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 MARCH 31, 2008



| ̈ | 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, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈            Accelerated filer   ̈            Non-accelerated filer   ̈            Smaller reporting company  þ

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 April 30, 2008 there were 40,396,905
shares of the registrants common stock outstanding.









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KINTERA, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

INDEX



|                              |  |                                                                                                                |  |   
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                               
|                              |  |                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                           |  |   
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007                      |  | 3 
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited) |  | 4 
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited) |  | 5 
|                              |  |                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 6 
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 14
|                              |  |                                                                                                               
|Item 4T.                      |  | Controls and Procedures                                                                                        |  | 20
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                               
|                              |  |                                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                                              |  | 21
|                              |  |                                                                                                               
|Item 1A.                      |  | Risk Factors                                                                                                   |  | 21
|                              |  |                                                                                                               
|Item 4.                       |  | Submission of Matters to Vote of Security Holders                                                              |  | 29
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                       |  | 29
|                              |  |                                                                                                               
|                              |  | Signature                                                                                                      |  | 31
|                              |  |                                                                                                               
|                              |  | Exhibit 31.1                                                                                                   |  |   
|                              |  |                                                                                                               
|                              |  | Exhibit 31.2                                                                                                   |  |   
|                              |  |                                                                                                               
|                              |  | Exhibit 32.1                                                                                                   |  |   
|                              |  |                                                                                                               
|                              |  | Exhibit 32.2                                                                                                   |  |   



2



---

PART I. FINANCIAL INFORMATION



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

KINTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                           |  | March 31,2008 |          |   | December 31,2007 |  
|Assets                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                  |  | $             | 4,080    |   |                  | $ | 6,556    |  
|Marketable securities                                                                                                                                                      |  |               | 1,580    |   |                  |   | 2,848    |  
|Restricted cash                                                                                                                                                            |  |               | 7,718    |   |                  |   | 12,429   |  
|Accounts receivable, net of allowance for doubtful accounts of $332 and $320 at March 31, 2008 and December 31, 2007                                                       |  |               | 4,608    |   |                  |   | 4,174    |  
|Prepaid expenses and other current assets                                                                                                                                  |  |               | 922      |   |                  |   | 1,024    |  
|Deferred costs                                                                                                                                                             |  |               | 1,362    |   |                  |   | 1,123    |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                       |  |               | 20,270   |   |                  |   | 28,154   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Property and equipment, net                                                                                                                                                |  |               | 3,991    |   |                  |   | 4,173    |  
|Software development costs, net                                                                                                                                            |  |               | 1,863    |   |                  |   | 1,686    |  
|Other assets                                                                                                                                                               |  |               | 47       |   |                  |   | 54       |  
|Intangible assets, net                                                                                                                                                     |  |               | 3,392    |   |                  |   | 3,914    |  
|Goodwill                                                                                                                                                                   |  |               | 12,017   |   |                  |   | 12,017   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                               |  | $             | 41,580   |   |                  | $ | 49,998   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                       |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Accounts payable, trade                                                                                                                                                    |  | $             | 1,395    |   |                  | $ | 1,881    |  
|Accrued expenses                                                                                                                                                           |  |               | 845      |   |                  |   | 820      |  
|Accrued employee benefits and severance                                                                                                                                    |  |               | 1,595    |   |                  |   | 1,513    |  
|Donations payable                                                                                                                                                          |  |               | 7,718    |   |                  |   | 12,429   |  
|Short-term notes payable                                                                                                                                                   |  |               | 1,217    |   |                  |   | 1,021    |  
|Deferred revenue                                                                                                                                                           |  |               | 15,721   |   |                  |   | 15,513   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                  |  |               | 28,491   |   |                  |   | 33,177   |  
|Notes payable                                                                                                                                                              |  |               | 1,988    |   |                  |   | 2,161    |  
|Deferred rent and other                                                                                                                                                    |  |               | 817      |   |                  |   | 628      |  
|Deferred tax liability                                                                                                                                                     |  |               | 478      |   |                  |   | 441      |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                          |  |               | 31,774   |   |                  |   | 36,407   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Commitments and contingencies                                                                                                                                              |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Preferred stock, $0.001 par value; 20,000 shares authorized, no shares outstanding at March 31, 2008 and December 31,
2007                                                 |  |               |         |   |                  |   |         |  
|Common stock, $0.001 par value, authorized 60,000 shares authorized, 40,397 and 40,397 shares issued and outstanding at March 31, 2008
and December 31, 2007, respectively |  |               | 40       |   |                  |   | 40       |  
|Additional paid-in capital                                                                                                                                                 |  |               | 157,932  |   |                  |   | 157,426  |  
|Accumulated other comprehensive income                                                                                                                                     |  |               | 6        |   |                  |   | 2        |  
|Accumulated deficit                                                                                                                                                        |  |               | (148,172 | ) |                  |   | (143,877 | )
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                 |  |               | 9,806    |   |                  |   | 13,591   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $             | 41,580   |   |                  | $ | 49,998   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  

See accompanying notes to unaudited condensed consolidated financial statements.



3



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                           |  |                             |        |   |      |   |        |  
|------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | Three Months EndedMarch 31, |       
|                                           |  | 2008                        |        |   | 2007 |  
|Net revenue                                |  | $                           | 8,911  |   |      | $ | 10,721 |  
|Cost of revenue                            |  |                             | 3,993  |   |      |   | 4,136  |  
|                                           |  |                             |        |   |      |   |        |  
|Gross profit                               |  |                             | 4,918  |   |      |   | 6,585  |  
|                                           |  |                             |        |   |      |   |        |  
|Operating expenses:                        |  |                             |        |   |      |   |        |  
|Sales and marketing                        |  |                             | 4,018  |   |      |   | 5,620  |  
|Product development and support            |  |                             | 1,621  |   |      |   | 1,732  |  
|General and administrative                 |  |                             | 3,006  |   |      |   | 4,486  |  
|Amortization of purchased intangibles      |  |                             | 522    |   |      |   | 733    |  
|Restructuring charges                      |  |                             |       |   |      |   | 2,445  |  
|                                           |  |                             |        |   |      |   |        |  
|Total operating expenses                   |  |                             | 9,167  |   |      |   | 15,016 |  
|                                           |  |                             |        |   |      |   |        |  
|Operating loss                             |  |                             | (4,249 | ) |      |   | (8,431 | )
|Other income (expense), net                |  |                             | 6      |   |      |   | 286    |  
|                                           |  |                             |        |   |      |   |        |  
|Loss before income taxes                   |  |                             | (4,243 | ) |      |   | (8,145 | )
|Provision for income taxes                 |  |                             | 52     |   |      |   | 118    |  
|                                           |  |                             |        |   |      |   |        |  
|Net loss                                   |  | $                           | (4,295 | ) |      | $ | (8,263 | )
|                                           |  |                             |        |   |      |   |        |  
|Loss per common share - basic and diluted  |  | $                           | (0.11  | ) |      | $ | (0.21  | )
|                                           |  |                             |        |   |      |   |        |  
|Weighted average common shares outstanding |  |                             | 40,248 |   |      |   | 39,839 |  
|                                           |  |                             |        |   |      |   |        |  

See accompanying notes to unaudited condensed consolidated financial statements.



