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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005



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



Commission file number 000-50507



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KINTERA, INC.

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-2947183                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9605 Scranton Road, Suite 240 San Diego, California            |  | 92121                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of Class)



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 an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes x No ̈



As of May 2, 2005 there were 31,414,739 shares of the registrants common stock outstanding.



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##### Table of Contents

KINTERA, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

INDEX



|                              |  |                                                                                                      |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                 |  |   
|                              |  |                                                                                                     
|                              |  | Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 (unaudited)            |  | 3 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 (unaudited) |  | 4 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (unaudited) |  | 5 
|                              |  |                                                                                                     
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                               |  | 6 
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 13
|                              |  |                                                                                                     
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 24
|                              |  |                                                                                                     
|Item 4.                       |  | Controls and Procedures                                                                              |  | 24
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Legal Proceedings                                                                                    |  | 25
|                              |  |                                                                                                     
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 25
|                              |  |                                                                                                     
|Item 6.                       |  | Exhibits                                                                                             |  | 26
|                              |  |                                                                                                     
|                              |  | Signatures                                                                                           |  | 27
|                              |  |                                                                                                     
|                              |  | Certifications                                                                                       |  |   
|                              |  | Exhibit 31.1                                                                                         |  |   
|                              |  | Exhibit 32.1                                                                                         |  |   



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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



KINTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                 |  | March 31,2005 |         |   | December 31,2004 |  
|Assets                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                        |  | $             | 16,401  |   |                  | $ | 20,862  |  
|Marketable securities                                                                                                                                                            |  |               | 23,015  |   |                  |   | 29,384  |  
|Accounts receivable, net of allowance for doubtful accounts of $590 and $482 at March 31, 2005 and December 31, 2004,
respectively                                               |  |               | 7,001   |   |                  |   | 6,471   |  
|Prepaid expenses and other current assets                                                                                                                                        |  |               | 2,294   |   |                  |   | 1,970   |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                             |  |               | 48,711  |   |                  |   | 58,687  |  
|Property and equipment, net                                                                                                                                                      |  |               | 3,896   |   |                  |   | 3,576   |  
|Software development costs, net                                                                                                                                                  |  |               | 3,136   |   |                  |   | 1,908   |  
|Other assets                                                                                                                                                                     |  |               | 277     |   |                  |   | 191     |  
|Intangible assets, net                                                                                                                                                           |  |               | 13,463  |   |                  |   | 13,687  |  
|Goodwill                                                                                                                                                                         |  |               | 9,311   |   |                  |   | 8,889   |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                     |  | $             | 78,794  |   |                  | $ | 86,938  |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Liabilities and stockholders equity                                                                                                                                             |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                             |  |               |         |   |                  |   |         |  
|Accounts payable and accrued expenses                                                                                                                                            |  | $             | 2,580   |   |                  | $ | 4,279   |  
|Accrued salaries and employee benefits                                                                                                                                           |  |               | 1,607   |   |                  |   | 1,070   |  
|Donations payable to customers                                                                                                                                                   |  |               | 2,610   |   |                  |   | 4,610   |  
|Deferred revenue                                                                                                                                                                 |  |               | 8,406   |   |                  |   | 8,149   |  
|Notes payable                                                                                                                                                                    |  |               | 176     |   |                  |   | 139     |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                        |  |               | 15,379  |   |                  |   | 18,247  |  
|Deferred rent and other                                                                                                                                                          |  |               | 101     |   |                  |   | 104     |  
|Commitment and contingencies                                                                                                                                                     |  |               |        |   |                  |   |        |  
|Stockholders equity:                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized at March 31, 2005 and December 31, 2004, no shares issued and outstanding at
March 31, 2005 and December 31, 2004 |  |               |        |   |                  |   |        |  
|Common stock, $.001 par value, 60,000,000 shares authorized; 31,365,474 and 31,138,387 shares issued and outstanding at March 31, 2005 and
December 31, 2004, respectively       |  |               | 31      |   |                  |   | 31      |  
|Additional paid-in capital                                                                                                                                                       |  |               | 132,964 |   |                  |   | 131,867 |  
|Deferred compensation                                                                                                                                                            |  |               | (6,485  | ) |                  |   | (10,067 | )
|Accumulated other comprehensive loss                                                                                                                                             |  |               | (201    | ) |                  |   | (179    | )
|Accumulated deficit                                                                                                                                                              |  |               | (62,995 | ) |                  |   | (53,065 | )
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                       |  |               | 63,314  |   |                  |   | 68,587  |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                       |  | $             | 78,794  |   |                  | $ | 86,938  |  
|                                                                                                                                                                                 |  |               |         |   |                  |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)



