily of salaries, and related costs of employees engaged in engineering, development and quality assurance activities, compensation expense associated with the adoption of SFAS 123R,
subcontracting costs and facilities expenses.

General and Administrative Expenses.General and administrative expenses consist
primarily of personnel-related expenses, compensation expense associated with the adoption of SFAS 123R, depreciation, legal and other professional fees, facilities and communication expenses and information technology expenditures. During the
quarter ended March 31, 2006, we have incurred a significant amount of outside consultant costs and audit fees to comply with the provisions of the Sarbanes-Oxley Act of 2002 relating to managements assessment of internal control over
financial reporting.

Amortization of Purchased Intangibles Expense. Amortization of purchased intangibles expense (excluding
amortization of software recorded in Cost of Revenue) consists of costs associated with the acquired intangibles such as contact list, customer files, etc. that are expensed using the straight-line method over the estimated useful lives of three to
five years. In previous quarters these amounts were recorded in sales and marketing, product development and support and general and administrative expenses in the consolidated statements of operations. Management believes that reporting
amortization of purchased intangibles expenses as a distinct reporting category provides better and more complete disclosure regarding the associated expense. Comparative figures for the three months ended March 31, 2005 have been reclassified
to conform to the current periods presentation.

Application of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to the allowance for doubtful accounts, goodwill and intangible assets, income taxes, commitments and accrued
liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making



15



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judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We consider accounting policies relating to the following areas to be both those most
important to the portrayal of our financial condition and those that require the most subjective judgment:



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | accounting for goodwill and other intangible assets;
| | - |  | ----------------------------------------------------



| |  |  | accounting for software development costs;
| | - |  | ------------------------------------------

You should
refer to our Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 16, 2006 for a discussion of our policies on revenue recognition, accounting for goodwill and other intangible assets, accounting for software
development costs, accounting for stock-based compensation and accounting for income taxes. See Note 1 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the discussion of our revenue recognition
policies and Notes 1 and 3 for a discussion of our policies regarding accounting for stock-based compensation.

Results of Operations

Comparison of results for the three months ended March 31, 2006 and 2005.

The following table sets forth certain statement of income data expressed as a percentage of net revenue for the periods indicated:



|                                      |  |                             |    |  |      |   
|------------------------------------- |  | --------------------------- | -- |  | ---- | --
|                                      |  | Three Months EndedMarch 31, |   
|                                      |  | 2006                        |    |  | 2005 |   
|Net revenue                           |  | 100                         | %  |  | 100  | % 
|Cost of revenue                       |  | 29                          |    |  | 29   |   
|                                      |  |                             |    |  |      |   
|Gross profit                          |  | 71                          |    |  | 71   |   
|Operating expenses:                   |  |                             |    |  |      |   
|Sales and marketing                   |  | 66                          |    |  | 119  |   
|Product development and support       |  | 28                          |    |  | 43   |   
|General and administrative            |  | 60                          |    |  | 35   |   
|Amortization of purchased intangibles |  | 7                           |    |  | 1    |   
|                                      |  |                             |    |  |      |   
|Loss from operations                  |  | (90                         | )  |  | (127 | ) 
|                                      |  |                             |    |  |      |   
|Interest income, net                  |  | 3                           |    |  | 2    |   
|                                      |  |                             |    |  |      |   
|Net loss                              |  | (87                         | )% |  | (125 | )%
|                                      |  |                             |    |  |      |   

Net Revenue, Cost of Revenue and Gross Profit

The following table presents net revenue, cost of revenue and gross profit for three months ended March 31, 2006 and 2005.



|                |  |                                   |        |                |                                  |   |        |          |                |         |     |   |  |   |       |  |    |  
|--------------- |  | --------------------------------- | ------ | -------------- | -------------------------------- | - | ------ | -------- | -------------- | ------- | --- | - |  | - | ----- |  | -- | -
|                |  | Three Months EndedMarch 31, 2006  |        |                | Three Months EndedMarch 31, 2005 |   |        | Increase |                | %Change |    
|                |  | Amount                            |        | % ofNetRevenue |                                  |   | Amount |          | % ofNetRevenue |         |     |  
|                |  | (in thousands, except percentage) |       
|Net revenue     |  | $                                 | 10,660 |                | 100                              | % |        | $        | 9,334          |         | 100 | % |  | $ | 1,326 |  | 14 | %
|Cost of revenue |  |                                   | 3,115  |                | 29                               |   |        |          | 2,730          |         | 29  |   |  |   | 385   |  | 14 |  
|                |  |                                   |        |                |                                  |   |        |          |                |         |     |   |  |   |       |  |    |  
|Gross profit    |  |                                   | 7,545  |                | 71                               | % |        |          | 6,604          |         | 71  | % |  |   | 941   |  | 14 | %
|                |  |                                   |        |                |                                  |   |        |          |                |         |     |   |  |   |       |  |    |  



16



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|                             |  |                                   |        |                 |                                  |   |        |          |                 |  |         |   |  |   |       |   |  |     |  
|---------------------------- |  | --------------------------------- | ------ | --------------- | -------------------------------- | - | ------ | -------- | --------------- |  | ------- | - |  | - | ----- | - |  | --- | -
|                             |  | Three Months EndedMarch 31, 2006  |        |                 | Three Months EndedMarch 31, 2005 |   |        | Increase |                 |  | %Change |  
|                             |  | Amount                            |        | % ofNet Revenue |                                  |   | Amount |          | % ofNet Revenue |  |         |  
|                             |  | (in thousands, except percentage) |       
|Implementation               |  | $                                 | 1,439  |                 | 13                               | % |        | $        | 937             |  | 10      | % |  | $ | 502   |   |  | 54  | %
|License and subscription     |  |                                   | 664    |                 | 6                                |   |        |          | 837             |  | 9       |   |  |   | (173  | ) |  | (21 | )
|Service plan and maintenance |  |                                   | 4,816  |                 | 45                               |   |        |          | 3,790           |  | 41      |   |  |   | 1,026 |   |  | 27  |  
|Data and support services    |  |                                   | 1,848  |                 | 17                               |   |        |          | 1,799           |  | 19      |   |  |   | 49    |   |  | 3   |  
|Transaction and usage        |  |                                   | 1,893  |                 | 19                               |   |        |          | 1,971           |  | 21      |   |  |   | (78   | ) |  | (4  | )
|                             |  |                                   |        |                 |                                  |   |        |          |                 |  |         |   |  |   |       |   |  |     |  
|                             |  | $                                 | 10,660 |                 | 100                              | % |        | $        | 9,334           |  | 100     | % |  | $ | 1,326 |   |  | 14  | %
|                             |  |                                   |        |                 |                                  |   |        |          |                 |  |         |   |  |   |       |   |  |     |  

Net Revenue.Our revenue is generated principally by fees paid by nonprofit organizations
related to their use of our software and services. Net revenue is revenue less reductions for discount and provisions for allowances and credit card fees. The preceding table presents net revenue from each of our revenue streams and their respective
contribution to the increase in net revenues for the three months ended March 31, 2006 and 2005, respectively.

