##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

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 SEPTEMBER 30, 2007



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

Commission file number 000-50507



---

KINTERA, INC.

(Exact name of
Registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-2947183                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|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 ̈Non-accelerated filer  x

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
October 31, 2007 there were 40,333,993 shares of the registrants common stock outstanding.



---



---

##### Table of Contents

KINTERA, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

INDEX



|                              |  |                                                                                                                             |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                                            
|                              |  |                                                                                                                            
|Item 1.                       |  | Financial Statements                                                                                                        |  |   
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006                               |  | 3 
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited) |  | 4 
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)           |  | 5 
|                              |  |                                                                                                                            
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                            |  | 6 
|                              |  |                                                                                                                            
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 13
|                              |  |                                                                                                                            
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 21
|                              |  |                                                                                                                            
|Item 4.                       |  | Controls and Procedures                                                                                                     |  | 21
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                            
|                              |  |                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                           |  | 22
|                              |  |                                                                                                                            
|Item 1A.                      |  | Risk Factors                                                                                                                |  | 22
|                              |  |                                                                                                                            
|Item 4.                       |  | Submission of Matters to Vote of Security Holders                                                                           |  | 30
|                              |  |                                                                                                                            
|Item 5.                       |  | Other Information                                                                                                           |  | 31
|                              |  |                                                                                                                            
|Item 6.                       |  | Exhibits                                                                                                                    |  | 31
|                              |  |                                                                                                                            
|                              |  | Signature                                                                                                                   |  | 32
|                              |  |                                                                                                                            
|                              |  | Exhibit 10.1                                                                                                                |  |   
|                              |  |                                                                                                                            
|                              |  | Exhibit 31.1                                                                                                                |  |   
|                              |  |                                                                                                                            
|                              |  | Exhibit 31.2                                                                                                                |  |   
|                              |  |                                                                                                                            
|                              |  | Exhibit 32.1                                                                                                                |  |   
|                              |  |                                                                                                                            
|                              |  | Exhibit 32.2                                                                                                                |  |   



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



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

KINTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                               |  | September 30, 2007 |          |   | December 31, 2006 |  
|Assets                                                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                      |  | $                  | 3,242    |   |                   | $ | 11,548   |  
|Marketable securities                                                                                                                                                          |  |                    | 8,509    |   |                   |   | 7,384    |  
|Restricted cash                                                                                                                                                                |  |                    | 11,776   |   |                   |   | 15,381   |  
|Accounts receivable, net of allowance for doubtful accounts of $392 and $915 at September 30, 2007 and December 31,
2006                                                       |  |                    | 5,025    |   |                   |   | 6,346    |  
|Prepaid expenses and other current assets                                                                                                                                      |  |                    | 1,115    |   |                   |   | 709      |  
|Deferred costs                                                                                                                                                                 |  |                    | 845      |   |                   |   | 581      |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                           |  |                    | 30,512   |   |                   |   | 41,949   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Property and equipment, net                                                                                                                                                    |  |                    | 1,603    |   |                   |   | 1,818    |  
|Software development costs, net                                                                                                                                                |  |                    | 1,793    |   |                   |   | 1,703    |  
|Other assets                                                                                                                                                                   |  |                    | 60       |   |                   |   | 83       |  
|Intangible assets, net                                                                                                                                                         |  |                    | 4,487    |   |                   |   | 7,651    |  
|Goodwill                                                                                                                                                                       |  |                    | 12,017   |   |                   |   | 12,017   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total assets                                                                                                                                                                   |  | $                  | 50,472   |   |                   | $ | 65,221   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Liabilities and stockholders equity                                                                                                                                           |  |                    |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                           |  |                    |          |   |                   |   |          |  
|Accounts payable, trade                                                                                                                                                        |  | $                  | 2,386    |   |                   | $ | 2,349    |  
|Accrued expenses                                                                                                                                                               |  |                    | 1,158    |   |                   |   | 1,390    |  
|Accrued employee benefits and severance                                                                                                                                        |  |                    | 2,247    |   |                   |   | 2,242    |  
|Donations payable                                                                                                                                                              |  |                    | 11,776   |   |                   |   | 15,381   |  
|Short-term notes payable and current portion of capital lease obligation                                                                                                       |  |                    | 252      |   |                   |   |         |  
|Deferred revenue                                                                                                                                                               |  |                    | 15,637   |   |                   |   | 17,748   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                      |  |                    | 33,456   |   |                   |   | 39,110   |  
|Deferred rent and other                                                                                                                                                        |  |                    | 782      |   |                   |   | 509      |  
|Deferred tax liability                                                                                                                                                         |  |                    | 319      |   |                   |   |         |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                              |  |                    | 34,557   |   |                   |   | 39,619   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Commitments and Contingencies                                                                                                                                                  |  |                    |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                                          |  |                    |          |   |                   |   |          |  
|Preferred stock, $0.001 par value; 20,000 shares authorized, no shares outstanding at September 30, 2007 and December 31,
2006                                                 |  |                    |         |   |                   |   |         |  
|Common stock, $0.001 par value, authorized 60,000 shares authorized, 40,257 and 40,098 shares issued and outstanding at September 30,
2007 and December 31, 2006, respectively |  |                    | 40       |   |                   |   | 40       |  
|Additional paid-in capital                                                                                                                                                     |  |                    | 156,702  |   |                   |   | 153,642  |  
|Accumulated other comprehensive (loss) income                                                                                                                                  |  |                    | (3       | ) |                   |   | 12       |  
|Accumulated deficit                                                                                                                                                            |  |                    | (140,824 | ) |                   |   | (128,092 | )
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                     |  |                    | 15,915   |   |                   |   | 25,602   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $                  | 50,472   |   |                   | $ | 65,221   |  
|                                                                                                                                                                               |  |                    |          |   |                   |   |          |  

See accompanying notes to unaudited condensed consolidated financial statements.



3



---

##### Table of Contents

KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                           |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                           |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Net revenue                                |  | $                               | 11,937 |   |                                | $ | 10,094 |      |  | $ | 35,451  |   |  | $ | 31,389  |  
|Cost of revenue                            |  |                                 | 3,745  |   |                                |   | 4,653  |      |  |   | 12,217  |   |  |   | 14,216  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                               |  |                                 | 8,192  |   |                                |   | 5,441  |      |  |   | 23,234  |   |  |   | 17,173  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Sales and marketing                        |  |                                 | 4,191  |   |                                |   | 6,195  |      |  |   | 15,315  |   |  |   | 20,080  |  
|Product development and support            |  |                                 | 1,698  |   |                                |   | 2,245  |      |  |   | 4,949   |   |  |   | 7,470   |  
|General and administrative                 |  |                                 | 3,548  |   |                                |   | 4,625  |      |  |   | 11,990  |   |  |   | 14,388  |  
|Amortization of purchased intangibles      |  |                                 | 572    |   |                                |   | 736    |      |  |   | 1,878   |   |  |   | 2,259   |  
|Restructuring charges                      |  |                                 |       |   |                                |   |       |      |  |   | 2,283   |   |  |   |        |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                   |  |                                 | 10,009 |   |                                |   | 13,801 |      |  |   | 36,415  |   |  |   | 44,197  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating loss                             |  |                                 | (1,817 | ) |                                |   | (8,360 | )    |  |   | (13,181 | ) |  |   | (27,024 | )
|Interest income and other, net             |  |                                 | 260    |   |                                |   | 213    |      |  |   | 786     |   |  |   | 704     |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                   |  |                                 | (1,557 | ) |                                |   | (8,147 | )    |  |   | (12,395 | ) |  |   | (26,320 | )
|Provision for income taxes                 |  |                                 | 104    |   |                                |   | 74     |      |  |   | 337     |   |  |   | 110     |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                   |  | $                               | (1,661 | ) |                                | $ | (8,221 | )    |  | $ | (12,732 | ) |  | $ | (26,430 | )
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss per common share - basic and diluted  |  | $                               | (0.04  | ) |                                | $ | (0.23  | )    |  | $ | (0.32   | ) |  | $ | (0.75   | )
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding |  |                                 | 39,996 |   |                                |   | 35,615 |      |  |   | 39,906  |   |  |   | 35,617  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