|                                            |  |                                     |         |   |      |   |        |  
|------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------ | -
|                                            |  | For the three months endedMarch 31, |        
|                                            |  | 2005                                |         |   | 2004 |  
|Net revenues                                |  | $                                   | 9,468   |   |      | $ | 3,071  |  
|Cost of revenues                            |  |                                     | 2,736   |   |      |   | 569    |  
|                                            |  |                                     |         |   |      |   |        |  
|Gross profit                                |  |                                     | 6,732   |   |      |   | 2,502  |  
|Sales and marketing                         |  |                                     | 7,336   |   |      |   | 2,984  |  
|Product development and support             |  |                                     | 2,449   |   |      |   | 1,589  |  
|General and administrative                  |  |                                     | 3,050   |   |      |   | 1,612  |  
|Stock-based compensation                    |  |                                     | 4,065   |   |      |   | 1,128  |  
|                                            |  |                                     |         |   |      |   |        |  
|Total operating expenses                    |  |                                     | 16,900  |   |      |   | 7,313  |  
|                                            |  |                                     |         |   |      |   |        |  
|Operating loss                              |  |                                     | (10,168 | ) |      |   | (4,811 | )
|Interest income (expense) and other, net    |  |                                     | 238     |   |      |   | 57     |  
|                                            |  |                                     |         |   |      |   |        |  
|Net loss                                    |  | $                                   | (9,930  | ) |      | $ | (4,754 | )
|                                            |  |                                     |         |   |      |   |        |  
|Basic and diluted net loss per share        |  | $                                   | (0.33   | ) |      | $ | (0.21  | )
|                                            |  |                                     |         |   |      |   |        |  
|Weighted average shares  basic and diluted |  |                                     | 29,777  |   |      |   | 22,472 |  
|                                            |  |                                     |         |   |      |   |        |  



|                                                 |  |                                     |       |      |   |      
|------------------------------------------------ |  | ----------------------------------- | ----- | ---- | - | -----
|                                                 |  | For the three months endedMarch 31,
|                                                 |  | 2005                                |       | 2004
|Stock-based compensation includes the following: |  |                                     |       |      |   |      
|Sales and marketing                              |  | $                                   | 3,719 |      | $ | 653  
|Product development and support                  |  |                                     | 126   |      |   | 246  
|General and administrative                       |  |                                     | 220   |      |   | 229  
|                                                 |  |                                     |       |      |   |      
|                                                 |  | $                                   | 4,065 |      | $ | 1,128
|                                                 |  |                                     |       |      |   |      



See accompanying notes
to unaudited condensed consolidated financial statements.