Implementation revenue
consists primarily of revenue generated from the implementation services that are performed by our services personnel on behalf of customers. Depending on the nature of the contract, this revenue may have been deferred and amortized over the
contract period or may be recognized upon delivery. Net revenue from implementations increased 54% to $1.4 million in the first three months ended March 31, 2006 from $900,000 in 2005. This growth was primarily due to the ongoing signing of new
or expanded customer accounts requiring implementation services.

License and subscription revenue consists primarily of packaged software
sales and advertising and access to Masterplanner online content. Net revenues from license and subscriptions decreased 21% to $700,000 in the three months ended March 31, 2006 from $800,000 in 2005, due to the discontinuation of our
Masterplanner print magazine.

Service plan and maintenance revenue consists primarily of activation, hosting and use of our Kintera Sphere
software as a service (SaaS) offering as well as software maintenance revenue for our Fundware software installations. Net revenues from service plan and maintenance increased 27% to $4.8 million in the three months ended March 31,
2006 from $3.8 million in 2005, primarily due to new contract signings for our Sphere platform.

Data and support services revenue consists
of delivery of wealth screening data services, professional services and consulting, and billable support services. Net revenues from data and support services were consistent period over period with a marginal increase of 3% to $1.8 million in the
three months ended March 31, 2006 from $1.8 million in 2005. Revenue growth was limited in this category due to the deferral of revenue for certain contracts with long-term obligations.

Transaction and usage revenue consists of the fees charged for processing of donations and other usage related services such as emails, faxes and other
measurable activities. Net revenues from transactions and usage decreased 4% from $2.0 million for the three months ended March 31, 2005 to $1.9 million in 2006. The decrease was driven by the 2005 tsunami disaster and a shift in mix from
customers paying fixed fees versus transaction fees.

Cost of Revenue and Gross Profit. Cost of revenues increased to $3.1 million
for the three months ended March 31, 2006 from $2.7 million in 2005 primarily due to increases in staff related costs associated with the delivery of implementation and support services, as well increased data costs associated with our
wealth screening business. Gross margins for the first quarter of 2006 and 2005 were constant at 71%.



17



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Sales and Marketing, Product Development and Support, General and Administrative Expenses and Amortization of
Purchased Intangibles Expenses

The following table presents sales and marketing, product development and support, general and
administrative and depreciation and amortizations expenses for the three months ended March 31, 2006 and 2005 respectively.



|                                      |  |                                   |       |                 |                                  |   |        |                    |                 |  |         |   |  |   |        |   |  |     |   
|------------------------------------- |  | --------------------------------- | ----- | --------------- | -------------------------------- | - | ------ | ------------------ | --------------- |  | ------- | - |  | - | ------ | - |  | --- | --
|                                      |  | Three Months EndedMarch 31, 2006  |       |                 | Three Months EndedMarch 31, 2005 |   |        | Increase(decrease) |                 |  | %Change |  
|                                      |  | Amount(1)                         |       | % ofNet Revenue |                                  |   | Amount |                    | % ofNet Revenue |  |         |  
|                                      |  | (in thousands, except percentage) |      
|Sales and marketing                   |  | $                                 | 7,025 |                 | 66                               | % |        | $                  | 11,111          |  | 119     | % |  | $ | (4,086 | ) |  | (37 | )%
|Product development and support       |  |                                   | 2,896 |                 | 27                               |   |        |                    | 4,010           |  | 43      |   |  |   | (1,114 | ) |  | (28 | ) 
|General and administrative            |  |                                   | 6,444 |                 | 60                               |   |        |                    | 3,264           |  | 35      |   |  |   | 3,180  |   |  | 97  |   
|Amortization of purchased intangibles |  |                                   | 777   |                 | 7                                |   |        |                    | 119             |  | 1       |   |  |   | 658    |   |  | 553 |   

---

|(1) | The amounts included in the three months ended March 31, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method,
our unaudited condensed consolidated statements of income for the prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Notes 2 and 3 of Notes to Unaudited Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended was $7.0 million or 66% of
revenues compared to $11.1 million or 104% of revenues for the comparable period in 2005. The decrease of $4.1 million in selling and marketing expenses was primarily due to a decrease of $404,000 in contract labor, a decrease of $452,000 for
facilities and depreciation offset by an increase of $1.3 million in personnel-related expenses relating to increased compensation levels and a decrease of $3.2 million for stock-based compensation expense.

In addition, in April 2005, we released and accelerated vesting on 341,357 shares of common stock, formerly held in escrow, to the former CTSG
shareholders upon the fulfillment of certain milestones. As a result of such vesting, we realized a stock compensation charge of approximately $3.0 million during the year ended December 31, 2005. In the event that the sum of the gross proceeds
from the sale of all shares sold by the former CTSG stockholders prior to March 15, 2006, plus the total value of the unsold shares was less than an aggregate of $1.8 million (such difference, the Pro-Rata Shortfall), then we were
obligated to pay the former CTSG stockholders an amount equal to the Pro-Rata Shortfall. On March 16, 2006, we made cash payments to the shareholders in the aggregate amount of $745,756 which resulted in an incremental expense of $165,000
during the three months ended March 31, 2006.

Product Development and Support Expenses.Product development and support expenses
for the three months ended were $2.9 million or 27% of revenues compared to $4.0 million or 38% of revenues for the comparable period in 2005. The decrease of $1.1 million resulted primarily from a $567,000 in personnel and related costs associated
with a decrease in headcount.