4



---

##### Table of Contents

KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                      |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine Months endedSeptember 30, |        
|                                                                                      |  | 2007                           |         |   | 2006 |  
|OPERATING ACTIVITIES                                                                  |  |                                |         |   |      |   |         |  
|Net loss                                                                              |  | $                              | (12,732 | ) |      | $ | (26,430 | )
|Adjustments to reconcile loss to net cash used in operating activities:               |  |                                |         |   |      |   |         |  
|Bad debt expense                                                                      |  |                                | (405    | ) |      |   | (185    | )
|Depreciation                                                                          |  |                                | 1,019   |   |      |   | 1,509   |  
|Amortization of software development costs                                            |  |                                | 792     |   |      |   | 722     |  
|Amortization of intangible assets                                                     |  |                                | 1,878   |   |      |   | 2,259   |  
|Amortization of premium (accretion of discount) on securities                         |  |                                | (22     | ) |      |   | 27      |  
|Forgiveness of employee notes                                                         |  |                                | 11      |   |      |   | 72      |  
|Deferred income taxes                                                                 |  |                                | 319     |   |      |   |        |  
|Non-cash restructuring charges                                                        |  |                                | 1,116   |   |      |   |        |  
|Impairment of software development costs                                              |  |                                | 18      |   |      |   | 439     |  
|Stock-based compensation                                                              |  |                                | 2,809   |   |      |   | 3,599   |  
|Loss on disposal of property and equipment                                            |  |                                | 154     |   |      |   | 19      |  
|Changes in assets and liabilities:                                                    |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                   |  |                                | 1,700   |   |      |   | (1,647  | )
|Prepaid expenses and other current assets                                             |  |                                | 89      |   |      |   | 883     |  
|Deferred costs                                                                        |  |                                | (264    | ) |      |   | (396    | )
|Accounts payable and accrued expenses                                                 |  |                                | (195    | ) |      |   | (1,313  | )
|Accrued employee benefits and severance                                               |  |                                | 5       |   |      |   | 123     |  
|Donations payable to customers                                                        |  |                                | (3,605  | ) |      |   | (3,225  | )
|Restricted cash                                                                       |  |                                | 3,605   |   |      |   | 3,225   |  
|Deferred revenue                                                                      |  |                                | (1,858  | ) |      |   | 4,649   |  
|Deferred rent                                                                         |  |                                | 105     |   |      |   | (52     | )
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash used in operating activities                                                     |  |                                | (5,461  | ) |      |   | (15,722 | )
|                                                                                      |  |                                |         |   |      |   |         |  
|INVESTING ACTIVITIES                                                                  |  |                                |         |   |      |   |         |  
|Purchases of marketable securities                                                    |  |                                | (9,316  | ) |      |   | (4,995  | )
|Sales and maturities of marketable securities                                         |  |                                | 8,198   |   |      |   | 17,499  |  
|Purchases of property and equipment                                                   |  |                                | (680    | ) |      |   | (214    | )
|Additions to software development costs                                               |  |                                | (903    | ) |      |   | (701    | )
|Other assets                                                                          |  |                                | 23      |   |      |   | 159     |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash (used in) provided by investing activities                                       |  |                                | (2,678  | ) |      |   | 11,748  |  
|                                                                                      |  |                                |         |   |      |   |         |  
|FINANCING ACTIVITIES                                                                  |  |                                |         |   |      |   |         |  
|Payments under financing arrangement and capital lease                                |  |                                | (418    | ) |      |   | (580    | )
|Proceeds from issuance of common stock under employee stock option and purchase plans |  |                                | 251     |   |      |   | 250     |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash used in financing activities                                                     |  |                                | (167    | ) |      |   | (330    | )
|                                                                                      |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                             |  |                                | (8,306  | ) |      |   | (4,304  | )
|Cash and cash equivalents, beginning of period                                        |  |                                | 11,548  |   |      |   | 8,324   |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                              |  | $                              | 3,242   |   |      | $ | 4,020   |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                     |  |                                |         |   |      |   |         |  
|Cash paid for taxes                                                                   |  | $                              | 18      |   |      | $ | 110     |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash paid for interest                                                                |  | $                              | 20      |   |      | $ | 19      |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Supplemental disclosure for non-cash investing and financing activities:              |  |                                |         |   |      |   |         |  
|Value of shares released from escrow in connection with contingent consideration      |  | $                              |        |   |      | $ | 313     |  
|Unrealized gain (loss) on investments                                                 |  | $                              | (15     | ) |      | $ | 71      |  
|Purchase of equipment under capital lease                                             |  | $                              | 332     |   |      | $ |        |  

See accompanying notes to unaudited condensed consolidated financial statements.



5



---

##### Table of Contents

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(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. The Company has prepared the accompanying unaudited
interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in Accounting Principles Board (APB) Opinion No. 28 and any amendments
thereto adopted by the Financial Accounting Standards Board (FASB). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the
Companys management, the accompanying unaudited interim condensed consolidated financial statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair
presentation of the Companys financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Companys audited consolidated financial
statements and notes thereto presented in the Companys 2006 Annual Report on Form 10-K. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for
the entire fiscal year.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation, as a result of internal corporate restructuring and
modifications to the way management runs the business. Amounts from operating expenses generally related to data and support services revenue in the amounts of $1,661 and $4,781 for the three and nine months ended September 30, 2006,
respectively, were reclassified to cost of revenue. Amounts from general and administrative related to income taxes in the amounts of $74 and $110 for the three and nine months ended September 30, 2006, respectively, were reclassified to
provision for income taxes.

The following table presents the impact of these reclassifications on the Companys previously reported
condensed consolidated statements of operations for the three months ended March 31 and June 30, 2007.



|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|------------------------------------------ |  | --------------------------------- | ------ | - | -------------------------------- | - | ------ | -------------- |  | - | ---------- | - |  | ------- | ------ | - | -------------- | - | ------ | - |  | - | ------ | -
|                                           |  | Three months ended March 31, 2007 |        |   | Three months ended June 30, 2007 |  
|                                           |  | AsReported                        |        |   | Reclass                          |   |        | AsReclassified |  |   | AsReported |   |  | Reclass |        |   | AsReclassified |  
|Net revenues                               |  | $                                 | 10,721 |   |                                  |   |        |                |  | $ | 10,721     |   |  | $       | 12,793 |   |                |   |        |   |  | $ | 12,793 |  
|Cost of Revenue                            |  |                                   | 2,947  |   |                                  |   | 1,189  |                |  |   | 4,136      |   |  |         | 3,163  |   |                |   | 1,173  |   |  |   | 4,336  |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Gross profit                               |  |                                   | 7,774  |   |                                  |   | (1,189 | )              |  |   | 6,585      |   |  |         | 9,630  |   |                |   | (1,173 | ) |  |   | 8,457  |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Operating expenses:                        |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Sales and marketing                        |  |                                   | 5,630  |   |                                  |   | (10    | )              |  |   | 5,620      |   |  |         | 5,453  |   |                |   | 51     |   |  |   | 5,504  |  
|Product development and support            |  |                                   | 1,732  |   |                                  |   |        |                |  |   | 1,732      |   |  |         | 1,519  |   |                |   |        |   |  |   | 1,519  |  
|General and administrative                 |  |                                   | 5,665  |   |                                  |   | (1,179 | )              |  |   | 4,486      |   |  |         | 5,180  |   |                |   | (1,224 | ) |  |   | 3,956  |  
|Amortization of purchased intangibles      |  |                                   | 733    |   |                                  |   |        |                |  |   | 733        |   |  |         | 573    |   |                |   |        |   |  |   | 573    |  
|Restructuring charges                      |  |                                   | 2,445  |   |                                  |   |        |                |  |   | 2,445      |   |  |         | (162   | ) |                |   |        |   |  |   | (162   | )
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Total operating expenses                   |  |                                   | 16,205 |   |                                  |   | (1,189 | )              |  |   | 15,016     |   |  |         | 12,563 |   |                |   | (1,173 | ) |  |   | 11,390 |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Operating loss                             |  |                                   | (8,431 | ) |                                  |   |       |                |  |   | (8,431     | ) |  |         | (2,933 | ) |                |   |       |   |  |   | (2,933 | )
|Interest income (expense) and other, net   |  |                                   | 286    |   |                                  |   |        |                |  |   | 286        |   |  |         | 240    |   |                |   |        |   |  |   | 240    |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Loss before income taxes                   |  |                                   | (8,145 | ) |                                  |   |       |                |  |   | (8,145     | ) |  |         | (2,693 | ) |                |   |       |   |  |   | (2,693 | )
|Provision for income taxes                 |  |                                   | 118    |   |                                  |   |        |                |  |   | 118        |   |  |         | 115    |   |                |   |        |   |  |   | 115    |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Net loss                                   |  | $                                 | (8,263 | ) |                                  | $ |       |                |  | $ | (8,263     | ) |  | $       | (2,808 | ) |                | $ |       |   |  | $ | (2,808 | )
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Loss per common share - basic and diluted  |  | $                                 | (0.21  | ) |                                  | $ |       |                |  | $ | (0.21      | ) |  | $       | (0.07  | ) |                | $ |       |   |  | $ | (0.07  | )
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  
|Weighted average common shares outstanding |  |                                   | 39,839 |   |                                  |   | 39,839 |                |  |   | 39,839     |   |  |         | 39,881 |   |                |   | 39,881 |   |  |   | 39,881 |  
|                                           |  |                                   |        |   |                                  |   |        |                |  |   |            |   |  |         |        |   |                |   |        |   |  |   |        |  



6



---

##### Table of Contents

The following table presents the impact of these reclassifications on the Companys previously
reported condensed consolidated statements of operations for the three months ended March 31, June 30 and September 30, 2006.