4



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                      |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Three Months EndedMarch 31, |       
|                                                                                      |  | 2008                        |        |   | 2007 |  
|OPERATING ACTIVITIES                                                                  |  |                             |        |   |      |   |        |  
|Net loss                                                                              |  | $                           | (4,295 | ) |      | $ | (8,263 | )
|Adjustments to reconcile loss to net cash used in operating activities:               |  |                             |        |   |      |   |        |  
|Bad debt expense (benefit)                                                            |  |                             | 33     |   |      |   | (204   | )
|Depreciation                                                                          |  |                             | 504    |   |      |   | 378    |  
|Amortization of software development costs                                            |  |                             | 239    |   |      |   | 259    |  
|Amortization of intangible assets                                                     |  |                             | 522    |   |      |   | 733    |  
|Amortization of premium (accretion of discount) on securities                         |  |                             |       |   |      |   | (20    | )
|Other than temporary impairment of marketable securities                              |  |                             | 25     |   |      |   |       |  
|Forgiveness of employee notes                                                         |  |                             | 6      |   |      |   | 5      |  
|Deferred income taxes                                                                 |  |                             | 37     |   |      |   | 106    |  
|Non-cash restructuring charges                                                        |  |                             |       |   |      |   | 1,340  |  
|Stock-based compensation                                                              |  |                             | 506    |   |      |   | 838    |  
|Loss on disposal of property and equipment                                            |  |                             | 10     |   |      |   |       |  
|Changes in assets and liabilities:                                                    |  |                             |        |   |      |   |        |  
|Accounts receivable                                                                   |  |                             | (467   | ) |      |   | 634    |  
|Prepaid expenses and other current assets                                             |  |                             | 384    |   |      |   | 418    |  
|Deferred costs                                                                        |  |                             | (239   | ) |      |   | (243   | )
|Accounts payable and accrued expenses                                                 |  |                             | (513   | ) |      |   | (1,073 | )
|Accrued employee benefits and severance                                               |  |                             | 82     |   |      |   | 1,112  |  
|Donations payable                                                                     |  |                             | (4,711 | ) |      |   | (9,110 | )
|Restricted cash                                                                       |  |                             | 4,711  |   |      |   | 9,110  |  
|Deferred revenue                                                                      |  |                             | 208    |   |      |   | 253    |  
|Deferred rent and other                                                               |  |                             | 189    |   |      |   | 6      |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Cash used in operating activities                                                     |  |                             | (2,769 | ) |      |   | (3,721 | )
|                                                                                      |  |                             |        |   |      |   |        |  
|INVESTING ACTIVITIES                                                                  |  |                             |        |   |      |   |        |  
|Purchases of marketable securities                                                    |  |                             |       |   |      |   | (4,720 | )
|Sales and maturities of marketable securities                                         |  |                             | 1,247  |   |      |   | 2,888  |  
|Purchases of property and equipment                                                   |  |                             | (280   | ) |      |   | (50    | )
|Additions to software development costs                                               |  |                             | (416   | ) |      |   | (298   | )
|Other assets                                                                          |  |                             | 7      |   |      |   | 9      |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Cash (used in) provided by investing activities                                       |  |                             | 558    |   |      |   | (2,171 | )
|                                                                                      |  |                             |        |   |      |   |        |  
|FINANCING ACTIVITIES                                                                  |  |                             |        |   |      |   |        |  
|Payments under financing arrangement and capital lease                                |  |                             | (265   | ) |      |   | (121   | )
|Proceeds from issuance of common stock under employee stock option and purchase plans |  |                             |       |   |      |   | 21     |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Cash used in financing activities                                                     |  |                             | (265   | ) |      |   | (100   | )
|                                                                                      |  |                             |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                             |  |                             | (2,476 | ) |      |   | (5,992 | )
|Cash and cash equivalents, beginning of period                                        |  |                             | 6,556  |   |      |   | 11,548 |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                              |  | $                           | 4,080  |   |      | $ | 5,556  |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                     |  |                             |        |   |      |   |        |  
|Cash paid for taxes                                                                   |  | $                           | 16     |   |      | $ | 12     |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Cash paid for interest                                                                |  | $                           | 96     |   |      | $ | 7      |  
|                                                                                      |  |                             |        |   |      |   |        |  
|Supplemental disclosure for non-cash investing and financing activities:              |  |                             |        |   |      |   |        |  
|Value of shares released from escrow in connection with contingent consideration      |  | $                           | 35     |   |      | $ |       |  
|Unrealized gain (loss) on investments                                                 |  | $                           | 4      |   |      | $ | 20     |  
|Purchase of equipment under capital lease                                             |  | $                           |       |   |      | $ | 50     |  
|Accrual of software license owed and to be purchased                                  |  | $                           | 52     |   |      | $ |       |  
|Financial insurance premiums                                                          |  | $                           | 288    |   |      | $ | 419    |  

See accompanying notes to unaudited condensed consolidated financial statements.



5



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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 condensed 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 2007 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. The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
U.S. Generally Accepted Accounting Principles for complete financial statements.

2008 Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Companys assets and the satisfaction of its liabilities in the normal course of business. Through March 31, 2008, the Company has an accumulated deficit of $148 million. The Companys long
term operating success will depend on its ability to introduce and market enhancements to its existing products and services in a timely manner, which meet customer requirements and to respond to competitive pressures and technological advances. In
order for the Company to achieve positive operating results and positive cash flows, it will need to increase in the level of revenues or reduce operating costs. In order to reduce our operating expenses, on May 6, 2008 the Company executed a
reduction in force that eliminated 14% of its employees. This reduction, combined with reductions in non-compensation related spending, is intended to offset the lower levels of revenue the Company is currently experiencing and improve cash flow. If
events or circumstances occur such that the Company does not meet its operating plan as expected, the Company may be required to further reduce operating expense which could have a material adverse effect on its ability to achieve its intended
business objectives.

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.