General and Administrative Expenses.General and administrative expenses increased to $6.4 million,
or 60% of revenue for the three months ended March 31, 2006 from $3.3 million or 31% of revenues in 2005. The increase of $3.1 million resulted primarily from an increase of $726,000 in personnel-related expenses attributed to an increase in
headcount as well as increased cash compensation levels, an increase of $558,000 for facilities and communication expenses, an increase of $803,000 relating to other professional fees relating to accounting and Sarbanes-Oxley Act of 2002 compliance
efforts, an increase of $279,000 in depreciation expense and increase in stock-based compensation expense of $286,000. We also recorded an increase of $420,000 related to operating leases of data servers and license expense.

Amortization of purchased intangibles. Amortization of purchased intangibles expense for the three months ended March 31, 2006 and 2005 was
$777,000 and $119,000, respectively.

Stock-Based Compensation Expense

The following table presents details of stock-based compensation expense that is included in each functional line item above:



|                                |  |                             |       |      |   |      
|------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                |  | Three MonthsEnded March 31,
|                                |  | 2006                        |       | 2005
|                                |  | (in thousands)             
|Sales and marketing             |  | $                           | 490   |      | $ | 3,719
|Product development and support |  |                             | 222   |      |   | 126  
|General and administrative      |  |                             | 621   |      |   | 220  
|                                |  |                             |       |      |   |      
|                                |  | $                           | 1,333 |      | $ | 4,065
|                                |  |                             |       |      |   |      

The adoption of SFAS 123R will continue to have a significant adverse impact on our reported
results of operations, although it will have no impact on our overall financial position or cash flow. The amount of unearned stock-based compensation currently estimated to be expensed in the period of 2006 through 2010 related to unvested
share-based payment award at March 31, 2006 is approximately $5.7 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 8.5 years. If



18



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there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining
unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection
with acquisitions.

Liquidity and Capital Resources

We have historically funded our operations principally through sales of equity securities. In December 2003, we completed our initial public offering and received net proceeds of $36.1 million. In July 2004, we sold
2.5 million shares of our common stock in a private placement at a price of $8.00 per share for net proceeds of $18.5 million. In December 2004, we sold 2.5 million shares of our common stock in a private placement at a price of $7.00 per
share for net proceeds of $16.3 million. In December 2005, we sold 4.5 million shares of our common stock in a private placement at a price of $3.00 per share for gross proceeds of $13.5 million. In connection therewith, we issued warrants to
purchase 1.8 million shares of our common stock at an exercise price of $3.50 per share.

Working Capital and Cash and Marketable
Securities. The following table presents working capital and cash and marketable securities.



|                                 |  |                |        |                  |   |            |  |   |         |  
|-------------------------------- |  | -------------- | ------ | ---------------- | - | ---------- |  | - | ------- | -
|                                 |  | March 31,2006  |        | December 31,2005 |   | (Decrease) | 
|                                 |  | (in thousands) |       
|Working capital                  |  | $              | 14,170 |                  | $ | 20,081     |  | $ | (5,911  | )
|                                 |  |                |        |                  |   |            |  |   |         |  
|Cash and cash equivalents        |  | $              | 9,426  |                  | $ | 19,612     |  | $ | (10,186 | )
|Short-term marketable securities |  |                | 18,003 |                  |   | 21,869     |  |   | (3,866  | )
|                                 |  |                |        |                  |   |            |  |   |         |  
|                                 |  | $              | 27,429 |                  | $ | 41,481     |  | $ | (14,052 | )
|                                 |  |                |        |                  |   |            |  |   |         |  

Cash Flows

Operating Activities

Our net cash used in operating activities was $13.6 million for the
three months ended March 31, 2006 compared to $9.6 million for the three months ended March 31, 2005. For the first quarter of 2006 the net loss of $9.2 million included certain non-cash expenses totaling $2.9 million, including a
reduction of $234,000 for bad debt expense, $1.4 million in depreciation and amortization expenses $1.3 million as stock-based compensation expense and $415,000 as impairment of software development costs. In addition, cash used in operating
activities included an increase of $1.6 million in accounts receivable, a decrease of $607,000 in accounts payable and accrued expenses, a decrease of $6.0 million in donations payables, a decrease of $78,000 in accrued employee benefits and $20,000
decrease for deferred rent, offset by an increase of $583,000 in deferred revenue.

Our net cash used in operating activities for the three
month period ended March 31, 2005 was $9.6 million resulting primarily from the $11.7 million loss for the period, a decrease of $1.7 million in accounts payable and accrued expenses, a decrease of $2.0 million in donations payable to customers
offset by an increase of $466,000 million in accounts receivables, a $564,000 million increase in accrued salaries and an increase of $572,000 million for deferred revenue, net of customer deposits.

At March 31, 2006, we had working capital of $14.1 million, compared to working capital of $20.1 million at December 31, 2005. This decrease
was primarily a result of by cash used in operating activities partially offset by the financings described above.

At March 31, 2006,
we had trade accounts receivable of $7.8 million. This compares to $6.0 million in trade accounts receivable at December 31, 2005. The level of trade accounts receivable at March 31, 2006 and 2005 represented approximately 67 and
58 days of revenues, respectively. Terms with individual customers vary greatly. We typically require thirty-day terms from our customers. Our receivables can vary dramatically due to overall sales volumes and due to quarterly variations in
donations processed and timing of implementation of services and receipts from large customers and the timing of contract payments.

Investing Activities

Net cash provided by investing activities was $3.5 million for the three months ended
March 31, 2006. This was primarily the result of the sale of $5.7 million of marketable securities, offset by the purchase of $1.9 million of marketable securities, purchases of $84,000 of property and equipment, additions of $368,000 to
software development costs and $109,000 decrease in other assets.



19



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Net cash provided by investing activities was $4.9 million for the three months ended March 31,
2005. This was primarily the result of the sale of $7.8 million of marketable securities, partially offset by the purchase of marketable securities of $1.5 million, purchases of property and equipment of $0.7 million and acquisition and other costs
of $0.6 million.

Financing Activities

During the three months ended March 31, 2006, net cash used by financing activities was $81,000. This was primarily the result of proceeds from the exercise of stock options and from the issuance of common stock
under our Employee Stock Purchase Plan of $108,000 offset by payments under financing arrangements of $189,000. Net cash provided by financing activities was $192,000 for the three months ended March 31, 2005. This primarily resulted from
exercise of stock options.