|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | --------------------------------- | ------- | - | -------------------------------- | - | ------ | ------------------------------------- |  | - | ---------- | - |  | ------- | ------ | - | -------------- | - | ------ | ---------- |  | - | ------- | - |  | -------------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three months ended March 31, 2006 |         |   | Three months ended June 30, 2006 |   |        | Three months ended September 30, 2006 | 
|                                           |  | AsReported                        |         |   | Reclass                          |   |        | AsReclassified                        |  |   | AsReported |   |  | Reclass |        |   | AsReclassified |   |        | AsReported |  |   | Reclass |   |  | AsReclassified |       
|Net revenues                               |  | $                                 | 9,913   |   |                                  |   |        |                                       |  | $ | 9,913      |   |  | $       | 11,382 |   |                |   |        |            |  | $ | 11,382  |   |  | $              | 10,094 |   |  |   |        |   |  | $ | 10,094 |  
|Cost of Revenue                            |  |                                   | 3,014   |   |                                  |   | 1,270  |                                       |  |   | 4,284      |   |  |         | 3,429  |   |                |   | 1,850  |            |  |   | 5,279   |   |  |                | 2,992  |   |  |   | 1,661  |   |  |   | 4,653  |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Gross profit                               |  |                                   | 6,899   |   |                                  |   | (1,270 | )                                     |  |   | 5,629      |   |  |         | 7,953  |   |                |   | (1,850 | )          |  |   | 6,103   |   |  |                | 7,102  |   |  |   | (1,661 | ) |  |   | 5,441  |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Operating expenses:                        |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Sales and marketing                        |  |                                   | 6,984   |   |                                  |   | 142    |                                       |  |   | 7,126      |   |  |         | 6,678  |   |                |   | 81     |            |  |   | 6,759   |   |  |                | 6,233  |   |  |   | (38    | ) |  |   | 6,195  |  
|Product development and support            |  |                                   | 2,896   |   |                                  |   |        |                                       |  |   | 2,896      |   |  |         | 2,329  |   |                |   |        |            |  |   | 2,329   |   |  |                | 2,245  |   |  |   |        |   |  |   | 2,245  |  
|                                           |  |                                   |         |   |                                  |   |        |                                       | 
|General and administrative                 |  |                                   | 6,413   |   |                                  |   | (1,448 | )                                     |  |   | 4,965      |   |  |         | 6,729  |   |                |   | (1,931 | )          |  |   | 4,798   |   |  |                | 6,322  |   |  |   | (1,697 | ) |  |   | 4,625  |  
|Amortization of purchased intangibles      |  |                                   | 777     |   |                                  |   |        |                                       |  |   | 777        |   |  |         | 746    |   |                |   |        |            |  |   | 746     |   |  |                | 736    |   |  |   |        |   |  |   | 736    |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Total operating expenses                   |  |                                   | 17,070  |   |                                  |   | (1,306 | )                                     |  |   | 15,764     |   |  |         | 16,482 |   |                |   | (1,850 | )          |  |   | 14,632  |   |  |                | 15,536 |   |  |   | (1,735 | ) |  |   | 13,801 |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Operating loss                             |  |                                   | (10,171 | ) |                                  |   | 36     |                                       |  |   | (10,135    | ) |  |         | (8,529 | ) |                |   |       |            |  |   | (8,529  | ) |  |                | (8,434 | ) |  |   | 74     |   |  |   | (8,360 | )
|Interest income (expense) and other, net   |  |                                   | 316     |   |                                  |   |        |                                       |  |   | 316        |   |  |         | 175    |   |                |   |        |            |  |   | 175     |   |  |                | 213    |   |  |   |        |   |  |   | 213    |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Loss before income taxes                   |  |                                   | (9,855  | ) |                                  |   | 36     |                                       |  |   | (9,819     | ) |  |         | (8,354 | ) |                |   |       |            |  |   | (8,354  | ) |  |                | (8,221 | ) |  |   | 74     |   |  |   | (8,147 | )
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Provision for income taxes                 |  |                                   |         |   |                                  |   | 36     |                                       |  |   | 36         |   |  |         |        |   |                |   |        |            |  |   |        |   |  |                |        |   |  |   | 74     |   |  |   | 74     |  
|Net loss                                   |  | $                                 | (9,855  | ) |                                  | $ |       |                                       |  | $ | (9,855     | ) |  | $       | (8,354 | ) |                | $ |       |            |  | $ | (8,354  | ) |  | $              | (8,221 | ) |  | $ |       |   |  | $ | (8,221 | )
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Loss per common share - basic and diluted  |  | $                                 | (0.29   | ) |                                  | $ |       |                                       |  | $ | (0.29      | ) |  | $       | (0.23  | ) |                | $ |       |            |  | $ | (0.23   | ) |  | $              | (0.23  | ) |  | $ |       |   |  | $ | (0.23  | )
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding |  |                                   | 35,494  |   |                                  |   | 35,494 |                                       |  |   | 35,494     |   |  |         | 35,723 |   |                |   | 35,723 |            |  |   | 35,723  |   |  |                | 35,615 |   |  |   | 35,615 |   |  |   | 35,615 |  
|                                           |  |                                   |         |   |                                  |   |        |                                       |  |   |            |   |  |         |        |   |                |   |        |            |  |   |         |   |  |                |        |   |  |   |        |   |  |   |        |  

The following table presents the impact of these reclassifications on the Companys
previously reported condensed consolidated statements of operations for the twelve months ended December 31, 2006.



|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|------------------------------------------ |  | ------------------------------------- | ------- | - | ------- | - | ------ | -------------- |  | - | ------- | -
|                                           |  | Twelve months ended December 31, 2006 |        
|                                           |  | AsReported                            |         |   | Reclass |   |        | AsReclassified | 
|Net revenues                               |  | $                                     | 41,103  |   |         |   |        |                |  | $ | 41,103  |  
|Cost of Revenue                            |  |                                       | 12,102  |   |         |   | 6,292  |                |  |   | 18,394  |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Gross profit                               |  |                                       | 29,001  |   |         |   | (6,292 | )              |  |   | 22,709  |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Operating expenses:                        |  |                                       |         |   |         |   |        |                |  |   |         |  
|Sales and marketing                        |  |                                       | 25,183  |   |         |   | 267    |                |  |   | 25,450  |  
|Product development and support            |  |                                       | 9,340   |   |         |   |        |                |  |   | 9,340   |  
|General and administrative                 |  |                                       | 25,477  |   |         |   | (6,559 | )              |  |   | 18,918  |  
|Amortization of purchased intangibles      |  |                                       | 2,996   |   |         |   |        |                |  |   | 2,996   |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Total operating expenses                   |  |                                       | 62,996  |   |         |   | (6,292 | )              |  |   | 56,704  |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Operating loss                             |  |                                       | (33,995 | ) |         |   |       |                |  |   | (33,995 | )
|Interest income (expense) and other, net   |  |                                       | 925     |   |         |   |        |                |  |   | 925     |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Loss before income taxes                   |  |                                       | (33,070 | ) |         |   |       |                |  |   | (33,070 | )
|Provision for income taxes                 |  |                                       | 53      |   |         |   |        |                |  |   | 53      |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Net loss                                   |  | $                                     | (33,123 | ) |         | $ |       |                |  | $ | (33,123 | )
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Loss per common share - basic and diluted  |  | $                                     | (0.93   | ) |         | $ |       |                |  | $ | (0.93   | )
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  
|Weighted average common shares outstanding |  |                                       | 35,798  |   |         |   | 35,798 |                |  |   | 35,798  |  
|                                           |  |                                       |         |   |         |   |        |                |  |   |         |  



7



---

##### Table of Contents

Income Taxes

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes and
prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006.

The Companys practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Upon
adoption of FIN 48 on January 1, 2007, the Company did not record any interest or penalties.

The Company is subject to taxation
in the US and various state jurisdictions. The Companys tax years for 2000 and forward are subject to examination by the US and California tax authorities due to the carryforward of unutilized net operating losses and research and development
credits.

The adoption of FIN 48 did not impact the Companys financial condition, results of operations or cash flows. At
January 1, 2007, the Company had net deferred tax assets of $48,194. The deferred tax assets are primarily composed of federal and state tax net operating loss (NOL) carryforwards and federal and state research and development
(R&D) credit carryforwards. Due to uncertainties surrounding the Companys ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset.
Additionally, the future utilization of the NOL and R&D credit carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of ownership changes that may have occurred previously or that could occur
in the future. The Company has not yet determined whether such an ownership change has occurred, however, the Company plans to complete a Section 382 analysis regarding the limitation of the net operating losses and research and development
credits. When this project is completed, the Company plans to update the unrecognized tax benefits under FIN 48. Therefore, the Company expects that the unrecognized tax benefits may change within 12 months of this reporting date. At this time, the
Company cannot estimate how much the unrecognized tax benefits may change. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the
valuation allowance. Due to the existence of the valuation allowance, future changes in the Companys unrecognized tax benefits will not impact the Companys effective tax rate.

Internal Use Software

The Company accounts
for internal use software development costs in accordance with Statement of Position (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 an annual basis, or more frequently when events or changes in circumstances indicate
that software might be impaired. Impairment losses are included in operating expenses in the accompanying statement of operations.

The
following table summarizes the total amount of software costs capitalized and impaired for internal use software during the three and nine months ended September 30, 2007 and 2006.



|                               |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|------------------------------ |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                               |  | Three months ended September 30, |     | Nine months ended September 30,
|                               |  | 2007                             |     | 2006                            |   | 2007 |  | 2006
|Internal Use SoftwareSOP 98-1 |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|Capitalized costs              |  | $                                | 231 |                                 | $ | 67   |  | $    | 657 |  | $ | 701
|Impairment losses              |  | $                                |    |                                 | $ |     |  | $    | 18  |  | $ | 439

Marketed Software

The Company accounts for the development costs of software that is marketed to customers in accordance with SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed
(SFAS 86). All costs



8



---

##### Table of Contents

incurred prior to the resolution of unproven functionality and features, including new technologies, are expensed as research and development. After the
uncertainties have been tested and the development issues have been resolved and technological feasibility is achieved, subsequent direct costs such as coding, debugging and testing are capitalized. 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 an annual basis, or more frequently when events or changes in circumstances indicate that software might be impaired. Impairment losses are included in cost of revenue in the accompanying statement of operations.

The following table summarizes the total amount of software costs capitalized for marketed software during the three and nine months ended
September 30, 2007 and 2006.



|                          |  |                                  |     |                                 |   |      |  |      |     |  |   |  
|------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | --- |  | - | -
|                          |  | Three months ended September 30, |     | Nine months ended September 30,
|                          |  | 2007                             |     | 2006                            |   | 2007 |  | 2006
|Marketed SoftwareSFAS 86 |  |                                  |     |                                 |   |      |  |      |     |  |   |  
|Capitalized costs         |  | $                                | 146 |                                 | $ |     |  | $    | 246 |  | $ | 

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123, Share-Based Payment (revised 2004) (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.

Comprehensive Income (Loss)

Comprehensive
income (loss) is the total of net income (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 securities. The
components of comprehensive income (loss) are as follows:



|                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                               |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Net loss                                       |  | $                               | (1,661 | ) |                                | $ | (8,221 | )    |  | $ | (12,732 | ) |  | $ | (26,430 | )
|Other comprehensive income (loss)              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Change in unrealized gain (loss) on securities |  |                                 | 8      |   |                                |   | 42     |      |  |   | (15     | ) |  |   | 71      |  
|                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss                       |  | $                               | (1,653 | ) |                                | $ | (8,179 | )    |  | $ | (12,747 | ) |  | $ | (26,359 | )
|                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

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 inclusion would be anti-dilutive.