Revenue Recognition

The Company derives revenues from overage fees generated from usage and professional services provided in excess of contractually agreed upon limits.
Usage overage fees are generated from activity related to the amount of emails transmitted, faxes sent, contact records, users, and data storage that exceed contractual limits. Professional services overage fees are generated from hours of
consulting and support provided that exceed contractual limits on service plan, maintenance and support agreements. During the periods preceding the first quarter of 2008, the Company recorded the amount of overage revenue in which collectibility
was reasonably assured in during the period in which the overages occurred. Therefore, the Company estimated a concessions reserve, in addition to the allowance for bad debts, which was recorded against the overage receivable balances. The
concessions reserve estimates were based on historical trends as well as an analysis of the overage receivable balances.



6



---

Starting in the first quarter of 2008, the Company determined that, due to recent internal business
trends and the downturn in the economy, collectibility of the overage revenues are no longer reasonably assured. These trends include the reorganization of the sales department, changes to contract renewal terms and managements focus on
improving renewal rates and revenue on existing customers. Accordingly, the Company began recognizing usage revenue based on cash received beginning in the first quarter of 2008. The change in timing of recognizing overage revenue was made
prospectively and had the initial effect of reducing overage revenues recorded in the first quarter of 2008.

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.

The Company has not yet completed an analysis of its
ability to utilize its research and development credit carryforwards. Until this analysis has been completed, the Company has removed the deferred tax assets related to its research and development credit carryforwards of $4.1 million generated
through 2007 from its deferred tax asset schedule and has recorded a corresponding decrease to its valuation allowance. As a result, the Company has no unrecognized tax benefits as of March 31, 2008. When the analysis of the research and
development tax credits is finalized, the Company will update its deferred tax asset schedule and its analysis of unrecognized tax benefits under FIN 48. However, at this time, the Company cannot estimate how much the unrecognized tax benefits may
change. 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.

The Companys practice is to recognize interest and/or penalties accrued on any unrecognized tax benefits as a component of income tax expense. On
January 1, 2008, the Company did not have any interest or penalties associated with unrecognized tax benefits, nor was any interest or penalties recognized during the three months ended March 31, 2008.

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

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis
and the tax basis of assets and liabilities using enacted tax rates. Valuation allowances are established to reduce deferred tax assets to the amount that is expected to more likely than not be realized in future tax returns.



7



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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 months ended
March 31, 2008 and 2007.



|                               |  |                             |     |      |   |    
|------------------------------ |  | --------------------------- | --- | ---- | - | ---
|                               |  | Three months endedMarch 31,
|                               |  | 2008                        |     | 2007
|Internal Use SoftwareSOP 98-1 |  |                             |     |      |   |    
|Capitalized costs              |  | $                           | 316 |      | $ | 298

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 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 months ended March 31, 2008 and
2007.



|                          |  |                             |     |      |   |  
|------------------------- |  | --------------------------- | --- | ---- | - | -
|                          |  | Three months endedMarch 31,
|                          |  | 2008                        |     | 2007
|Marketed SoftwareSFAS 86 |  |                             |     |      |   |  
|Capitalized costs         |  | $                           | 100 |      | $ | 

Marketable Securities

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 introduces a framework for measuring fair value and
expands required disclosure about fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007, and the Company has adopted the standard
for those assets and liabilities as of January 1, 2008 and the impact of adoption was not significant.

SFAS 157 defines fair value as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.



8



---

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.

When possible, the Company utilizes the market approach to measure fair value for its
financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



|                         |  |                                             |       |         |   |         |  |         |   |  |   |    
|------------------------ |  | ------------------------------------------- | ----- | ------- | - | ------- |  | ------- | - |  | - | ---
|                         |  | Fair Value Measurements as ofMarch 31, 2008
|Description              |  | Total                                       |       | Level 1 |   | Level 2 |  | Level 3
|Certificates of deposit1 |  | $                                           | 97    |         | $ | 97      |  | $       |  |  | $ |   
|Auction rate security2   |  |                                             | 975   |         |   |        |  |         |  |  |   | 975
|US Government/Agency1    |  |                                             | 508   |         |   | 508     |  |         |  |  |   |   
|                         |  |                                             |       |         |   |         |  |         |   |  |   |    
|Total                    |  | $                                           | 1,580 |         | $ | 605     |  | $       |  |  | $ | 975
|                         |  |                                             |       |         |   |         |  |         |   |  |   |    



|1 | Unrealized gains or losses on certificates of deposit and US Government/Agency investments are recorded in accumulated
other comprehensive income at each measurement date.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | As of March 31, 2008 the Company held an auction rate security with an aggregate principal balance of $1.0 million
at March 31, 2008 which consists of one auction rate securities that the Company has been unable to liquidate via auction due to recent weakness in the auction rate securities market. As a result, the Companys continues to hold this
security and the issuer is required to pay interest on the securities at the maximum contractual rates. The auction rate security that the Company holds at March 31, 2008 is a Student Loan Asset-Backed Note, Series 2007-1, Class A-5 Auction
Rate Notes, College Loan Corporation Trust II - Issuing Entity.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company estimated the fair value of these auction
rate securities using the discounted cash flow method (Level 3 inputs), which represents a change in the methodology used to determine fair value since its initial adoption of SFAS No. 157. The discounted cash flow method determines fair value based
on the present value of projected cash flows over a specific period. The values are then discounted to reflect the degree of risk inherent in the security and achieving the projected cash flows. The discounted cash flow model used to determine the
fair value of the auction rate securities utilized two significant unobservable inputs: a discount rate of approximately 5.37% which represents an estimate market rate of return and an estimated period until sale and/or successful auction of the
security of five years. Based on the discounted cash flow model, the Company determined that the fair value of the auction rate security had declined by $25 during the first quarter of 2008. The determination of the fair value of the auction rate
security also considered, among other things, the collateralization underlying the individual securities and the creditworthiness of the counterparty.

In accordance with the guidance provided by FASB Staff Position (FSP) Nos. 115-1 the Company periodically reviews the fair value of its marketable securities to determine if declines in the fair value of
individual securities are other-than-temporary in nature. To determine if a decline in the fair value of an investment is other-than-temporary, the Company considers several factors including, among others, the period of time and extent to which the
estimated fair value has been less than cost, overall market conditions, the historical and projected future financial condition of the issuer of the security and our ability and intent to hold the security for a period of time sufficient to allow
for a recovery of the market value. If the Company believes the decline in the fair value of an individual security is other-than-temporary, the Company will write-down the carrying value of the security to its estimated fair value and recognize the
write-down as a charge in our statement of operations.