We believe that our cash, cash equivalents and short-term investments will be sufficient to meet our planned
working capital requirements and contractual commitments for at least the next 12 months.

If we are unable to increase our revenues and
substantially decrease our expenses, we will need to raise additional funds to finance our future capital needs. We may need additional financing earlier than we anticipate. If we raise additional funds through the sale of equity or convertible debt
securities, these transactions may dilute the value of our outstanding common stock. We may also decide to issue securities, including debt securities, which have rights, preferences and privileges senior to our common stock. We cannot assure you
that we will be able to raise additional funds on terms favorable to us or at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs. This may prevent us from increasing our
market share, capitalizing on new business opportunities or remaining competitive in our industry.

We currently do not believe we have any
variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable securities. Due
to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

As reported in our 2005 Form 10-K, management concluded that as of December 31, 2005, certain deficiencies in our
internal controls related to revenue recognition, our acquisition processes and our financial close processes constituted material weaknesses within the meaning of the Public Company Accounting Oversight Board Auditing Standard
No. 2.

Management believes that the steps implemented during the three months ended March 31, 2006 have been sufficient to
address the internal control deficiency surrounding our acquisition processes, and we concluded that these controls were operating effectively at March 31, 2006. However, management believes that the new internal controls related to revenue
accounting and our financial close process must continue to be improved and operate effectively for a sufficient period of time to validate a conclusion that such controls are effective. As of March 31, 2006, management did believe these
criteria have been satisfied. As a result, management has concluded that, in light of the failure to confirm remediation of the material weakness related to revenue recognition and our financial close process, our disclosure controls and procedures
were not effective as of the end of the fiscal period covered by this report.



20



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Changes in Internal Control over Financial Reporting

Our efforts during the fiscal period covered by this report to remediate the deficiencies in our internal controls include the following:

Revenue Recognition Process



| |  |  | We established and filled a full-time position, Revenue/Billing Manager, within the accounting organization which oversees the manual and systematic processes involved in the
monthly recording of revenue.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We created and implemented revenue recognition templates for each product sold and/or combination of products sold which is utilized by each person in order entry and accounting
that is involved in the revenue recognition process.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continued to work with a nationally recognized consulting firm to assist with the configuration and deployment of an integrated accounting system. We made substantial progress in
implementing a planning and customer relationship management technology solution, which will include order entry, revenue recognition and all related financial modules. Implementation of this technology is expected to occur in the second half of
2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have provided additional training and documentation of our internal pricing policies to our sales, services, and product management personnel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have implemented a new billing and revenue recognition system. As of March 31, 2006, we were experiencing significant performance problems with the cutover to the new system
which created delays in billing.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Acquisition Process

We revised our review process for contingent liabilities associated with acquisitions.

Financial Close Process

We modified of our fixed asset management systems, the related depreciation, amortization and accrued liabilities accounts,
provision process, including the reconciliation of certain income tax payable accounts, and the implementation of additional review procedures over the processing of certain journal entries. In addition, we hired a Vice President of Finance to
assist us in the development and execution of these controls.

Other than the items noted above, we have made no significant changes in the Companys
internal controls over financial reporting during the quarter ended March 31, 2006 that would materially affect, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The information set forth under
Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.



|Item 1A. | Risk Factors
|-------- | ------------

Before deciding to purchase, hold or
sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC,
including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our
business. If any these known or unknown risks or uncertainties actually occur with material adverse effects on Kintera, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our
common stock will likely decline and you may lose all or part of your investment.



21



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Risks Related to Our Business

Because we have a limited operating history, it is difficult to evaluate our prospects.

We
incorporated in February 2000 and first achieved meaningful revenues in 2001. As a result, we will encounter risks and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets. These risks include the
following:



| |  |  | we may not increase our sales to our existing customers and expand our customer base;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | fees related to Kintera Sphere are our principal source of revenues, and we may not successfully introduce new services and enhance existing services of Kintera Sphere;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not successfully expand our sales and marketing efforts;
| | - |  | ---------------------------------------------------------------



| |  |  | we may not attract and retain key sales, technical and management personnel; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | we may not effectively manage our anticipated growth.
| | - |  | -----------------------------------------------------

In
addition, because of our limited operating history and the early stage of the market for online fundraising solutions, we have limited insight into trends that may emerge and affect our business.

We have a history of losses, and we may not achieve or maintain profitability.

We have experienced operating and net losses in each fiscal quarter since our inception, and as of March 31, 2006, we had an accumulated deficit of
$104.0 million. We incurred net losses of $9.3 million for the three months ended March 31, 2006 and $11.7 million for the three months ended March 31, 2005. We will need to increase revenues and reduce operating expenses to achieve
profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. We may also fail to accurately estimate our increased
operating expenses as we grow. If our operating expenses exceed our expectations, our financial performance will be adversely affected. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.

Our operating results have fluctuated and may fluctuate significantly, and these fluctuations may cause our stock price to fall.

Our operating results have varied significantly in the past and will likely vary in the future as the result of fluctuations in
our revenues and operating expenses. For example, our revenues increased to $10.7 million for the three months ended March 31, 2006, from $9.3 million for the three months ended March 31, 2005 and our net loss decreased to $9.3 million for
the three months ended March 31, 2006, from $11.7 million for the three months ended March 31, 2005. Although we have reviewed and implemented plans to help reduce our overall operating expenses and will continue to do so, operating
expenses may increase in the future as we expand and hire additional personnel. Our revenues in any period depend substantially on monthly service fees, on the number and size of donations that we process in that period for customer sponsored
fundraising events and on the sale and licensing of our software products. In addition, the number and size of transactions we process tends to be seasonal, with the first calendar quarter representing the seasonal low for non-profit fundraising. As
a result, it is possible that in some future periods, our revenues may not meet our expectations or, due to our increased expense levels, our results of operations may be below the expectations of current or potential investors. If this occurs, the
price of our common stock may decline.

Recent acquisitions and potential future acquisitions could prove difficult to integrate,
disrupt our business, dilute stockholder value and strain our resources, which could prevent us from properly servicing and maintaining customer relationships.