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



|                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|------------------------------ |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                               |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                               |  | 2007                            |            |   | 2006                           |   |            | 2007 |  |   | 2006       |  
|Numerator:                     |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                       |  | $                               | (1,661     | ) |                                | $ | (8,221     | )    |  | $ | (12,732    | ) |  | $ | (26,430    | )
|                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|DenominatorBasic and Diluted: |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares |  |                                 | 40,244,791 |   |                                |   | 36,231,563 |      |  |   | 40,164,132 |   |  |   | 36,315,100 |  



9



---

##### Table of Contents

|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three months endedSeptember 30, |            |   | Nine months endedSeptember 30, |  
|                                                    |  | 2007                            |            |   | 2006                           |   |            | 2007 |  |   | 2006       |  
|Less: Weighted average shares subject to repurchase |  |                                 | (249,039   | ) |                                |   | (616,911   | )    |  |   | (258,281   | ) |  |   | (698,092   | )
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Denominator                                         |  |                                 | 39,995,752 |   |                                |   | 35,614,652 |      |  |   | 39,905,851 |   |  |   | 35,617,008 |  
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and Diluted net loss per share                |  | $                               | (0.04      | ) |                                | $ | (0.23      | )    |  | $ | (0.32      | ) |  | $ | (0.75      | )
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

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:



|                                   |  |                                |  |          
|---------------------------------- |  | ------------------------------ |  | ---------
|                                   |  | Nine Months EndedSeptember 30,
|Common Stock Equivalents           |  | 2007                           |  | 2006     
|Common stock subject to repurchase |  | 242,394                        |  | 391,834  
|Options to purchase common stock   |  | 6,879,563                      |  | 6,448,616
|Warrants to purchase common stock  |  | 3,020,000                      |  | 1,820,000
|                                   |  |                                |  |          
|Total                              |  | 10,141,957                     |  | 8,660,450
|                                   |  |                                |  |          

Segment Information

In accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information,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 as 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. Any additional consideration paid will be allocated between goodwill and stock-based
compensation expense, as applicable. The measurement, recognition and allocation of contingent consideration are accounted for using the following principles:

Measurement and Recognition

In accordance with SFAS No. 141, Business Combinations,
which superseded APB No. 16, Business Combinations, 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 Emerging Issue Task Force (EITF) No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination, the portion of additional consideration not affected by employment termination is recorded as additional purchase price, as the consideration is unrelated to continuing employment with the
Company. Such portion is allocated to goodwill. No contingent consideration was recorded during the three and nine months ended September 30, 2007. As of September 30, 2007 there are approximately 242,000 shares subject to contingent
consideration provisions from previous acquisitions that may be issued. The Company recorded $0 and $313 in additional contingent consideration in goodwill during the three and nine months ended September 30, 2006 relating to earnout provisions
for prior acquisitions as follows:



|                                                       |  |                                  |   |                                 |   |    
|------------------------------------------------------ |  | -------------------------------- | - | ------------------------------- | - | ---
|                                                       |  | Three Months Ended September 30, |   | Nine Months Ended September 30,
|Common Stock Equivalents                               |  | 2006                             |   | 2006                           
|Prospect Information Network acquired in February 2004 |  | $                                |  |                                 | $ | 124
|Giving Capital Network acquired in September 2004      |  |                                  |  |                                 |   | 189
|                                                       |  |                                  |   |                                 |   |    
|Total                                                  |  | $                                |  |                                 | $ | 313
|                                                       |  |                                  |   |                                 |   |    



10



---

##### Table of Contents

On October 9, 2007, 56,000 of the 242,000 shares subject to contingent consideration were released.
The contingent consideration is measured based on revenues recognized in accordance with Generally Accepted Accounting Principles. Although the contingency was not fulfilled using the Companys current revenue recognition methodologies, during
the third quarter of 2007 the Company concluded that if the contingency was applied using the historical licensed software methodologies of Prospect Information Network that these shares would have been released as defined by the contingent
consideration agreement. As such, the Company recorded stock-based compensation expense of $101 during the three and nine months ended September 30, 2007.



|2. | Employee Benefit Plans
|-- | ----------------------

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 123(R) for the three and nine months ended September 30, 2007 and 2006.



|                                |  |                                  |     |                                 |   |       |  |      |       |  |   |      
|------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                |  | 2007                             |     | 2006                            |   | 2007  |  | 2006
|Cost of revenue                 |  | $                                | 59  |                                 | $ | 88    |  | $    | 256   |  | $ | 347  
|Sales and marketing             |  |                                  | 185 |                                 |   | 289   |  |      | 618   |  |   | 1,093
|Product development and support |  |                                  | 88  |                                 |   | 156   |  |      | 351   |  |   | 517  
|General and administrative      |  |                                  | 395 |                                 |   | 634   |  |      | 1,584 |  |   | 1,642
|                                |  |                                  |     |                                 |   |       |  |      |       |  |   |      
|                                |  | $                                | 727 |                                 | $ | 1,167 |  | $    | 2,809 |  | $ | 3,599
|                                |  |                                  |     |                                 |   |       |  |      |       |  |   |      

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 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. The Company estimates expected term consistent with the simplified method identified in Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based
Payment. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award.

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 
|For the nine months ended September 30, |  | 2007           |  | 2006          
|Risk-free interest rate                 |  | 4.56%  4.77%  |  | 4.55%  5.10% 
|Expected term (years)                   |  | 5.38  6 years |  | 4.53  6 years
|Expected volatility                     |  | 70%            |  | 70%  75%     
|Dividend yield                          |  | 0%             |  | 0%            



|3. | Restructuring Program
|-- | ---------------------

The Company accounts for
restructuring costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that costs associated with exit or disposal activities generally be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The Company accounts for long-lived assets to be abandoned in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires that a long-lived asset to be abandoned be considered held and used until disposed of, with a revision to the depreciable life in accordance with APB Opinion No. 20, Accounting Changes.

In March 2007, the Company announced and began implementation of a restructuring program. The Companys Board of Directors approved
managements plan, including the estimated amounts of the charges, on March 28, 2007. The workforce reduction was implemented as a means to reduce ongoing operating expenses by restructuring the Companys operations and reducing its
workforce. The restructuring program was completed as of June 30, 2007. The restructuring program consisted of the elimination of 16% of the workforce, the restructuring of the Companys sales compensation plan, the elimination of certain
lines of business and the abandonment of certain long-lived fixed assets. The total amount incurred



11



---

##### Table of Contents

for termination benefits was $1,157, which included $553 payable to certain former executive officers as described below. The Company has recorded $0 and
$1,157 during the three and nine months ended September 30, 2007, for such termination benefits which are included in restructuring charges in the condensed consolidated statement of operations.

In May 2007, the Company agreed to the terms of severance arrangements for Dr. Harry E. Gruber, former Chief Executive Officer of the
Company, who will remain on the board of directors of the Company, and Dennis Berman, former Executive Vice President of the Company, who has left the board of directors in July 2007. At the election of the former executives, these severance
liabilities may be settled in shares of common stock, notwithstanding the Companys failure to achieve certain operational performance metrics. The severance arrangements with Dr. Gruber and Mr. Berman will have a total cost of
approximately $553.

In connection with the restructuring program the Company identified certain intangible assets with a net carrying
value of $1,439 as of December 31, 2006 which are associated with certain lines of business considered eliminated as of March 31, 2007. The excess amortization associated with the revision to useful lives recorded in the three months ended
March 31, 2007 amounted to approximately $1,286 and is included in restructuring charges in the condensed consolidated statement of operations. These intangible assets were written-off as of March 31, 2007.

In connection with the restructuring program the Company has identified certain fixed assets with a net carrying value of $70 as of December 31,
2006 which were abandoned March 31, 2007. The excess depreciation associated with the revision to depreciable lives recorded in the three months ended March 31, 2007 amounted to approximately $54 and is included in restructuring charges in
the condensed consolidated statement of operations. These fixed assets were written off as of March 31, 2007.

In connection with the
restructuring program the Company disposed of certain product lines during the three months ended June 30, 2007, with such disposals resulting in a net gain of $214, which is included in restructuring charges in the condensed consolidated
statement of operations.

The following table shows the activity related to the restructuring program for the nine months ended
September 30, 2007:



|                                |  |                      |       |   |                   |   |        |       |  |   |       |   |  |   |        |  
|------------------------------- |  | -------------------- | ----- | - | ----------------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                |  | Termination Benefits |       |   | Asset Impairments |   |        | Other |  |   | Total |  
|Liability at December 31, 2006  |  | $                    |      |   |                   | $ |       |       |  | $ |      |   |  | $ |       |  
|Charged to expense              |  |                      | 1,157 |   |                   |   | 1,340  |       |  |   | (214  | ) |  |   | 2,283  |  
|Non-cash charges                |  |                      |      |   |                   |   | (1,340 | )     |  |   | 224   |   |  |   | (1,116 | )
|Cash payments                   |  |                      | (685  | ) |                   |   |       |       |  |   | (10   | ) |  |   | (695   | )
|                                |  |                      |       |   |                   |   |        |       |  |   |       |   |  |   |        |  
|Liability at September 30, 2007 |  | $                    | 472   |   |                   | $ |       |       |  | $ |      |   |  | $ | 472    |  
|                                |  |                      |       |   |                   |   |        |       |  |   |       |   |  |   |        |  

The liability at September 30, 2007 relates to termination benefits payable to certain former
executive officers with payment thereof primarily contingent upon the achievement of certain operational performance metrics, as defined in the respective severance agreements, for two fiscal quarters. Those operational performance metrics were
achieved during the three months ended September 30, 2007 and termination benefits of $210 will be paid on November 30, 2007. Upon achievement of the second quarter of those operational performance metrics, an additional $210 will be paid.
At the election of the former executives, these amounts may be settled in shares of common stock, notwithstanding the Companys failure to achieve those operational performance metrics.



|4. | Legal Proceedings
|-- | -----------------

From time to time, the Company
is involved in litigation relating to claims arising out of our operations. The Company is 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.



12



---

##### Table of Contents

|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, 2006 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 a leading
provider of donor management, engagement and accounting solutions that enable nonprofit organizations (NPOs) to leverage 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 NPOs as a service accessed with a web browser. NPOs pay Kintera
service fees for access to Kintera Sphere and transaction-based fees tied to the donations and purchases.