Considering the inability to sell the remaining auction rate security at auction,
the recent deterioration of overall market conditions and the Companys near-term liquidity needs, the Company concluded that the decline in the fair value of its auction rate security was other-than-temporary. Accordingly, the Company
wrote-down our auction rate security to its estimated fair value as of March 31, 2008 and recognized a charge of $25, which is included in other income (expense), net, in the accompanying consolidated statement of operations.

The following table summarizes the changes in the fair values for Level 3 items for the three months ended March 31, 2008.



|                                                                              |  |         |      
|----------------------------------------------------------------------------- |  | ------- | -----
|Changes in fair value during the three months ended March 31, 2008 (pre-tax): |  | Level 3
|Beginning Balance                                                             |  | $       | 0    
|Transfers into Level 3                                                        |  |         | 1,000
|Realized loss  included in other income (expense), net                       |  |         | 25   
|                                                                              |  |         |      
|Ending Balance                                                                |  | $       | 975  
|                                                                              |  |         |      

The Company has reviewed all other investments as of March 31, 2008 for impairment and
concluded that their carrying value approximated their fair value.



9



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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 endedMarch 31, |       
|                                               |  | 2008                        |        |   | 2007 |  
|Net loss                                       |  | $                           | (4,295 | ) |      | $ | (8,263 | )
|Other comprehensive income (loss)              |  |                             |        |   |      |   |        |  
|Change in unrealized gain (loss) on securities |  |                             | 4      |   |      |   | (20    | )
|                                               |  |                             |        |   |      |   |        |  
|Total comprehensive loss                       |  | $                           | (4,291 | ) |      | $ | (8,283 | )
|                                               |  |                             |        |   |      |   |        |  

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 EndedMarch 31, |           
|                                                                               |  | 2008                        |            |   | 2007 |  
|Numerator:                                                                     |  |                             |            |   |      |   |            |  
|Net loss                                                                       |  | $                           | (4,295     | ) |      | $ | (8,263     | )
|                                                                               |  |                             |            |   |      |   |            |  
|DenominatorBasic and Diluted:                                                 |  |                             |            |   |      |   |            |  
|Weighted average common shares                                                 |  |                             | 40,425,667 |   |      |   | 40,106,747 |  
|Less: Weighted Average shares held in escrow related to completed acquisitions |  |                             | (177,855   | ) |      |   | (268,032   | )
|                                                                               |  |                             |            |   |      |   |            |  
|Denominator                                                                    |  |                             | 40,247,812 |   |      |   | 39,838,715 |  
|                                                                               |  |                             |            |   |      |   |            |  
|Basic and Diluted net loss per share                                           |  | $                           | (0.11      | ) |      | $ | (0.21      | )
|                                                                               |  |                             |            |   |      |   |            |  

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



|                                                              |  |                             |  |          
|------------------------------------------------------------- |  | --------------------------- |  | ---------
|                                                              |  | Three Months EndedMarch 31,
|Common Stock Equivalents                                      |  | 2008                        |  | 2007     
|Common stock held in escrow related to completed acquisitions |  | 130,532                     |  | 259,587  
|Options to purchase common stock                              |  | 6,404,927                   |  | 6,384,552
|Warrants to purchase common stock                             |  | 3,020,000                   |  | 3,020,000
|                                                              |  |                             |  |          
|Total                                                         |  | 9,555,459                   |  | 9,664,139
|                                                              |  |                             |  |          



10



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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 months ended March 31, 2008. No contingent consideration was recorded during the three months ended March 31, 2007. As of
March 31, 2008 there are approximately 131,000 shares subject to contingent consideration provisions from previous acquisitions that may be issued.

Amount Allocated to Compensation Expense

On March 18, 2008, 56,000 shares subject to contingent
consideration were released from escrow. The contingent consideration was 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, 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 $35 during the three months ended March 31, 2008.

Restructuring Costs

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.



11



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|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 months ended March 31, 2008 and 2007.



|                                |  |                             |     |      |   |    
|------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                |  | Three Months EndedMarch 31,
|                                |  | 2008                        |     | 2007
|Cost of revenue                 |  | $                           | 48  |      | $ | 59 
|Sales and marketing             |  |                             | 106 |      |   | 168
|Product development and support |  |                             | 54  |      |   | 107
|General and administrative      |  |                             | 298 |      |   | 504
|                                |  |                             |     |      |   |    
|                                |  | $                           | 506 |      | $ | 838
|                                |  |                             |     |      |   |    

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. During prior periods, the Company estimated the 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. During
the three months ended March 31, 2008 the Company modified its expected term calculation to estimate the term based on its historical option term experience.

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 three months ended March 31, |  | 2008          |  | 2007   
|Risk-free interest rate              |  | 2.37%         |  | 4.65%  
|Expected term (years)                |  | 3.66 years    |  | 6 years
|Expected volatility                  |  | 65%           |  | 75%    
|Dividend yield                       |  | 0%            |  | 0%     



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

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 for termination benefits was $1,157,
which included $553 payable to certain former executive officers as described below. The Company recorded $1,157 during the year ended December 31, 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 remained on the board of directors of the Company, and Dennis Berman, former Executive Vice President of the Company. 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 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 eliminated as of March 31, 2007. The impairment of assets was 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 also identified certain fixed assets with a net carrying value of $70 as of December 31, 2006 which were abandoned March 31, 2007. The impairment of
these assets was 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.



12



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In connection with the restructuring program the Company disposed of certain product lines during the
year ended December 31, 2007, with such disposals resulting in a net gain of $223, which is included in restructuring charges in the condensed consolidated statement of operations. The net gain was the result of the recognition of $262 of
deferred revenue offset by $26 of receivables sold, $3 of capitalized software sold and net cash paid of $10.