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                             |        |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                            |  | Three months endedMarch 31, |       
|                                                                            |  | 2005                        |        |   | 2004 |  
|Operating activities:                                                       |  |                             |        |   |      |   |         |  
|Net loss                                                                    |  | $                           | (9,930 | ) |      | $ | (4,754  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |        |   |      |   |         |  
|Bad debt expense                                                            |  |                             | 107    |   |      |   | 30      |  
|Depreciation                                                                |  |                             | 421    |   |      |   | 201     |  
|Amortization of software development costs                                  |  |                             | 125    |   |      |   |        |  
|Amortization of intangible assets                                           |  |                             | 824    |   |      |   | 173     |  
|Forgiveness of employee note                                                |  |                             |       |   |      |   | 3       |  
|Interest expense associated with issuance of warrant                        |  |                             |       |   |      |   | 28      |  
|Stock-based compensation expense                                            |  |                             | 19     |   |      |   | 88      |  
|Amortization of deferred compensation                                       |  |                             | 4,060  |   |      |   | 1,056   |  
|Changes in operating assets and liabilities, net of acquisitions:           |  |                             |        |   |      |   |         |  
|Accounts receivable                                                         |  |                             | (640   | ) |      |   | 1,306   |  
|Prepaid expenses and other current assets                                   |  |                             | (323   | ) |      |   | (199    | )
|Accounts payable and accrued expenses                                       |  |                             | (1,696 | ) |      |   | (738    | )
|Accrued salaries and employee benefits                                      |  |                             | 564    |   |      |   | (37     | )
|Donations payable to customers                                              |  |                             | (1,995 | ) |      |   | 573     |  
|Customer deposits                                                           |  |                             | (323   | ) |      |   |        |  
|Deferred revenue                                                            |  |                             | 579    |   |      |   | 11      |  
|Deferred rent                                                               |  |                             | 3      |   |      |   | 20      |  
|                                                                            |  |                             |        |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (8,205 | ) |      |   | (2,239  | )
|Investing activities:                                                       |  |                             |        |   |      |   |         |  
|Purchases of marketable securities                                          |  |                             | (1,503 | ) |      |   | (22,657 | )
|Sales and maturities of marketable securities                               |  |                             | 7,848  |   |      |   | 167     |  
|Acquisition costs, net of cash acquired                                     |  |                             | (614   | ) |      |   | (221    | )
|Purchases of property and equipment                                         |  |                             | (741   | ) |      |   | (336    | )
|Additions to software development costs                                     |  |                             | (1,352 | ) |      |   |        |  
|Other assets                                                                |  |                             | (86    | ) |      |   | (267    | )
|                                                                            |  |                             |        |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                             | 3,552  |   |      |   | (23,314 | )
|Financing activities:                                                       |  |                             |        |   |      |   |         |  
|Draw on line of credit obligation                                           |  |                             |       |   |      |   | 6       |  
|Payment of line of credit obligation                                        |  |                             |       |   |      |   | (143    | )
|Proceeds from issuance and exercise of common stock and stock options       |  |                             | 192    |   |      |   | 263     |  
|                                                                            |  |                             |        |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                             | 192    |   |      |   | 126     |  
|                                                                            |  |                             |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                             | (4,461 | ) |      |   | (25,427 | )
|Cash and cash equivalents at beginning of period                            |  |                             | 20,862 |   |      |   | 38,480  |  
|                                                                            |  |                             |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                           | 16,401 |   |      | $ | 13,053  |  
|                                                                            |  |                             |        |   |      |   |         |  
|Supplemental disclosure of cash flow information:                           |  |                             |        |   |      |   |         |  
|Cash paid for interest                                                      |  | $                           |       |   |      | $ | 10      |  
|                                                                            |  |                             |        |   |      |   |         |  
|Supplemental disclosure of non-cash investing and financing activities:     |  |                             |        |   |      |   |         |  
|Issuance of common stock and options for acquisitions                       |  | $                           | 655    |   |      | $ | 8,544   |  
|                                                                            |  |                             |        |   |      |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



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, improve operations and build awareness and affinity for their causes by bringing their employees, volunteers and donors together in online,
interactive communities.



Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation, consisting only of normal and
recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2004.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and all wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.



Concentration of Credit Risk and
Significant Customers



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



Revenue Recognition



The Company primarily generates revenue from Kintera Sphere, its wealth
profiling business, its awareness campaign business and other services and products offered by Kintera.