As of September 30, 2007 we
had approximately 4,700 active customers. The average term for agreements with new customers for the nine months ended September 30, 2007 was 14 months. Since inception, we have increased our revenue 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 Revenues

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. Revenue from upfront service fees are
deferred and recognized ratably over the entire term of our contracts. Revenue from transaction processing fees are recognized as they are earned. Total online donations processed for the three and nine months ended September 30, 2007 were
approximately $100.7 million and $281.3 million, respectively, as compared to $82.3 million and $224.4 million, respectively, for the comparable periods of 2006. We also enter into service contracts and implementation contracts related to Kintera
Sphere that are 12 months or longer in duration.

We also generate revenue from our wealth profiling services, which provide 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. Revenue from the wealth profiling services 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.



13



---

##### Table of Contents

Our awareness campaign services specialize 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 services 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. Unless evidence suggests that revenue is earned in a
different pattern, service revenue is generally recognized on a straight-line basis over the period during which the services are performed. Furthermore, in the event the license has not been delivered, revenue is deferred until the license is
delivered.

We also generate revenue through our accounting software. Revenue from this operation is 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 Revenue. 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 cost of revenue. 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.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions, stock-based
compensation, 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, stock-based compensation, subcontracting costs and facilities expenses.

General and Administrative Expenses.General and administrative expenses consist primarily of personnel-related expenses, stock-based compensation, depreciation, legal, audit and other professional fees, facilities and communication
expenses and information technology expenditures.

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.

Restructuring Charges Expense. Restructuring charges expense consists of costs
associated with the March 2007 restructuring program, including termination benefits, asset impairments and gains on disposal of product lines.

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, revenue 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, intangible assets, stock-based compensation 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 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;
| | - |  | ------------------------------------------



| |  |  | accounting for stock-based compensation; and
| | - |  | --------------------------------------------



14



---

##### Table of Contents

| |  |  | accounting for restructuring charges
| | - |  | ------------------------------------

Employees

As of September 30, 2007 we had 303 employees. While this number grew from 287 employees as of June 30, 2007, it largely
represents re-investments in sales as well as the conversion of temporary labor to drive cost savings. As of October 31, 2007 our total employee number was 290. Of the total employees as of September 30, 2007, there were 69 in cost of
revenue, 136 in sales and marketing, 63 in product development and support and 35 in general and administrative.

Results of Operations

Comparison of results for the three and nine months ended September 30, 2007 and 2006.

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



|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                      |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |   
|                                      |  | 2007                            |    |  | 2006                           |    |  | 2007  |    |  | 2006  |   
|Net revenue                           |  | 100.0                           | %  |  | 100.0                          | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of revenue                       |  | 31.4                            |    |  | 46.1                           |    |  | 34.5  |    |  | 45.3  |   
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Gross profit                          |  | 68.6                            |    |  | 53.9                           |    |  | 65.5  |    |  | 54.7  |   
|Operating expenses:                   |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Sales and marketing                   |  | 35.1                            |    |  | 61.4                           |    |  | 43.2  |    |  | 64.0  |   
|Product development and support       |  | 14.2                            |    |  | 22.2                           |    |  | 14.0  |    |  | 23.8  |   
|General and administrative            |  | 29.7                            |    |  | 45.8                           |    |  | 33.8  |    |  | 45.8  |   
|Amortization of purchased intangibles |  | 4.8                             |    |  | 7.3                            |    |  | 5.3   |    |  | 7.2   |   
|Restructuring charges                 |  |                                |    |  |                               |    |  | 6.4   |    |  |      |   
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total operating expenses              |  | 83.8                            |    |  | 136.7                          |    |  | 102.7 |    |  | 140.8 |   
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss from operations                  |  | (15.2                           | )  |  | (82.8                          | )  |  | (37.2 | )  |  | (86.1 | ) 
|Interest income, net                  |  | 2.2                             |    |  | 2.1                            |    |  | 2.2   |    |  | 2.2   |   
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss before income taxes              |  | (13.0                           | )  |  | (80.7                          | )  |  | (35.0 | )  |  | (83.9 | ) 
|Provision for income taxes            |  | 0.9                             |    |  | 0.7                            |    |  | 0.9   |    |  | 0.3   |   
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Net loss                              |  | (13.9                           | )% |  | (81.4                          | )% |  | (35.9 | )% |  | (84.2 | )%
|                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   

Net Revenue, Cost of Revenue and Gross Profit

The following tables present net revenue, cost of revenue and gross profit for the three and nine months ended September 30, 2007 and 2006.



|                |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|--------------- |  | ------------------------------------ | ------ | ---------------- | ------------------------------------ | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ----- | - |  | ----- | -
|                |  | Three Months EndedSeptember 30, 2007 |        |                  | Three Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                |  | Amount                               |        | % of Net Revenue |                                      |   | Amount |                    | % of Net Revenue |  |         |  
|                |  | (in thousands, except percentage)    |       
|Net revenue     |  | $                                    | 11,937 |                  | 100.0                                | % |        | $                  | 10,094           |  | 100.0   | % |  | $ | 1,843 |   |  | 18.3  | %
|Cost of revenue |  |                                      | 3,745  |                  | 31.4                                 |   |        |                    | 4,653            |  | 46.1    |   |  |   | (908  | ) |  | (19.5 | )
|                |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|Gross profit    |  | $                                    | 8,192  |                  | 68.6                                 | % |        | $                  | 5,441            |  | 53.9    | % |  | $ | 2,751 |   |  | 50.6  | %
|                |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  



|                |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |  
|--------------- |  | ----------------------------------- | ------ | ---------------- | ----------------------------------- | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ------ | - |  | ----- | -
|                |  | Nine Months EndedSeptember 30, 2007 |        |                  | Nine Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                |  | Amount                              |        | % of Net Revenue |                                     |   | Amount |                    | % of Net Revenue |  |         |  
|                |  | (in thousands, except percentage)   |       
|Net revenue     |  | $                                   | 35,451 |                  | 100.0                               | % |        | $                  | 31,389           |  | 100.0   | % |  | $ | 4,062  |   |  | 12.9  | %
|Cost of revenue |  |                                     | 12,217 |                  | 34.5                                |   |        |                    | 14,216           |  | 45.3    |   |  |   | (1,999 | ) |  | (14.1 | )
|                |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |  



15



---

##### Table of Contents

|             |  |                                     |        |                  |                                     |   |        |                    |                  |         |      |   |  |   |       |  |      |  
|------------ |  | ----------------------------------- | ------ | ---------------- | ----------------------------------- | - | ------ | ------------------ | ---------------- | ------- | ---- | - |  | - | ----- |  | ---- | -
|             |  | Nine Months EndedSeptember 30, 2007 |        |                  | Nine Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  | %Change |     
|             |  | Amount                              |        | % of Net Revenue |                                     |   | Amount |                    | % of Net Revenue |         |      |  
|             |  | (in thousands, except percentage)   |       
|Gross profit |  | $                                   | 23,234 |                  | 65.5                                | % |        | $                  | 17,173           |         | 54.7 | % |  | $ | 6,061 |  | 35.3 | %
|             |  |                                     |        |                  |                                     |   |        |                    |                  |         |      |   |  |   |       |  |      |  

The following tables present the components of net revenue for three and nine months ended
September 30, 2007 and 2006. The following line items represent revenue related categories that are consistent with the way management classifies its revenues internally and may not be representative of the fair value of those categories as
defined by AICPA Statement of Position No. 97-2 and Emerging Issues Task Force Issue No. 00-21.



|                             |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|---------------------------- |  | ------------------------------------ | ------ | ---------------- | ------------------------------------ | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ----- | - |  | ----- | -
|                             |  | Three Months EndedSeptember 30, 2007 |        |                  | Three Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                             |  | Amount                               |        | % of Net Revenue |                                      |   | Amount |                    | % of Net Revenue |  |         |  
|                             |  | (in thousands, except percentage)    |       
|Service plan and maintenance |  | $                                    | 4,648  |                  | 38.9                                 | % |        | $                  | 4,345            |  | 43.1    | % |  | $ | 303   |   |  | 7.0   | %
|Transaction and usage        |  |                                      | 3,324  |                  | 27.9                                 |   |        |                    | 2,434            |  | 24.1    |   |  |   | 890   |   |  | 36.6  |  
|Data and support services    |  |                                      | 1,879  |                  | 15.7                                 |   |        |                    | 1,849            |  | 18.3    |   |  |   | 30    |   |  | 1.6   |  
|Implementation               |  |                                      | 1,907  |                  | 16.0                                 |   |        |                    | 1,031            |  | 10.2    |   |  |   | 876   |   |  | 85.0  |  
|License and subscriptions    |  |                                      | 179    |                  | 1.5                                  |   |        |                    | 435              |  | 4.3     |   |  |   | (256  | ) |  | (58.9 | )
|                             |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|Net revenue                  |  | $                                    | 11,937 |                  | 100.0                                | % |        | $                  | 10,094           |  | 100.0   | % |  | $ | 1,843 |   |  | 18.3  | %
|                             |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|                             |  |                                      |        |                 
|                             |  | Nine Months EndedSeptember 30, 2007  |        |                  | Nine Months EndedSeptember 30, 2006  |   |        | Increase(Decrease) |                  |  | %Change |  
|                             |  | Amount                               |        | % of Net Revenue |                                      |   | Amount |                    | % of Net Revenue |  |         |  
|                             |  | (in thousands, except percentage)    |       
|Service plan and maintenance |  | $                                    | 14,183 |                  | 40.0                                 | % |        | $                  | 13,402           |  | 42.7    | % |  | $ | 781   |   |  | 5.8   | %
|Transaction and usage        |  |                                      | 10,033 |                  | 28.3                                 |   |        |                    | 7,780            |  | 24.8    |   |  |   | 2,253 |   |  | 29.0  |  
|Data and support services    |  |                                      | 6,220  |                  | 17.6                                 |   |        |                    | 4,664            |  | 14.9    |   |  |   | 1,556 |   |  | 33.4  |  
|Implementation               |  |                                      | 3,870  |                  | 10.9                                 |   |        |                    | 3,701            |  | 11.8    |   |  |   | 169   |   |  | 4.6   |  
|License and subscriptions    |  |                                      | 1,145  |                  | 3.2                                  |   |        |                    | 1,842            |  | 5.8     |   |  |   | (697  | ) |  | (37.8 | )
|                             |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  
|Net revenue                  |  | $                                    | 35,451 |                  | 100.0                                | % |        | $                  | 31,389           |  | 100.0   | % |  | $ | 4,062 |   |  | 12.9  | %
|                             |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |       |   |  |       |  

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 tables present net revenue from each of our revenue streams and their respective
contribution to the increase in net revenue for the three and Nine months ended September 30, 2007 and 2006, respectively. During the three months ended September 30, 2007, sales to one customer accounted for 8% of net revenue.