The following table shows
the activity related to the restructuring program for the twelve months ended December 31, 2007 and the three months ended March 31, 2008:



|                               |  |                     |       |   |                  |   |        |       |  |   |       |   |  |   |        |  
|------------------------------ |  | ------------------- | ----- | - | ---------------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                               |  | TerminationBenefits |       |   | AssetImpairments |   |        | Other |  |   | Total |  
|Liability at December 31, 2006 |  | $                   |      |   |                  | $ |       |       |  | $ |      |   |  | $ |       |  
|Charged to expense             |  |                     | 1,157 |   |                  |   | 1,340  |       |  |   | (223  | ) |  |   | 2,274  |  
|Non-cash charges               |  |                     |      |   |                  |   | (1,340 | )     |  |   | 233   |   |  |   | (1,107 | )
|Cash payments                  |  |                     | (907  | ) |                  |   |       |       |  |   | (10   | ) |  |   | (917   | )
|                               |  |                     |       |   |                  |   |        |       |  |   |       |   |  |   |        |  
|Liability at December 31, 2007 |  | $                   | 250   |   |                  | $ |       |       |  | $ |      |   |  | $ | 250    |  
|Cash payments                  |  |                     | (9    | ) |                  |   |       |       |  |   |      |   |  |   | (9     | )
|                               |  |                     |       |   |                  |   |        |       |  |   |       |   |  |   |        |  
|Liability at March 31, 2008    |  | $                   | 241   |   |                  | $ |       |       |  | $ |      |   |  | $ | 241    |  
|                               |  |                     |       |   |                  |   |        |       |  |   |       |   |  |   |        |  

The liability at March 31, 2008 relates to termination benefits payable to certain former
executive officers with payment of cash thereof primarily contingent upon the achievement of certain operational performance metrics, as defined in the respective severance agreements, for two fiscal quarters. The first quarter of those operational
performance metrics was achieved during the three months ended September 30, 2007 and termination benefits of $210 were paid on November 30, 2007. Upon achievement of the second quarter of those operational performance metrics, an
additional $210 will be paid in cash. At the election of the former executives, these amounts may be settled in shares of common stock at any time, notwithstanding the Companys failure to achieve those operational performance metrics. In March
2008 two former executive officers elected to receive their severance in 273,652 shares of common stock. The common shares were not issued as of March 31, 2008 and as a result the Company has recorded a long term liability of $155 of deferred
rent and other.



|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.



|5. | Recent Events
|-- | -------------

Restructuring Program

On May 6, 2008, 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 April 29, 2008. The restructuring program consists of a workforce reduction and realignment. The workforce reduction is being implemented as a means to reduce ongoing
operating expenses by restructuring the Companys operations and reducing its workforce. The restructuring program is expected to be completed by June 30, 2008. The restructuring program consists of the elimination of approximately 14% of the
workforce. The total amount incurred for termination benefits is $442, which will be reflected as restructuring charges in the condensed consolidated statement of operations as of and for the three months ended June 30, 2008.

Lawsuit Settlement

In May 2008, the Company
entered into a settlement agreement to resolve a lawsuit filed by a former employee of the Company, pursuant to which the Company will pay a total of $130 in installments through October 2008. The liability was reflected in accrued expenses as of
March 31, 2008.



13



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

Special Note About Forward-Looking Statements

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

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

The following discussion should be read in conjunction with our condensed 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, include but are 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 future capital needs; 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 March 31,
2008 we had approximately 4,000 active customers.

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 is deferred and recognized as revenue over the entire term of our
contracts. Revenue from transaction processing fees is recognized as it is earned. Total online donations processed for the three months ended March 31, 2008 was approximately $57.8 million, as compared to $66.9 million for the comparable
period in 2007. Revenue from service plan, maintenance and support associated with Kintera Sphere represented approximately 53% and 50% of our total net revenue during the three months ended March 31, 2008 and 2007. Revenue from data services
represented approximately 20% and 23% of our total net revenue during the three months ended March 31, 2008 and 2007. 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.

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.



14



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We also generate revenue through the sale of our fund 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.

We also derive revenues from overage fees generated from usage and professional services provided in excess of contractually agreed upon limits. Usage
overage fees are generated from activity related to the amount of emails transmitted, faxes sent, contact records, users, and data storage that exceed contractual limits. Professional services overage fees are generated from hours of consulting and
support provided that exceed contractual limits on service plan, maintenance and support agreements. During the periods preceding the first quarter of 2008, we recorded the amount of overage revenue in which collectibility was reasonably assured in
during the period in which the overages occurred. Therefore, we estimated a concessions reserve, in addition to the allowance for bad debts, which was recorded against the overage receivable balances. The concessions reserve estimates were based on
historical trends as well as an analysis of the overage receivable balances.

Starting in the first quarter of 2008, we determined that,
due to recent internal business trends and the downturn in the economy, collectibility of the overage revenues are no longer reasonably assured. These trends include the reorganization of the sales department, changes to contract renewal terms and
managements focus on improving renewal rates and revenue on existing customers. Accordingly, we began recognizing usage revenue based on cash received beginning in the first quarter of 2008. The change in timing of recognizing overage revenue
was made prospectively and had the initial effect of reducing overage revenues recorded in the first quarter of 2008

Cost of Revenue and Operating
Expenses

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.



15



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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
| | - |  | --------------------------------------------



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

Employees

As of March 31, 2008 we had 276 employees, including 87 in professional services and support, 94 in sales and marketing, 59 in
product development and support and 36 in general and administrative. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Results of Operations

Comparison of results for the three
months ended March 31, 2008 and 2007.

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



|                                      |  |                             |    |  |       |   
|------------------------------------- |  | --------------------------- | -- |  | ----- | --
|                                      |  | Three Months EndedMarch 31, |   
|                                      |  | 2008                        |    |  | 2007  |   
|Net revenue                           |  | 100.0                       | %  |  | 100.0 | % 
|Cost of revenue                       |  | 44.8                        |    |  | 38.6  |   
|                                      |  |                             |    |  |       |   
|Gross profit                          |  | 55.2                        |    |  | 61.4  |   
|Operating expenses:                   |  |                             |    |  |       |   
|Sales and marketing                   |  | 45.1                        |    |  | 52.4  |   
|Product development and support       |  | 18.2                        |    |  | 16.2  |   
|General and administrative            |  | 33.7                        |    |  | 41.8  |   
|Amortization of purchased intangibles |  | 5.9                         |    |  | 6.8   |   
|Restructuring charges                 |  |                            |    |  | 22.8  |   
|                                      |  |                             |    |  |       |   
|Total operating expenses              |  | 102.9                       |    |  | 140.0 |   
|                                      |  |                             |    |  |       |   
|Loss from operations                  |  | (47.7                       | )  |  | (78.6 | ) 
|Interest income, net                  |  | (0.1                        | )  |  | 2.6   |   
|                                      |  |                             |    |  |       |   
|Loss before income taxes              |  | (47.6                       | )  |  | (76.0 | ) 
|Provision for income taxes            |  | 0.6                         |    |  | 1.1   |   
|                                      |  |                             |    |  |       |   
|Net loss                              |  | (48.2                       | )% |  | (77.1 | )%
|                                      |  |                             |    |  |       |   

Net Revenue, Cost of Revenue and Gross Profit

The following table presents net revenue, cost of revenue and gross profit for the three months ended March 31, 2008 and 2007.