Acquisitions have been an important part of our development to date. During 2004, we completed acquisitions of several complementary businesses including Prospect Information Network, Carol/Trevelyan Strategy Group,
BNW, Inc., KindMark, Inc., Kamtech, Inc., Giving Capital, Inc. and American Fundware, Inc. In 2005, we completed the acquisition of Gold Box, Inc. As part of our business strategy, we may acquire companies, services and technologies that we feel
could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with important customer contacts or otherwise offer growth opportunities. Acquisitions and investments involve numerous risks,
including:



| |  |  | difficulties in integrating operations, technologies, services, accounting and personnel;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | difficulties in supporting and transitioning customers of our acquired companies;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | diversion of financial and management resources from existing operations;
| | - |  | -------------------------------------------------------------------------



| |  |  | risks of entering new sectors of the nonprofit industry;
| | - |  | --------------------------------------------------------



| |  |  | potential loss of key employees; and
| | - |  | ------------------------------------



| |  |  | inability to generate sufficient revenues to offset acquisition or investment costs.
| | - |  | ------------------------------------------------------------------------------------



22



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Acquisitions also frequently result in recording of goodwill and other intangible assets which are
subject to potential impairments in the future that could harm our operating results. We may issue common stock that would dilute our current stockholders ownership and incur debt and other costs in connection with future acquisitions which
may cause our quarterly operating results to vary significantly. As a result, if we fail to properly evaluate and execute acquisitions or investments, we may not achieve the anticipated benefits of any such acquisition, and we may incur costs in
excess of what we anticipate.

If we are not able to manage our growth effectively, we may not become profitable.

Since commencing operations in 2000, we have experienced significant growth, and we anticipate that expansion will continue to be required to address
potential market opportunities. There can be no assurance that our infrastructure will be sufficiently scalable to manage our experienced growth and any future projected growth. For example, our anticipated growth will result in a significant
increase in the volume of transactions handled by our payment processing system. If we are unable to sufficiently enhance and improve this system to handle this increased volume, our profitability and growth may suffer. In addition, to execute our
anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively. There also can be no assurance that if we continue to expand our operations, management will be effective in expanding our
physical facilities or that our systems, procedures or controls will be adequate to support such expansion. Our inability to manage our growth may harm our business.

Nonprofit organizations have not traditionally used the Internet or online software solutions, and they may not adopt our solution.

The market for online fundraising solutions for nonprofit organizations is new and emerging. Nonprofit organizations have not traditionally used the
Internet or online software solutions for fundraising. We cannot be certain that the market will continue to develop and grow or that nonprofit organizations will elect to adopt our solution rather than continuing to use traditional offline methods,
attempting to develop software solutions internally or utilizing standardized software solutions without integrating them. Nonprofit organizations that have already invested substantial resources in other fundraising methods may be reluctant to
adopt a new approach like ours to supplement or replace their existing systems or methods. In addition, increasing concerns about fraud, privacy, reliability and other problems may cause nonprofit organizations not to adopt the Internet as a method
for fundraising. We expect that we will continue to need to pursue intensive marketing and sales efforts to educate prospective nonprofit organization customers about the uses and benefits of our solution. If demand for and market acceptance of our
solution does not occur, we may not grow our business as we expect.

If our efforts to increase awareness of Kintera Sphere and
expand sales to other sectors of the nonprofit industry do not succeed, our revenue may not increase as we expect.

We have
primarily sold our Kintera Sphere solution to nonprofit organizations in the health and human services, religion and education sectors, in part because they rely on special events for fundraising. Based on our experience, we believe that many
nonprofit organizations in all nonprofit sectors are still unaware of the benefits that can be achieved through the use of Kintera Sphere. We intend to commit significant resources to promote awareness of Kintera Sphere, but we cannot assure you
that we will be successful in this effort. Developing and maintaining awareness of Kintera Sphere is important to our success. If we fail to successfully promote Kintera Sphere, our financial condition could suffer. We have also begun, and intend to
continue, to market Kintera Sphere to nonprofit organizations in additional nonprofit sectors. Organizations in these other sectors may not rely on special events or be as willing to purchase our solutions as health and human services nonprofit
organizations. If we are unable to increase awareness of Kintera Sphere and expand sales to other sectors of the nonprofit industry, our revenue may not increase as we expect.

Any failure to manage and accurately account for the large amounts of donations we process could diminish the use of Kintera Sphere, which may
prevent or delay our becoming profitable.

Our ability to manage and account accurately for the online donations we process
requires a high level of internal controls. We have a limited operating history of maintaining these internal controls. As our business continues to grow, we must monitor our internal controls to ensure they are effective. Our success requires
significant customer and donor confidence in our ability to handle large and growing donation volumes and amounts. Any failure to maintain necessary controls or to accurately manage online donations could severely diminish nonprofit
organizations and donors use of Kintera Sphere.

We may experience customer dissatisfaction and lose sales if our
solution does not scale to accommodate a high volume of traffic and transactions.

We seek to generate a high volume of traffic and
transactions on the websites we host for our customers. A portion of our revenues depends on the number of donations raised by our customers using Kintera Sphere. Accordingly, the satisfactory performance, reliability and availability of our
solution, including its processing systems and network infrastructure, are critical to our reputation and our ability to attract and retain new customers. Any system interruptions that



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result in the unavailability of our solution or reduced donor activity would reduce the volume of donations and may also diminish the attractiveness of our
solution to our customers. Furthermore, our inability to add software and hardware or to develop and further upgrade our existing technology, payment processing systems or network infrastructure to accommodate increased traffic or increased
transaction volume may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality of the users experience, and delays in reporting accurate financial information. There can be no
assurance that we will be able to effectively upgrade and expand our systems or to integrate smoothly any new technologies with our existing systems. Any inability to do so would have an adverse effect on our ability to maintain customer
relationships and grow our business.

Our products may contain defects, which may result in liability and/or decreased sales.