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 revenue from service plan and maintenance amounted to $4.6 million for the three months ended September 30, 2007, which was a 7% increase from the
$4.3 million for the three months ended September 30, 2006. Net revenue from service plan and maintenance amounted to $14.2 million for the nine months ended September 30, 2007, which was a 6% increase from the $13.4 million for the nine
months ended September 30, 2006.

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 revenue from transactions and usage increased 36.6% to $3.3 million for the three months ended September 30, 2007 from $2.4 million for the three months ended
September 30, 2006. Net revenue from transactions and usage increased 29% to $10 million for the nine months ended September 30, 2007 from $7.8 million for the nine months ended September 30, 2006. The increase was driven by an
increase in donations processed and the average processing fee rate.



16



---

##### Table of Contents

Data and support services revenue consists of delivery of wealth screening data services, professional
services and consulting, and billable support services. Net revenue from data and support services amounted to $1.9 million for the three months ended September 30, 2007 and was consistent with the $1.8 million for the three months ended
September 30, 2006. Net revenue from data and support services increased 33.4% to $6.2 million for the nine months ended September 30, 2007 from $4.7 million for the nine months ended September 30, 2006. The increase reflects the
cumulative addition of amortizing revenue from agreements entered in prior periods into the data screening portfolio.

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 85% to $1.9 million for the three months ended September 30, 2007 from $1 million for the three months ended September 30, 2006. Net revenue
from implementations amounted to $3.9 million for the nine months ended September 30, 2007, which was a 5% increase from $3.7 million for the nine months ended September 30, 2006. This increase was primarily due to one large customer
for which we had a significant delivery of service.

License and subscription revenue consists primarily of packaged software sales and
advertising and access to Masterplanner online content. Net revenue from licenses and subscriptions decreased 59% to $0.2 million for the three months ended September 30, 2007 from $0.4 million for the three months ended September 30,
2006. Net revenue from licenses and subscriptions decreased 38% to $1.1 million for the nine months ended September 30, 2007 from $1.8 million for the nine months ended September 30, 2006. The decrease was primarily due to a decline in
Fundware software license sales and the elimination of Masterplanner advertising and subscriptions in 2007.

Cost of Revenue and Gross
Profit. Cost of revenue decreased by 19.5% to $3.7 million for the three months ended September 30, 2007 from $4.7 million for the three months ended September 30, 2006. Cost of revenue decreased by 14% to $12.2 million for the nine
months ended September 30, 2007 from $14.2 million for the nine months ended September 30, 2006. Gross margins for the three and nine months ended September 30, 2007 were 68.6% and 65.5%, respectively, as compared with gross margins
for the three and nine months ended September 30, 2006, of 53.9% and 54.7%, respectively. The decrease in cost of revenue and increase in margins was driven by a focus on operational efficiencies an restructuring of our support organization to
reduce our cost of revenue.

Operating Expenses

The following tables present sales and marketing, product development and support, general and administrative, amortization of purchased intangibles and restructuring charge expenses for the three and nine months
ended September 30, 2007 and 2006.



|                                      |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   
|------------------------------------- |  | ------------------------------------ | ------ | ---------------- | ------------------------------------ | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ------ | - |  | ----- | --
|                                      |  | Three Months EndedSeptember 30, 2007 |        |                  | Three Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                                      |  | Amount                               |        | % of Net Revenue |                                      |   | Amount |                    | % of Net Revenue |  |         |  
|                                      |  | (in thousands, except percentage)    |       
|Sales and marketing                   |  | $                                    | 4,191  |                  | 35.1                                 | % |        | $                  | 6,195            |  | 61.4    | % |  | $ | (2,004 | ) |  | (32.4 | )%
|Product development and support       |  |                                      | 1,698  |                  | 14.2                                 |   |        |                    | 2,245            |  | 22.2    |   |  |   | (547   | ) |  | (24.4 | ) 
|General and administrative            |  |                                      | 3,548  |                  | 29.7                                 |   |        |                    | 4,625            |  | 45.8    |   |  |   | (1,077 | ) |  | (23.3 | ) 
|Amortization of purchased intangibles |  |                                      | 572    |                  | 4.8                                  |   |        |                    | 736              |  | 7.3     |   |  |   | (164   | ) |  | (22.3 | ) 
|                                      |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   
|Total operating expenses              |  | $                                    | 10,009 |                  | 83.8                                 | % |        | $                  | 13,801           |  | 136.7   | % |  | $ | (3,792 | ) |  | (27.5 | )%
|                                      |  |                                      |        |                  |                                      |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   



|                                      |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   
|------------------------------------- |  | ----------------------------------- | ------ | ---------------- | ----------------------------------- | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ------ | - |  | ----- | --
|                                      |  | Nine Months EndedSeptember 30, 2007 |        |                  | Nine Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                                      |  | Amount                              |        | % of Net Revenue |                                     |   | Amount |                    | % of Net Revenue |  |         |  
|                                      |  | (in thousands, except percentage)   |       
|Sales and marketing                   |  | $                                   | 15,315 |                  | 43.2                                | % |        | $                  | 20,080           |  | 64.0    | % |  | $ | (4,765 | ) |  | (23.7 | )%
|Product development and support       |  |                                     | 4,949  |                  | 14.0                                |   |        |                    | 7,470            |  | 23.8    |   |  |   | (2,521 | ) |  | (33.7 | ) 
|General and administrative            |  |                                     | 11,990 |                  | 33.8                                |   |        |                    | 14,388           |  | 45.8    |   |  |   | (2,398 | ) |  | (16.7 | ) 
|Amortization of purchased intangibles |  |                                     | 1,878  |                  | 5.3                                 |   |        |                    | 2,259            |  | 7.2     |   |  |   | (381   | ) |  | (16.9 | ) 
|Restructuring charges                 |  |                                     | 2,283  |                  | 6.4                                 |   |        |                    |                 |  |        |   |  |   | 2,283  |   |  | N/A   |   
|                                      |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   



17



---

##### Table of Contents

|                         |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   
|------------------------ |  | ----------------------------------- | ------ | ---------------- | ----------------------------------- | - | ------ | ------------------ | ---------------- |  | ------- | - |  | - | ------ | - |  | ----- | --
|                         |  | Nine Months EndedSeptember 30, 2007 |        |                  | Nine Months EndedSeptember 30, 2006 |   |        | Increase(Decrease) |                  |  | %Change |  
|                         |  | Amount                              |        | % of Net Revenue |                                     |   | Amount |                    | % of Net Revenue |  |         |  
|                         |  | (in thousands, except percentage)   |       
|Total operating expenses |  | $                                   | 36,415 |                  | 102.7                               | % |        | $                  | 44,197           |  | 140.8   | % |  | $ | (7,782 | ) |  | (17.6 | )%
|                         |  |                                     |        |                  |                                     |   |        |                    |                  |  |         |   |  |   |        |   |  |       |   

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended
September 30, 2007 were $4.2 million or 35.1% of net revenue compared to $6.2 million or 61.4% of net revenue for the comparable period in 2006. The decrease of $2 million in selling and marketing expenses was primarily due to a decrease of
$1.4 million in personnel related costs, a decrease of $0.2 million of advertising and marketing related expenses, a decrease of $0.2 million consulting and legal fees and a decrease of $0.1 million in stock-based compensation expense. The decrease
in personnel related costs is not indicative of a decrease in the number of quota-carrying salespeople but rather is reflective of changes in sales incentive plans and the numbers of resources supporting the sales function.

Sales and marketing expenses for the nine months ended September 30, 2007 were $15.3 million or 43.2% of net revenue compared to $20.1 million or
64% of net revenue for the comparable period in 2006. The decrease of $4.8 million in selling and marketing expenses was primarily due to a decrease of $2.8 million in personnel related costs, a decrease of $0.9 million of advertising and marketing
related expenses, a decrease of $0.7 million in stock-based compensation expense, a decrease of $0.4 million in travel and travel related expenses and a decrease of $0.1 million in consulting and legal fees, offset in part by an increase of $0.1
million in facilities and communications expenses. The decrease in personnel related costs is not indicative of a decrease in the number of quota-carrying salespeople but rather is reflective of changes in sales incentive plans and the numbers of
resources supporting the sales function.

Product Development and Support Expenses.Product development and support expenses for the
three months ended September 30, 2007 were $1.7 million or 14.2% of net revenue compared to $2.2 million or 22.2% of net revenue for the comparable period in 2006. The decrease of $0.5 million resulted primarily from a decrease of $0.4 million
in personnel related costs and a decrease of $0.1 million in internal software development expenses related to an increase in the capitalization of software development expense. The reduction in personnel related costs was due to a reduction in the
numbers of resources supporting the product development and support function, which included a reduction in consultants.

Product
development and support expenses for the nine months ended September 30, 2007 were $4.9 million or 14% of net revenue compared to $7.5 million or 23.8% of net revenue for the comparable period in 2006. The decrease of $2.5 million resulted
primarily from a decrease of $1.8 million in personnel related costs, a decrease of $0.4 million in internal software development expenses related to an increase in the capitalization of software development expense, a decrease of $0.1 million in
professional services and a decrease of $0.1 million in stock-based compensation expense. The reduction in personnel related costs was due to a reduction in the numbers of resources supporting the product development and support function, which
included a reduction in consultants.