|                |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   
|--------------- |  | --------------------------------- | ----- | -------------- | -------------------------------- | - | ------ | ------------------ | -------------- |  | ------- | - |  | - | ------ | - |  | ----- | --
|                |  | Three Months EndedMarch 31, 2008  |       |                | Three Months EndedMarch 31, 2007 |   |        | Increase(Decrease) |                |  | %Change |  
|                |  | Amount                            |       | % ofNetRevenue |                                  |   | Amount |                    | % ofNetRevenue |  |         |  
|                |  | (in thousands, except percentage) |      
|Net revenue     |  | $                                 | 8,911 |                | 100.0                            | % |        | $                  | 10,721         |  | 100.0   | % |  | $ | (1,810 | ) |  | (16.9 | )%
|Cost of revenue |  |                                   | 3,993 |                | 44.8                             |   |        |                    | 4,136          |  | 38.6    |   |  |   | (143   | ) |  | (3.5  | ) 
|                |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   
|Gross profit    |  | $                                 | 4,918 |                | 55.2                             | % |        | $                  | 6,585          |  | 64.7    | % |  | $ | (1,667 | ) |  | (25.3 | )%
|                |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   



16



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The following table presents the components of net revenue for the three months ended March 31, 2008
and 2007. 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 SOP
No. 97-2, as modified by SOP 98-4, and EITF No. 00-21.



|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   
|------------------------------------- |  | --------------------------------- | ----- | -------------- | -------------------------------- | - | ------ | ------------------ | -------------- |  | ------- | - |  | - | ------ | - |  | ----- | --
|                                      |  | Three Months EndedMarch 31, 2008  |       |                | Three Months EndedMarch 31, 2007 |   |        | Increase(Decrease) |                |  | %Change |  
|                                      |  | Amount                            |       | % ofNetRevenue |                                  |   | Amount |                    | % ofNetRevenue |  |         |  
|                                      |  | (in thousands, except percentage) |      
|Service plan, maintenance and support |  | $                                 | 4,701 |                | 52.8                             | % |        | $                  | 5,124          |  | 47.8    | % |  | $ | (423   | ) |  | (8.3  | )%
|Transaction and usage                 |  |                                   | 2,301 |                | 25.8                             |   |        |                    | 2,684          |  | 25.0    |   |  |   | (383   | ) |  | (14.3 | ) 
|Services                              |  |                                   | 1,811 |                | 20.3                             |   |        |                    | 2,726          |  | 25.4    |   |  |   | (915   | ) |  | (33.6 | ) 
|License                               |  |                                   | 98    |                | 1.1                              |   |        |                    | 187            |  | 1.8     |   |  |   | (89    | ) |  | (47.6 | ) 
|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   
|Net revenue                           |  | $                                 | 8,911 |                | 100.0                            | % |        | $                  | 10,721         |  | 100.0   | % |  | $ | (1,810 | ) |  | (16.9 | )%
|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |       |   

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 decrease in net revenue for the three months ended March 31, 2008 and 2007, respectively.

Service plan,
maintenance and support revenue consists primarily of activation, hosting and use of our Kintera Sphere software as a service (SaaS) offering as well as software maintenance and support revenue for our Fundware software installations.
Net revenue from service plan, maintenance and support amounted to $4.7 million for the three months ended March 31, 2008, which was an 8.3% decrease from the $5.1 million for the three months ended March 31, 2007. The decrease was driven
by Sphere contracts that were not renewed in the first quarter of 2008.

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 decreased 14.3% to $2.3 million for the three months ended March 31, 2008 from $2.7 million
for the three months ended March 31, 2007. The decrease was driven by a 14% decrease in the amount of donations processed.

Services
revenue consists of revenue generated from implementation services that are performed by our services personnel on behalf of customers, professional services and consulting, billable support services, and wealth screening data services. Net revenue
from services decreased 33.6% to $1.8 million for the three months ended March 31, 2008 from $2.7 million for the three months ended March 31, 2007. The decrease was primarily the result of a decrease in the renewals of data services
contracts.

License revenue consists primarily of Fundware packaged software sales and advertising and access to Masterplanner online
content. Net revenue from licenses and subscriptions decreased 47.6% to $0.1 million for the three months ended March 31, 2008 from $0.2 million for the three months ended March 31, 2007. The decrease was primarily due to a decline in
Fundware software license sales and the elimination of Masterplanner advertising and subscriptions in the second quarter of 2007.

Cost
of Revenue and Gross Profit. Cost of revenue of $4 million for the three months ended March 31, 2008 was comparable to the $4.1 million for the three months ended March 31, 2007. Gross margin for the three months ended March 31,
2008 was 55.2%, as compared with gross margin for the three months ended March 31, 2007 of 61.4%.



17



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Operating Expenses

The following table presents sales and marketing, product development and support, general and administrative, amortization of purchased intangibles and restructuring charge expenses for the three months ended
March 31, 2008 and 2007.



|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |        |   
|------------------------------------- |  | --------------------------------- | ----- | -------------- | -------------------------------- | - | ------ | ------------------ | -------------- |  | ------- | - |  | - | ------ | - |  | ------ | --
|                                      |  | Three months endedMarch 31, 2008  |       |                | Three months endedMarch 31, 2007 |   |        | Increase(Decrease) |                |  | %Change |  
|                                      |  | Amount                            |       | % ofNetRevenue |                                  |   | Amount |                    | % ofNetRevenue |  |         |  
|                                      |  | (in thousands, except percentage) |      
|Sales and marketing                   |  | $                                 | 4,018 |                | 45.1                             | % |        | $                  | 5,620          |  | 52.4    | % |  | $ | (1,602 | ) |  | (28.5  | )%
|Product development and support       |  |                                   | 1,621 |                | 18.2                             |   |        |                    | 1,732          |  | 16.2    |   |  |   | (111   | ) |  | (6.4   | ) 
|General and administrative            |  |                                   | 3,006 |                | 33.7                             |   |        |                    | 4,486          |  | 41.8    |   |  |   | (1,480 | ) |  | (33.0  | ) 
|Amortization of purchased intangibles |  |                                   | 522   |                | 5.9                              |   |        |                    | 733            |  | 6.8     |   |  |   | (211   | ) |  | (28.8  | ) 
|Restructuring charges                 |  |                                   |      |                |                                 |   |        |                    | 2,445          |  | 22.8    |   |  |   | (2,445 | ) |  | (100.0 | ) 
|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |        |   
|Total operating expenses              |  | $                                 | 9,167 |                | 102.9                            | % |        | $                  | 15,016         |  | 140.0   | % |  | $ | (5,849 | ) |  | (39.0  | )%
|                                      |  |                                   |       |                |                                  |   |        |                    |                |  |         |   |  |   |        |   |  |        |   

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended
March 31, 2008 were $4 million or 45.1% of net revenue compared to $5.6 million or 52.4% of net revenue for the comparable period in 2007. The decrease of $1.6 million in selling and marketing expenses was primarily due to a decrease of $1.8
million in personnel related costs and a decrease of $0.1 million in stock-based compensation expense, offset in part by an increase of $0.2 million in professional services and an increase of $0.1 million in advertising and marketing related
expenses. The decrease in personnel related costs is primarily the result of changes in sales incentive plans and the numbers of resources supporting the sales function and is not indicative of a decrease in the number of quota-carrying salespeople.