Software products frequently contain errors or failures, especially when first introduced or when new versions are released.
Despite our best efforts to test our products, we might experience significant errors or failures in our products, or they might not work with other hardware or software as expected, which could delay the development or release of new products or
new versions of our products and adversely affect market acceptance of our products. We might not discover software errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements
to correct such errors. These errors could result in:



| |  |  | harm to our reputation;
| | - |  | -----------------------



| |  |  | lost sales;
| | - |  | -----------



| |  |  | delays in commercial release;
| | - |  | -----------------------------



| |  |  | product liability claims;
| | - |  | -------------------------



| |  |  | delays in or loss of market acceptance of our products; and
| | - |  | -----------------------------------------------------------



| |  |  | unexpected expenses and diversion of resources to remedy errors.
| | - |  | ----------------------------------------------------------------

We may not be able to develop new enhancements to or support services for Kintera Sphere at a rate required to achieve customer acceptance in our rapidly changing market.

Although Kintera Sphere is designed to operate with a variety of network hardware and software platforms, we will need to continuously modify and enhance
Kintera Sphere to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. Our future success depends on our ability to develop new enhancements to or support services for Kintera Sphere that
keep pace with rapid technological developments and that address the changing needs of our nonprofit customers. We may not be successful in either developing such services or introducing them to the market in a timely manner. In addition,
uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our development expenses. Any failure of our services to operate effectively with the existing
and future network platforms and technologies could limit or reduce the market for our services, result in customer dissatisfaction or cause our revenue growth to suffer.

If we are unable to detect and prevent unauthorized use of credit cards and bank account numbers and safeguard confidential donor data, our reputation may be harmed and customers may be reluctant to use our
service.

We rely on encryption and authentication technology to provide secure transmission of confidential information, including
customer credit card and bank account numbers, and protect confidential donor data. Identity thieves and criminals using stolen credit card or bank account numbers could still potentially circumvent our anti-fraud systems. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology we use to protect sensitive transaction data. If any such compromise of our security were to occur, it
could result in misappropriation of our proprietary information or interruptions in our operations and have an adverse impact on our reputation. We may have to spend significant money and time protecting against such security breaches or alleviating
problems caused by such breaches. If we are unable to detect and prevent unauthorized use of credit cards and bank account numbers or protect confidential donor data, our business may suffer.

If we were found subject to or in violation of any laws or regulations governing privacy or electronic fund transfers, we could be subject to
liability or forced to change our business practices.

It is possible that the payment processing component of Kintera Sphere and
certain services we provide are subject to various governmental regulations. In addition, we may be subject to the privacy provisions of the Gramm-Leach-Bliley Act and related regulations. Pending and enacted legislation at the state and federal
levels, including those related to fundraising activities, may also restrict further our information gathering and disclosure practices, for example, by requiring us to comply with extensive and costly registration, reporting or disclosure
requirements. Existing and potential future privacy laws may limit our ability to develop new products and services that make use of data gathered through our service. The provisions of these laws and related regulations are complicated, and we do
not have extensive experience with these



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laws and related regulations. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. Given the
high volumes of transactions we process, if we were found to be subject to and in violation of any of these laws or regulations, our business would suffer and we would likely have to change our business practices. In addition, these laws and
regulations could impose significant compliance costs on us and make it more difficult for donors to make online donations.

System
failure could harm our reputation and reduce the use of Kintera Sphere by nonprofit organizations, which could cause our revenues and operating results to decline.

If nonprofit organizations believe Kintera Sphere to be unreliable, they will be unlikely to use Kintera Sphere which will harm our revenue and profits.
Our systems and operations are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, electronic virus or worm attacks and similar events. They also could be subject to break-ins, sabotage and
intentional acts of vandalism. Our business interruption insurance may not be sufficient to compensate us for losses that may occur. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our
facilities could result in interruptions in our services. Interruptions in our service could harm our reputation and reduce our revenues and profits.

Sales cycles to major customers can be long, which makes it difficult to forecast our results.

It typically takes us between three and nine months to complete a sale to a major customer account, but it can take us up to one year or longer. It is therefore difficult to predict the quarter in which a particular sale will occur and to
forecast our sales. The period between our initial contact with a potential customer and its purchase of Kintera Sphere is relatively long due to several factors, including:



| |  |  | our need to educate potential customers about the uses and benefits of Kintera Sphere;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our customers have budget cycles which affect the timing of purchases; and
| | - |  | --------------------------------------------------------------------------



| |  |  | many of our customers have lengthy internal approval processes before purchasing our services.
| | - |  | ----------------------------------------------------------------------------------------------

Any delay or failure to complete sales in a particular quarter could reduce our revenues in that quarter, as well as subsequent quarters over which
revenues for the sale may be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenues.

Because we recognize revenue from upfront payments ratably over the term of the contract, downturns in sales may not be immediately reflected in
our revenues.

We have derived the substantial majority of our historical revenues from fees paid by nonprofit organizations
related to their use of Kintera Sphere, and we anticipate that Kintera Sphere will account for an increasing portion of our revenues in future periods. The fees we receive for Kintera Sphere include upfront fees that nonprofit organizations pay for
the right to access to Kintera Sphere. We recognize revenue from the upfront service fees over the term of the contract, which is typically one year or more. As a result, a portion of our revenues in each quarter is deferred revenue from contracts
entered into and paid for during previous quarters. Because of this deferred revenue, the revenues we report in any quarter or series of quarters may mask significant downturns in sales and the market acceptance of Kintera Sphere.

Our ability to generate increased revenues depends in part on the efforts of our strategic partners, over whom we have little control.

Our ability to generate increased revenues depends in part upon the ability and willingness of our strategic partners to increase
awareness of our solution to their customers. We cannot control the level of effort these partners expend or the extent to which any of them will be successful in increasing awareness of our solution. We may not be able to prevent these parties from
devoting greater resources to support services developed by them or other third parties. If our strategic partners fail to increase awareness of our solution or to assist us in getting access to decision-makers, then we may need to increase our
marketing expenses, change our marketing strategy or enter into marketing relationships with different parties, any of which could impair our ability to generate increased revenues.

We are dependent on our management team, and the loss of any key member of this team may prevent us from achieving our business plan in a timely
manner.

Our success depends largely upon the continued services of our executive officers and other key personnel. In particular,
we rely on Harry E. Gruber, M.D., our President, Chief Executive Officer and Chairman. We do not have employment agreements with our executive officers and, therefore, they could terminate their employment with us at any time without penalty. We do
not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees could seriously harm our business, results of operations and financial condition. We cannot assure you that in such an event we
would be able to recruit personnel to replace these individuals in a timely manner, or at all, on acceptable terms.