General and Administrative Expenses.General and administrative expenses for the three months
ended September 30, 2007 were $3.5 million or 29.7% of net revenue compared to $4.6 million or 45.8% of net revenue for the comparable period in 2006. The decrease of $1.1 million resulted primarily from a decrease of $0.3 million of
depreciation expense, a decrease of $0.2 million in stock-based compensation expense, a decrease of $0.2 million in professional services, a decrease of $0.2 million in bad debt expense, a decrease of $0.1 million in facilities and communication
expenses and a decrease of $0.1 million in personnel related costs.

General and administrative expenses for the nine months ended
September 30, 2007 were $12 million or 33.8% of net revenue compared to $14.4 million or 45.8% of net revenue for the comparable period in 2006. The decrease of $2.4 million resulted primarily from a decrease of $0.8 million in facilities and
communications expenses, a decrease of $0.8 million in professional services, a decrease of $0.5 million in depreciation, a decrease of $0.2 million in bad debt expense and a decrease of $0.2 million in personnel related costs, offset in part by a
$0.2 million loss on the disposal of assets.

Restructuring charges.Restructuring charges for the three and nine months ended
September 30, 2007 was $0 and $2.3 million or 0% and 6.4% of net revenue, respectively. There were no restructuring charges in the comparable period in 2006.

In March 2007, we announced and began implementation of a restructuring program. The workforce reduction was implemented as a means to reduce ongoing operating expenses by restructuring our operations and reducing our
workforce. The restructuring program was completed as of June 30, 2007. The restructuring program consisted of the elimination of approximately 16% of our workforce, the restructuring of our sales compensation plan, the elimination of certain
lines of business and the abandonment of certain long-lived fixed assets. Restructuring charges for the nine months ended



18



---

##### Table of Contents

September 30, 2007 consisted of $1.2 million for termination benefits, inclusive of the $553,000 payable to directors as described below, $1.3 million
in excess amortization associated with revisions to the useful lives of intangibles associated with eliminated lines of business and $0.1 million in excess depreciation associated with revisions to the useful lives of abandoned fixed assets.

In May 2007, the Company agreed to the terms of severance arrangements for Dr. Harry E. Gruber, former Chief Executive
Officer of the Company, who will remain on our board of directors, and Dennis Berman, former Executive Vice President of the Company who left the board of directors in July 2007, consistent with terms outlined in principle before they resigned their
positions, including the execution of mutual general releases of claims. The severance arrangements with Dr. Gruber and Mr. Berman had a total cost of approximately $553,000.

In connection with the restructuring program we disposed of certain product lines during the nine months ended September 30, 2007, with such
disposals resulting in a net gain of $214,000.

Stock-Based Compensation Expense

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



|                                |  |                                 |     |                                |   |       |  |      |       |  |   |      
|------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                |  | 2007                            |     | 2006                           |   | 2007  |  | 2006
|Cost of revenue                 |  | $                               | 59  |                                | $ | 88    |  | $    | 256   |  | $ | 347  
|Sales and marketing             |  |                                 | 185 |                                |   | 289   |  |      | 618   |  |   | 1,093
|Product development and support |  |                                 | 88  |                                |   | 156   |  |      | 351   |  |   | 517  
|General and administrative      |  |                                 | 395 |                                |   | 634   |  |      | 1,584 |  |   | 1,642
|                                |  |                                 |     |                                |   |       |  |      |       |  |   |      
|                                |  | $                               | 727 |                                | $ | 1,167 |  | $    | 2,809 |  | $ | 3,599

Stock-based compensation expense decreased 38% to $727 million for the three months ended
September 30, 2007 from $1,167 million of stock-based compensation expense for the three months ended September 30, 2006. The decrease in stock-based compensation expense is reflective of the full vesting and associated cessation of
expense recognition for certain options granted prior to our initial public offering in December 2003.

Stock-based compensation expense
decreased by 22% to $2.8 million for the nine months ended September 30, 2007 from $3.6 million for the nine months ended September 30, 2006. The decrease in stock-based compensation expense is reflective of the full vesting and associated
cessation of expense recognition for certain options granted prior to our initial public offering in December 2003.

The total compensation
cost related to nonvested awards not yet recognized amounted to $2.2 million at September 30, 2007 and will be recognized over a weighted-average period of 1.35 years. If there are any modifications or cancellations of the underlying unvested
awards, 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 net proceeds of
$12.3 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. In December 2006, we sold 4.0 million shares of our common stock in a private placement
at a price of $1.25 per share for net proceeds of $4.5 million. In connection therewith, we issued warrants to purchase 1.2 million shares of our common stock at an exercise price of $1.60 per share and amended the terms of the outstanding
1.8 million warrants issued in December 2005 to reduce the exercise price to $1.60 per share.



19



---

##### Table of Contents

Working Capital and Cash and Marketable Securities. The following table presents working capital
(current assets minus current liabilities) and cash and cash equivalents and marketable securities.



|                              |  |                   |        |   |               |   |        |                |  |   |                   |   |  |   |       
|----------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -------------- |  | - | ----------------- | - |  | - | ------
|                              |  | September 30,2007 |        |   | June 30, 2007 |   |        | March 31, 2007 |  |   | December 31, 2006
|                              |  | (in thousands)   
|Working capital and marketing |  | $                 | (2,944 | ) |               | $ | (2,891 | )              |  | $ | (2,119            | ) |  | $ | 2,839 
|                              |  |                   |        |   |               |   |        |                |  |   |                   |   |  |   |       
|Cash and cash equivalents     |  | $                 | 3,242  |   |               | $ | 946    |                |  | $ | 5,556             |   |  | $ | 11,548
|Marketable securities         |  |                   | 8,509  |   |               |   | 11,090 |                |  |   | 9,216             |   |  |   | 7,384 
|                              |  |                   |        |   |               |   |        |                |  |   |                   |   |  |   |       
|                              |  | $                 | 11,751 |   |               | $ | 12,036 |                |  | $ | 14,772            |   |  | $ | 18,932
|                              |  |                   |        |   |               |   |        |                |  |   |                   |   |  |   |       

Cash Flows

Operating Activities

Our net cash used in operating activities was $5.5 million for the nine
months ended September 30, 2007, resulting primarily from the $12.7 million net loss for the period and net working capital outflows of $0.4 million, which were offset by net non-cash charges of $7.7 million.

Our net cash used in operating activities was $15.7 million for the nine months ended September 30, 2006, resulting primarily from the $26.4 million
net loss for the period, offset by net non-cash charges of $8.5 million and net working capital inflows of $2.2 million.

At
September 30, 2007, we had net accounts receivable of $5 million compared to $6.3 million at December 31, 2006. Accounts receivable at September 30, 2007 and December 31, 2006 represented approximately 41 and 56 days of
revenue, respectively. Terms with individual customers vary greatly; however, 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 used in investing activities was $2.7 million for the nine months ended September 30, 2007. This was
primarily the result of the purchase of $9.3 million of marketable securities, additions of $0.9 million to software development costs, and purchases of $0.7 million of property and equipment, offset by the sale of $8.2 million of marketable
securities.

Net cash provided by investing activities was $11.7 million for the nine months ended September 30, 2006. This was
primarily the result of the sale of $17.5 million of marketable securities and a decrease of $0.2 million in other assets, offset by the purchase of $5 million of marketable securities, additions of $0.7 million to software development costs and
purchases of $0.2 million of property and equipment.

Financing Activities

Net cash used in financing activities was $0.2 million for the nine months ended September 30, 2007. This primarily resulted from payments under a
financing arrangement and capital lease of $0.4 million, net of proceeds from the issuance of common stock under employee stock option and employee stock purchase plans of $0.3 million.

Net cash used in financing activities was $0.3 million for the nine months ended September 30, 2006. This primarily resulted from payments under a
financing arrangement and capital lease of $0.6 million, net of proceeds from the issuance of common stock under employee stock option and employee stock purchase plans of $0.3 million.

We believe that our cash, cash equivalents, short-term investments and anticipated operating cash flows 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.



20



---

##### Table of Contents

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
reports pursuant to the Securities Exchange Act of 1934, as amended, (the Exchange Act) 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as they existed on September 30, 2007. The evaluation took into consideration the various
changes in controls and remediation measures that the Company had made prior to September 30, 2007 to address material weaknesses in internal controls over financial reporting that were identified and reported in the Form 10-K filed for the
period ended December 31, 2006. The evaluation also took into consideration the material weaknesses in internal control regarding revenue recognition that still existed as of September 30, 2007 that were identified by management during the
course of preparing the Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period
covered by this report because our controls and procedures were not adequately designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act 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 principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.

As of July 1, 2007, we implemented a revised revenue recognition control
structure designed to remediate material weakness in our revenue recognition process. This revised control structure was operational throughout the three months ended September 30, 2007. We will continue to test our revised revenue control
structure for effectiveness through the end of fiscal 2007, and we expect that this material weakness will be fully remediated by December 31, 2007.

Changes in Internal Control over Financial Reporting

Revenue Recognition Process

Our efforts during 2007 to remediate the deficiencies in our revenue recognition process include the following:



| |  |  | We consolidated all business unit accounting and reporting, including revenue recognition and billing functions, into our existing corporate headquarter process and
control framework;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We required a formal revenue recognition analysis for large contracts, which are reviewed, approved, and signed off by our Controller and Chief Financial Officer,
as well as close and periodic monitoring of the operations and progress of these large contracts to ensure that we can continue to meet our product and service commitments under those contracts;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To address revenue recognition initiation determination challenges relative to multi-element procedures where services are a significant component, we are taking
the following actions: (i) generation of a revenue recognition fact sheet that outlines all relevant contract information necessary to inform proper revenue recognition; (ii) review and redefinition of our process around revenue initiation
criteria in accordance with relevant revenue accounting standards; and (iii) improvement of our professional services management project tracking, communications, and reporting systems.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

| |  |  | We hired a full-time employee to fill the position of Director of Accounting who has previous revenue recognition experience. We hired a finance professional to
fill the newly created position of Revenue Manager. This position will assist in the administration, continuing evaluation, and execution of our revenue related activities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Existing revenue recognition processes and controls were reviewed during the second quarter and improvements in processes and updated and improved controls were
identified Based on these identified improvements, a revised revenue recognition control system was designed with implementation targeted to be complete at the beginning of the third quarter. Actions were taken to improve processing and controls
over recording of customer contracts, contract setup for revenue recognition, improve processes and controls relative to revenue recognition decisions, and improved review of revenue results.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenue recognition training was performed with revenue team members, key members of management and sales people to educate those involved with contracts, revenue
recognition and sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The improvements in processes and controls were incorporated into an updated revenue recognition policy which will be incorporated into our testing of internal
controls.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other than the items noted above, we have made no significant changes in our internal controls over financial
reporting during the quarter ended September 30, 2007 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.