Product Development and Support Expenses.Product development and support expenses for the three months ended March 31, 2008
were $1.6 million or 18.2% of net revenue compared to $1.7 million or 22.2% of net revenue for the comparable period in 2007. The decrease of $0.1 million resulted primarily from a decrease of $0.1 million in personnel related costs. 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 March 31, 2008 were $3 million or 33.7%
of net revenue compared to $4.5 million or 41.8% of net revenue for the comparable period in 2007. The decrease of $1.5 million resulted primarily from a decrease of $0.7 million in professional services related to the reduction in number of
consultants, a decrease of $0.3 million in legal expenses, a decrease of $0.2 million of depreciation expense, a decrease of $0.2 million in stock-based compensation expense, a decrease of $0.2 million in facilities and communication expenses and a
decrease of $0.2 million in personnel related costs, offset in part by an increase of $0.2 million in bad debt expense and a legal settlement of $0.1 million which occurred in 2008.

Restructuring charges.Restructuring charges for the three months ended March 31, 2008 and 2007 were $0 and $2.4 million or 0% and 6.8% of
net revenue, respectively.

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
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, we 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 twelve months ended December 31, 2007, with such disposals resulting in a net gain of $214,000.



18



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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 EndedMarch 31,
|                                |  | 2008                        |     | 2007
|Cost of revenue                 |  | $                           | 48  |      | $ | 59 
|Sales and marketing             |  |                             | 106 |      |   | 168
|Product development and support |  |                             | 54  |      |   | 107
|General and administrative      |  |                             | 298 |      |   | 504
|                                |  |                             |     |      |   |    
|                                |  | $                           | 506 |      | $ | 838
|                                |  |                             |     |      |   |    

Stock-based compensation expense decreased 70% to $506 thousand for the three months ended
March 31, 2008 from $838 thousand of stock-based compensation expense for the three months ended March 31, 2007. 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 $1.3 million at March 31, 2008 and will be recognized over a weighted-average period of 1.18 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.

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.



|                              |  |                |        |   |                  |   |        |                   |  |   |              |   |  |   |        |  
|----------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | ----------------- |  | - | ------------ | - |  | - | ------ | -
|                              |  | March 31,2008  |        |   | December 31,2007 |   |        | September 30,2007 |  |   | June 30,2007 |  
|                              |  | (in thousands) |       
|Working capital and marketing |  | $              | (8,221 | ) |                  | $ | (5,023 | )                 |  | $ | (2,944       | ) |  | $ | (2,891 | )
|                              |  |                |        |   |                  |   |        |                   |  |   |              |   |  |   |        |  
|Cash and cash equivalents     |  | $              | 4,080  |   |                  | $ | 6,556  |                   |  | $ | 3,242        |   |  | $ | 946    |  
|Marketable securities         |  |                | 1,580  |   |                  |   | 2,848  |                   |  |   | 8,509        |   |  |   | 11,090 |  
|                              |  |                |        |   |                  |   |        |                   |  |   |              |   |  |   |        |  
|                              |  | $              | 5,660  |   |                  | $ | 9,404  |                   |  | $ | 11,751       |   |  | $ | 12,036 |  
|                              |  |                |        |   |                  |   |        |                   |  |   |              |   |  |   |        |  

For the 12 months ended March 30, 2008, we incurred a net loss of $11.7 million and used
approximately $6.4 million of cash from operating activities. We had cash and cash equivalents of $9.4 million as of December 31, 2007 and $5.6 million as of March 30, 2008. Although we saw an increase in transaction revenue from existing customers,
the loss of 2 large customers at the end of 2007 is impacting overall revenue relative to the prior year. With this impact, we are taking actions to reduce expense to support ongoing operations. If we are unable to increase our revenue or
substantially decrease our expenses, we will need to raise additional funds to finance our future capital needs. In addition, if we are unable to meet our operational goals, including our expected revenue targets, we may need additional financing
earlier than we anticipate.

We currently believe that the cash and cash equivalents on hand at March 31, 2008 along with the availability
to borrow against our auction rate security will be sufficient to continue operations through at least March 31, 2009. Our assessment is based on historical working capital needs, operating loss trends, and our current business outlook. However, we
may need additional financing and there can be no assurance that when additional financing is necessary it will be available, or if available, that such financing can be obtained on satisfactory terms or without undue dilution to, or an adverse
impact on the rights of, our stockholders. If adequate funds are not available when needed, we may be required to significantly modify our business model to reduce spending beyond the restructuring charges announced in May 2008 to a sustainable
level. Such modification of the business model could also result in an impairment of assets which cannot be determined at this time.



19



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Cash Flows

Operating Activities

Our net cash used in operating activities was $2.8 million for the three
months ended March 31, 2008, resulting primarily from the $4.4 million net loss for the period and net working capital outflows of $0.4 million, which were offset by net non-cash charges of $2 million.

Our net cash used in operating activities was $3.7 million for the three months ended March 31, 2007, resulting primarily from the $8.2 million net
loss for the period, offset by net non-cash charges of $3.4 million and net working capital inflows of $1.1 million.

At March 31,
2008, we had net accounts receivable of $4.6 million compared to $4.2 million at December 31, 2007. Accounts receivable at March 31, 2008 and December 31, 2007 represented approximately 39 and 34 days of revenue, respectively.
Terms with individual customers vary; 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 provided by investing activities was $0.6 million for the three months ended March 31, 2008. This was primarily the
result of the sale of $1.3 million of marketable securities, offset by additions of $0.4 million to software development costs and purchases of $0.3 million of property and equipment.

Net cash used in investing activities was $2.2 million for the three months ended March 31, 2007. This was primarily the result of the purchase of
$4.7 million of marketable securities, purchases of $0.3 million of property and equipment, and additions of $0.1 million to software development costs, offset by the sale of $2.9 million of marketable securities.

Financing Activities

Net cash
used in financing activities was $0.3 million for the three months ended March 31, 2008. This primarily resulted from payments under a financing arrangement and capital lease of $0.3 million.