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In the past year we have hired several new members of our senior management and have experienced a high
rate of employee turnover at all levels. Our newly-hired employees have not worked with our senior management team and finance personnel for a significant length of time, and we cannot assure you that these management transitions will not result in
some disruption of our business. If our new senior management team and finance department are unable to work together effectively to implement our strategies, manage our operations and accomplish our objectives, our business, operations and
financial results could be severely impaired.

Because competition for highly qualified sales and software development personnel is
intense, we may not be able to attract and retain the employees we need to support our planned growth.

To execute our growth plan,
we have significantly increased the size of our sales force and software development staff. To successfully meet our objectives, we must continue to attract and retain highly qualified sales and software development personnel with specialized skill
sets focused on the nonprofit industry. Competition for qualified sales and software development personnel can be intense, and we cannot assure you that we will be successful in retaining current employees or attracting and retaining new ones. The
pool of qualified personnel with experience working with or selling to nonprofit organizations is limited. Our ability to expand our sales team will depend on our ability to recruit, train and retain top quality people with advanced skills who
understand sales to nonprofit organizations. Because the sale of online fund raising solutions is still relatively new, there is a shortage of sales personnel with the experience we need. We have from time to time in the past experienced, and we
expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition, it takes time for our new sales personnel to become productive, particularly
with respect to obtaining major customer accounts. In many cases, newly hired sales personnel are unable to develop their skills rapidly enough, which results in a relatively high turnover rate and a corresponding increased need to make continual
new hires. If we are unable to hire or retain qualified sales and software development personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to
sell our solution, and we may experience a shortfall in revenues and not achieve our planned growth.

Our failure to compete
successfully against current or future competitors could cause our revenues or market share to decline.

Our market is fragmented,
competitive and rapidly evolving, and there are limited barriers to entry for some aspects of this market. We mainly face competition from four sources:



| |  |  | traditional fundraising methods;
| | - |  | --------------------------------



| |  |  | custom developed solutions created by technical staff or outside custom service providers;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | companies that offer specialized software designed to address needs of businesses across a variety of industries; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | companies that offer integrated software solutions designed to address the needs of nonprofit organizations.
| | - |  | ------------------------------------------------------------------------------------------------------------

In the past, we have competed with these companies by focusing on and committing significant resources to promote awareness of Kintera Sphere to
nonprofit organizations in the health and human services sector, and by developing features to better meet the needs of our customers. However, the companies we compete with may have greater financial, technical and marketing resources, generate
greater revenues and better name recognition than we do. These competitive pressures could cause our revenues and market share to decline.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and establish our Kintera Sphere brand.

Our success and ability to compete depend in part on our internally developed technology and software applications. We rely on patent, trademark,
copyright and trade secret laws and restrictions in the United States and other jurisdictions, together with contractual restrictions on our employees, strategic partners and customers, to protect our proprietary rights. Any of our trademarks may be
challenged by others or invalidated through administrative process or litigation. As of March 31, 2006, we have three issued patents and 19 pending patent applications in the United States. We may not be successful in obtaining these patents
and we may be unable to obtain additional patent protection in the future. In addition, any issued patents may not provide us with any competitive advantages, or may be challenged by third parties. Furthermore, legal standards relating to the
validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our solution is available. As a
result, we cannot assure you that our means of protecting our proprietary rights will be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Any
such infringement or misappropriation could have a material adverse effect on our revenues and prospects for growth.



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Litigation may harm our business or otherwise distract our management.

Substantial, complete or extended litigation could cause us to incur large expenditures and distract our management. For example, lawsuits by employees,
stockholders or customers could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure you that we will always be able to resolve such disputes on
terms favorable to us.

Risks Related to the Securities Markets and Ownership of Our Common Stock

Our common stock price may fluctuate substantially, and your investment could suffer a decline in value.

The market price of our common stock may be volatile and could fluctuate substantially due to many factors, including:



| |  |  | actual or anticipated fluctuations in our results of operations;
| | - |  | ----------------------------------------------------------------



| |  |  | the introduction of new products or services, or product or service enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | developments with respect to our or our competitors intellectual property rights;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | announcements of significant acquisitions or other agreements by us or our competitors;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our sale of common stock or other securities in the future;
| | - |  | -----------------------------------------------------------



| |  |  | the trading volume of our common stock;
| | - |  | ---------------------------------------



| |  |  | conditions and trends in the nonprofit industry;
| | - |  | ------------------------------------------------



| |  |  | changes in our pricing policies or the pricing policies of our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in the estimation of the future size and growth of our markets; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | general economic conditions and other factors unrelated to our operating performance or the operating performance of our competitors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

In addition, the stock market in general, the Nasdaq National Market, and the market for shares of technology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities and technology companies have been particularly volatile. These broad
market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a companys securities, shareholder derivative
lawsuits securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of managements attention and resources.

Our publicly-filed reports are reviewed from time to time by the SEC and any significant changes or amendments required as a result of any such
review may result in material liability to us and may have a material adverse impact on the trading price of our common stock.

The
reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements, and the SEC is required to undertake a comprehensive review of a
companys reports at least once every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply,
in all material respects with the published rules and regulations of the SEC, we could be required to modify, amend or reformulate information contained in prior filings as a result of an SEC review. Any modification, amendment or reformulation of
information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result,
current and potential stockholders could lose confidence in our financial reporting, which would harm our business.

As described
in Item 4 of this Report, we identified several material weaknesses in our control over financial reporting in connection with the audit of our financial statements for the year ended December 31, 2005. Management believes that the new
internal controls related to revenue accounting and our financial close process must continue to be improved and operate effectively for a sufficient period of time to validate a conclusion that such controls are effective. As a result, management
has concluded that our disclosure controls and procedures were not effective as of March 31, 2006. We have implemented, and continue to implement, actions to address these weaknesses and to enhance the reliability and effectiveness of our
internal controls and operations; however, we cannot assure you that the measures we have taken to date or any future measures will remediate the material weaknesses discussed in this Report.