Risks Related to 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 September 30, 2007, we had an accumulated deficit
of $141 million. We incurred net losses of $1.7 million and $12.7 million for the three and nine months ended September 30, 2007 and net losses of $8.2 million and $26.4 million for the three and nine months ended September 30, 2006. We
will need to increase revenue 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 operating expenses, and if our operating expenses exceed our expectations, our financial performance will be adversely affected.

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
revenue and operating expenses. For example, our revenue increased to $11.9 million and $35.5 million for the three and nine months ended September 30, 2007, from $10.1 million and $31.4 million for the three and nine months ended
September 30, 2006 while our net loss decreased to $1.7 million and $12.7 million for the three and nine months ended September 30, 2007, from $8.2 million and $26.4 million for the three and nine months ended September 30, 2006.
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 to the extent that we expand our selling and marketing activities and hire
additional personnel. Our revenue in any period depends 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.



22



---

##### Table of Contents

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 revenue 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.

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

We incorporated in February 2000 and first achieved meaningful revenue 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 revenue, and we may not successfully introduce new services and enhance existing services of Kintera
Sphere;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | we may not effectively manage our anticipated growth; and
| | - |  | ---------------------------------------------------------



| |  |  | our plan to reduce operating expenses and focus on core activities, including the related reduction in our workforce, may disrupt our customer relationships.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 additional benefits that
can be achieved through the entire suite of applications available in 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.

In 2005, we began 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.

If we are not able to manage our anticipated 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 operating results and growth may suffer. There also can be no
assurance that if we continue to expand our operations, management will be effective in expanding our



23



---

##### Table of Contents

physical facilities or that our systems, procedures or controls will be adequate to support such expansion. In addition, we will need to provide additional
sales and support services if we achieve our anticipated growth with respect to the sale and implementation of Kintera Sphere. In March 2007, we announced and began implementation of a restructuring program, including a workforce reduction, as a
means to reduce ongoing operating expenses. The restructuring program consisted of the elimination of approximately 16% of our workforce, the restructuring of our sales compensation plan, the elimination of certain lines of business and the
abandonment of certain long-lived fixed assets. The restructuring program was completed as of June 30, 2007. Thus, we will be required to service the anticipated growth in sales and support services with a reduced workforce. Failure to properly
manage an increase in customer demands could result in a material adverse effect on customer satisfaction, our ability to perform on new contracts and on our operating results.

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, and 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 revenue depends on the amount 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 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. We
may be unable to effectively upgrade and expand our systems or to integrate smoothly any new technologies with our existing systems. We expect to continue to upgrade our Sphere system to improve its donor management capabilities. In addition, we
will be introducing enhanced versions of our accounting system software in both a client server and a software as a service version. 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



24



---

##### Table of Contents

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.

Historical 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. In prior years, we completed acquisitions of several complementary businesses as part
of our business strategy, and several of those acquisitions did not provide the anticipated benefits. We may also acquire companies, services and technologies in the future 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 revenue to offset acquisition or investment costs.
| | - |  | -----------------------------------------------------------------------------------

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. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. 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 unable to detect and prevent unauthorized use of credit cards and bank account numbers 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. We
maintain a SAS70 audit rating and are PCI compliant. We may have to spend significant money and time maintaining these controls in order to protect from unauthorized credit care use.

If we are unable to safeguard confidential donor data, our reputation may be harmed and customers may be reluctant to use our service.

Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments, such as a system failure
or unanticipated events in the case of data integration, 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 laws and related



25



---

##### Table of Contents

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 revenue 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 or failure in the course
of data integration. 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 or loss of data. Our business interruption insurance may
not be sufficient to compensate us for losses that may occur. Interruptions in our service could harm our reputation and reduce our revenue 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 revenue in that quarter, as well as subsequent quarters over which
revenue 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 revenue.

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

We have derived the substantial majority of our historical revenue 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 revenue 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 revenue in each quarter is deferred revenue from contracts entered into
and paid for during previous quarters. Because of this deferred revenue, the revenue 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 revenue depends in part on the efforts of our strategic partners, over whom we have little control.

Our ability to generate increased revenue depends in part upon the ability and willingness of our strategic partners to increase
awareness of our solution to their customers and provide implementation services. 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 revenue.

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 Richard LaBarbera,
our President and Chief Executive Officer. Our executive officers and key personnel 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.



26



---

##### Table of Contents

In the past year we have experienced a significant transition in our executive management team, in
connection with the resignations of Dr. Harry E. Gruber, Dr. Allen Gruber and Dennis Berman from their positions as executive officers, the promotion of Richard LaBarbera to President and Chief Executive Officer and the recent hiring
of Scott Crowder as Chief Technology Officer. We have also experienced a high rate of employee turnover at all levels. Our newly-hired employees have not worked with our new executive 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 executive 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 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. In addition, we have experienced a high level of employee turnover, and 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. Competition for qualified sales and software development personnel can be intense. Because the sale of online fund raising solutions is still relatively new, the
pool of qualified personnel with experience working with or selling to nonprofit organizations is limited and there is a shortage of sales personnel with the experience we need. Our recent restructuring and workforce reduction may also make it more
difficult to attract and retain qualified personnel. Our ability to meet our sales objectives will depend in part on our ability to recruit, train and retain top quality people with advanced skills who understand sales to nonprofit organizations. 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 revenue and not achieve our planned growth.

Our failure to compete successfully against current or future competitors could cause our revenue 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, many of the companies we compete with may have greater financial, technical and marketing resources,
generate greater revenue and have better name recognition than we do. These competitive pressures could cause our revenue 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 September 30, 2007, we have four issued patents and 13 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 revenue and prospects for growth.



27



---

##### Table of Contents

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.
| | - |  | ----------------------------

In
addition, the stock market in general, the Nasdaq Global 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 and securities class action litigation have 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.

During 2005 and 2006 we identified
material weaknesses in our internal control. If we continue to 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 9A of our Annual Report on Form
10-K/A and Item 4 of this Report, we identified a material weakness in our internal control over financial reporting in connection with the audit of our financial statements for the year ended December 31, 2006. We believe that new and
existing internal controls related to revenue recognition need to be developed and be improved and operate effectively for a sufficient period of time to validate a conclusion that such controls are effective. As a result, we have concluded that our
disclosure controls and procedures were not effective as of



28



---

##### Table of Contents

September 30, 2007. 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 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 founders, Harry Gruber, Allen Gruber, Dennis Berman and entities affiliated with them, own, in the aggregate, approximately 26.4% of our outstanding
common stock as of September 30, 2007. As a result, these persons, acting together, have the ability to exercise significant influence over the outcome of all matters submitted to our stockholders for approval, including the election and
removal of directors and any significant transaction involving us. 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; 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 of 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



29



---

##### Table of Contents

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.

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.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

At the
Companys Annual Meeting of Stockholders held on July 19, 2007, the following individuals, both members of the Board of Directors were re-elected as Class I directors: Alfred R. Berkeley III, Philip Heasley and Mitchell Tuchman. For each
elected director, the results of the voting were:



|                       |  |                  |  |              
|---------------------- |  | ---------------- |  | -------------
|                       |  | AffirmativeVotes |  | VotesWithheld
|Alfred R. Berkeley III |  | 32,774,463       |  | 148,166      
|Philip Heasley         |  | 31,050,808       |  | 1,871,821    
|Mitchell Tuchman       |  | 32,775,963       |  | 146,666      

Our stockholders also voted to ratify Ernst & Young LLP as the Companys independent registered
public accounting firm for the fiscal year ending December 31, 2007. The results of the voting on this proposal were:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|32,898,374        |  | 22,255         |  | 2,000       |  | 0               



30



---

##### Table of Contents

|Item 5. | Other Information.
|------- | ------------------

On October 4, 2007, we entered
into an Executive Employment Agreement with Alexander A. Fitzpatrick, our Senior Vice President, General Counsel and Secretary. If Mr. Fitzpatrick is terminated without cause, he will be eligible to receive continued payment of his annual base
salary and health care coverage, as in effect on the date of such termination, for six months. If within the period two months prior to and two years following a change in control Mr. Fitzpatrick resigns for good reason or is terminated without
cause, Mr. Fitzpatrick will be eligible to receive (i) in a lump sum within fifteen business days after the date of termination, an amount equal to the sum of fifty percent of his base salary in effect at the time of termination and fifty
percent of the maximum annual bonus for which he is eligible at the time of termination, (ii) health care coverage as in effect on the date of termination for six months and (iii) immediately vesting of one hundred percent (100%) of
all restricted stock, unvested stock options and other equity based compensation awards held by him as of the date of such termination.



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



|               |  |                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                    
|3.2 (1)        |  | 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.              
|               | 
|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           |  | Change in Control and Severance Agreement, dated October 4, 2007, by and between Kintera, Inc. and Alexander A. Fitzpatrick
|               | 
|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 with Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-109169) dated November 4, 2003.
|--- | --------------------------------------------------------------------------------------------------------------

|(2) | Filed on Current Report on Form 8-K on November 5, 2007.
|--- | --------------------------------------------------------

|(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.
|--- | ---------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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: November 7, 2007



32