Net cash used in financing activities was $0.1 million for the three months ended March 31, 2007. This primarily resulted from payments under a
financing arrangement and capital lease of $0.1 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. The $8 million deficit in working capital is the result of $16 million of deferred
revenue. The relief of the deferred revenue liability has little effect on anticipated operating cash flows as the cost to recognize that revenue is expected to be low. If we are unable to increase our revenue or substantially decrease our expenses,
we will need to raise additional funds to finance our future capital needs. In addition, if we are unable to meet our operational goals, including our expected revenue targets, 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. If our revenues or gross margins fall below budget and we are unable to raise additional capital through equity or debt financing, we will need to scale back our expenditures through reductions in our workforce and other
reductions in our operations. In order to reduce our operating expenses, on May 6, 2008 the company executed a reduction in force that eliminated 14% of the employee population. This reduction, combined with reductions in non-compensation related
spending is intended to offset the lower levels of revenue the company is currently experiencing, and improve cash flow. This operational reduction could prevent us from increasing our market share, capitalizing on new business opportunities or
remaining competitive in our industry. If our revenues or gross margins fall below budget or we are not able to raise additional capital through equity or debt financing, we will need to scale back our expenditures further.

A portion of our marketable securities are invested in auction rate securities. Since February 2008, every auction has failed for our $1.0 million
auction rate security. We believe that we will be able to liquidate the investment in auction rate security within the next year. Accordingly these auction rate securities are classified as short-term investments on our balance sheet. We have
reviewed all other investments as of March 31, 2008 for impairment and concluded that their carrying value approximated their fair value.



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

Evaluation of
Disclosure Controls and Procedures

Our management evaluated, under the supervision and with the participation of our principal
executive officer and our principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the three months ended March 31, 2008 pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934 (the Exchange Act). Based upon their evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of
March 31, 2008 to ensure that information required to be disclosed by us in the reports we file or



20



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submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control
Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended
March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control 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 March 31, 2008, we had an accumulated deficit of
$148 million. We incurred net losses of $4.2 million for the three months ended March 31, 2008 and net losses of $8.3 million for the three months ended March 31, 2007. We will need to increase revenue and reduce operating expenses to
achieve profitability, and we may not be able to do so. If our revenues or gross margins fall below budget or we are not able to raise additional capital through equity or debt financing, we will need to scale back our expenditures through
reductions in our workforce and other reductions in our operations. Such reductions could prevent us from increasing our market share, capitalizing on new business opportunities or remaining competitive in our industry. 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 decreased to $8.9 million for the three months ended March 31, 2008, from $10.7 million for the three months ended March 31, 2007
while our net loss decreased to $4.2 million for the three months ended March 31, 2008, from $8.3 million for the three months ended March 31, 2007. Although we have 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. 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.



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Because we are an early stage company, it is difficult to evaluate our prospects.

We incorporated in February 2000 and first achieved meaningful revenue in 2001. As a result, we have encountered and likely will
continue to encounter risks and difficulties associated with 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, concerns about
fraud, privacy, reliability and other problems may cause some 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, faith based 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 any future growth. For example, growth may 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 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 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. In May 2008, we eliminated an additional 14% of our workforce. Thus, we will be required to service any 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.



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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 obtain an independent attestation of internal controls of Kintera Sphere which is issued as a SAS70 Type II Report.

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 Kintera 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 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 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. Uncertainties about the
timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our development expenses. In addition our Connect Partners may not be able to interface existing applications with
Kintera Sphere or develop new applications that would interface with Sphere. 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.



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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 PCI compliance and obtain an independent attestation of internal controls of Kintera Sphere which is issued as a SAS70 Type II Report. We may have to spend significant money and time maintaining these controls in order to protect from
unauthorized credit card 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 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.



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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, including our new primary off site data center which became operational in January 2008, 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. Although we routinely upgrade and
implement additional security and procedures to detect and prevent willful and malicious attacks, there can be no assurance that we will be able to detect or defend any such attacks. In addition, our backup data facility may not be operational on a
timely basis or subject to similar natural disaster or other unexpected problems. 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 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



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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.

In the
past year we have experienced a significant transition in our executive management team. Historically, 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 December 31, 2007, we have four issued patents and eight 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



26



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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.

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.

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

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating
results could be misstated, our reputation may be harmed and the trading price of our stock could be



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negatively affected. In connection with the audit of our financial statements for the year ended December 31, 2006, we identified material weaknesses in
our controls related to the recognition of revenue. We have implemented actions to address these weaknesses and to enhance the reliability and effectiveness of our internal controls and operations, and our management has concluded that there are no
material weaknesses in our internal controls over financial reporting as of December 31, 2007. However, there can be no assurance that our controls over financial processes and reporting will be effective 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 23% of our outstanding common stock as of April 30, 2008. 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 need to scale back our expenditures through reductions in
our workforce and operations, and we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

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

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



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

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

Changes in, or interpretations of, accounting rules and regulations 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
|------- | ---------------------------------------------------

On December 31, 2007 we held a Special Meeting of Stockholders, which was then adjourned until January 14, 2008 in order to provide additional time to obtain stockholder votes. At that meeting the Companys stockholders voted
to amend the 2003 Equity Incentive Plan to increase the maximum aggregate number of shares that may be issued thereunder by 1,000,000 to 10,550,000. The results of the vote on this proposal were as follows:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|22,269,112        |  | 1,509,529      |  | 20,004      |  | 0               

Our stockholders also voted to amend the 2000 Stock Option Plan, the 2003 Equity Incentive Plan
and the 2004 Equity Incentive Plan (Fundware) to authorize the Compensation Committee of the Board of Directors to effect a repricing of outstanding stock options under these plans prior to January 14, 2009. The results of the vote on this
proposal were as follows:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|22,098,971        |  | 1,683,653      |  | 16,021      |  | 0               



|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.       



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---

|               |  |                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                           
|               | 
|10.1 (5)       |  | Form of Change in Control and Severance Agreement                                                 
|               | 
|10.2 (5)       |  | 2000 Stock Option Plan, as amended                                                                
|               | 
|10.3 (5)       |  | Amended and Restated 2003 Equity Incentive Plan, as amended                                       
|               | 
|10.4 (5)       |  | Amended and Restated 2004 Equity Incentive Plan (Fundware), as amended                            
|               | 
|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.
|--- | ---------------------------------------------------------------------------------------------------------------



|(5) | Filed as an exhibit to Annual Report on Form 10-K/A filed on March 26, 2008.
|--- | ----------------------------------------------------------------------------



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---

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: May 9, 2008



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