In addition, from time to time we acquire businesses which could have limited infrastructure and systems of internal controls. Performing assessments of
internal controls, implementing necessary changes, and maintaining an effective internal



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controls process is costly and requires considerable management attention, particularly in the case of newly acquired entities. Internal control systems are
designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Because of these
and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

We also cannot assure you that we will implement and maintain adequate controls over our financial processes and reporting in the future or that
additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. Any failure to remediate any future material weaknesses or implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements or other public disclosures. Inferior internal controls could
also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Because of their significant stock ownership, some of our existing stockholders will be able to exert control over us and our significant corporate decisions.

Our executive officers, directors and their affiliates own, in the aggregate, approximately 31.2% of our outstanding common stock. As a result, these
persons, acting together, have the ability to exercise significant influence the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any significant transaction involving us. In
addition, these persons, acting together, have the ability to control our management and affairs. This concentration of ownership may harm the market price of our common stock by, among other things:



| |  |  | delaying, deferring, or preventing a change in control of our company;
| | - |  | ----------------------------------------------------------------------



| |  |  | impeding a merger, consolidation, takeover, or other business combination involving our company;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

Our future capital needs are uncertain, and we may need to raise additional funds in the future which may not be available on acceptable terms or
at all.

Our capital requirements will depend on many factors, including:



| |  |  | acceptance of, and demand for, Kintera Sphere and our other product and service offerings;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the costs of developing new products, services or technology;
| | - |  | -------------------------------------------------------------



| |  |  | the extent to which we invest in new technology and product development;
| | - |  | ------------------------------------------------------------------------



| |  |  | the number and timing of acquisitions and other strategic transactions; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the costs associated with the growth of our business, if any.
| | - |  | -------------------------------------------------------------

Our existing sources of cash and cash flows may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity
or convertible debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those or our existing stockholders. If we incur
additional debt, it may increase our leverage relative to our earnings or to our equity capitalization. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and services, execute our business plan, take
advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

Anti-takeover
provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

Our certificate of incorporation, as amended, and our bylaws, as amended, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders
might consider favorable, including provisions authorizing the board of directors to issue preferred stock, prohibiting stockholder action by written consent and requiring advance notice for nominations for election to our board of directors or for
proposing matters to be acted upon by stockholders at meetings of our stockholders. In addition, our certificate of incorporation, as amended, and bylaws, as amended, also provide that our board of directors is classified into three classes of
directors, with each class elected at a separate election. The existence of a staggered board could delay a potential acquiror from obtaining majority control of our board, and thus deter potential acquisitions that might otherwise provide our
stockholders with a premium over the then current market price for their shares.



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In addition, on January 25, 2006, we adopted a stockholder rights plan (Rights Plan).
Pursuant to the Rights Plan, our board of directors declared a dividend distribution of one preferred share purchase right (Right) on each outstanding share of our common stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a newly created Series A Preferred Stock at a purchase price of $50.00, subject to adjustment, in the event the Right becomes exercisable. Subject to limited exceptions, the Rights will become exercisable if a person or
group acquires more than 15% or more of our common stock or announces a tender offer for 15% or more of our common stock. If we are acquired in a merger or other business combination transaction which has not been approved by our board of directors,
each Right will entitle its holder to purchase, at the Rights then-current purchase price, a number of the acquiring companys common shares having a market value at the time of twice the Rights exercise price. The Rights Plan may
discourage certain types of transactions involving an actual or potential change in control and may limit our stockholders ability to approve transactions that they deem to be in their best interests. As a result, these provisions may depress
our stock price.

We are also governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit
certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, as amended, and our bylaws, as amended, and Delaware law could make it more difficult
for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest or other change
of control transaction involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of a transaction in which our stockholders could receive a premium over the
then current market price for their shares.

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options,
could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies,
including policies governing revenue recognition, expenses, accounting for stock options and in-process research and development costs are subject to further review, interpretation and guidance from relevant accounting authorities, including the
Securities and Exchange Commission. Changes to, or interpretations of, accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements, including those contained in this
report.

For example, effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123(R), which requires us to treat the fair value of stock options granted to employees as an expense.
Prior to January 1, 2006, we were generally not required to record compensation expense in connection with stock option grants to employees, and we have relied heavily on stock options to motivate existing employees and attract new employees. The
change had a significant impact on our results of operations for the three months ended March 31, 2006. The specific impact of the new standard in future periods, however, cannot be predicted at this time because it will depend on levels of stock
options or other share-based payments granted and the possible variability in the valuation assumptions used in the future. The requirement to expense the fair value of stock option grants may reduce the attractiveness of granting stock options. If
we reduce our use of stock options, it may be more difficult for us to attract and retain qualified employees.

Any other subsequent
changes in the accounting rules applicable to us may also have an adverse effect on our results of operations.



|Item 6. | Exhibits
|------- | --------

(a) Exhibits



|              |  |                                                                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                             
|              | 
|2.4 (1)       |  | Agreement and Plan of Merger and Reorganization by and among the Registrant, Sunday Acquisition Corporation, Carol/Trevelyan Strategy Group, Inc. and Dan Carol, Stryder Thompkins, Greg
Nelson and Stuart Trevelyan
|              | 
|3.2 (2)       |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                                                                                 
|              | 
|3.4 (2)       |  | Amended and Restated Bylaws of the Registrant                                                                                                                                                                       
|              | 
|3.5 (3)       |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Preferred Stock of Kintera, Inc.                                                                                                       



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---

|              |  |                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                               
|              | 
|4.1 (4)       |  | Specimen Common Stock Certificate                                                                     
|              | 
|4.2 (3)       |  | Rights Agreement, dated as of January 25, 2006, between the Registration and U.S. Stock Transfer Corp.
|              | 
|10.1          |  | Employment offer letter by and between the Registrant and Richard LaBarbara, dated February 13, 2006. 
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    

---

|(1) | Filed on Current Report on Form 8-K/A on November 3, 2005.
|--- | ----------------------------------------------------------



|(2) | Filed with Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-109169) dated November 4, 2003.
|--- | --------------------------------------------------------------------------------------------------------------



|(3) | Filed on Current Report on Form 8-K on January 25, 2006.
|--- | --------------------------------------------------------



|(4) | Filed with Amendment No. 4 to Registration Statement on Form S-1 (File No. 333-109169) dated December 10, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------



30



---

SIGNATURE

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



KINTERA, INC.By:

/s/ RICHARD DAVIDSONRichard DavidsonChief Financial Officer


Date: May 12, 2006



31