Kintera Sphere, is an enterprise-grade software system that integrates a suite of features including content management, contact management,
communication, commerce, community and reporting. The Company receives revenues for upfront fees, monthly maintenance fees and transaction fees tied to the donations and purchases that the Company processes. The Company recognizes revenues when all
of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon contract signing or receipt of an authorized purchase order from the customer); (2) delivery has occurred (upon performance of services in accordance with
contract specifications); (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties (credit terms extending beyond twelve months or significantly longer than is customary are deemed not to be fixed
and determinable); and (4) collection is reasonably assured (there are no indicators of non-payment based upon history with the customer and/or upon completion of credit procedures, if completed). As of March 31, 2005, and for each period presented,
the Company did not have any arrangements with credit terms extending beyond twelve months. Billings made or payments received in advance of providing services are deferred until the period these services are provided. As of March 31, 2005, and
December 31, 2004, the Company had $8.4 million and $8.1 million, respectively, of deferred revenue.



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KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



The Companys wealth profiling business provides a prospect screening tool designed for the
fundraising community to find, profile, monitor, and dynamically rank the wealth in a nonprofit organizations prospect database. The Company recognizes revenues from its wealth profiling business primarily from three sources: (1) software
licensing; (2) post consumer support services of the software licenses; and (3) consulting services and related data processing fees. Revenue is recognized in accordance with American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition. Software license fee revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred at the customers location,
the fee is fixed or determinable and collection is probable. The Company uses the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and Vendor-Specific Objective Evidence
(VSOE) of the fair value of all undelivered elements exists. VSOE of fair value is based on the normal pricing practices for those products and services when sold separately by the Company and customer renewal rates for post-contract
customer support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements
does not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.



The Companys awareness campaign business specializes in melding offline and online strategies and tools to build membership, affinity and impact for
nonprofit organizations, political campaigns and unions. The Company recognizes revenue from its awareness campaign business primarily from four sources: (1) software licensing; (2) website development and customization; (3) messaging services
(email/fax); and (4) consulting services. Revenue is recognized in accordance with AICPA SOP 97-2, Software Revenue Recognition. Software license fee revenue is recognized when persuasive evidence of an arrangement exists, delivery of the
product has occurred, fees from the arrangement are fixed or determinable, and collection is probable. The Company uses the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and
VSOE of the fair value of all undelivered elements exists. VSOE of fair value is based on the normal pricing practices for those products and services when sold separately by the Company and customer renewal rates for post-contract customer support
services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist,
the revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.



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



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



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



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KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



If at the outset of an arrangement the Company determines that the arrangement fee is not fixed or
determinable, revenue is deferred until the arrangement fee becomes due. If at the outset of an arrangement the Company determines that collectibility is not probable, revenue is deferred until the earlier of when collectibility becomes probable or
the receipt of payment. Revenues from post-contract customer support services, such as software maintenance, are recognized on a straight-line basis over the term of the support period. The majority of software maintenance agreements provide
technical support as well as unspecified software product upgrades and releases when and if made available during the term of the support period.



The Company enters into transactions that either exchange advertising for advertising (Advertising Barter) or advertising for other products
and services (Non-advertising Barter). Advertising Barter transactions are recorded at the lesser of estimated fair value of the advertising received or given in accordance with the provisions of EITF Issue No. 99-17, Accounting
for Barter Transactions. Revenue for barter transactions is recognized when advertising is provided, and services received are charged to expense when used. Revenues for Non-advertising Barter transactions are recognized at the estimated fair
value when the advertising spots received under such contracts are either used or sold to third parties. For the three months ended March 31, 2005, and 2004, the Company recognized $0.2 million and $0.3 million, respectively, of revenue in
connection with co-marketing arrangements.



Software Development Costs



The Company accounts for Internal Use Software
Development costs in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). In accordance with SOP 98-1, costs to develop internal use computer software during
the application development stage are capitalized. Internal use capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the related software applications of up to three years and are included in
depreciation and amortization. For the three months ended March 31, 2005 and 2004, the Company capitalized $0.1 million and $0 in internally developed internal use software, respectively.



The Company accounts for the development cost of software that is marketed to customers in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86). SFAS 86 requires product development costs to be charged to expense as incurred until
technological feasibility is attained. Technological feasibility is attained when software has completed a detail program design for its intended use. Capitalized 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 periodically reviews the software that has been capitalized for impairment. For the three months ended March 31, 2005 and 2004,
the Company capitalized $1.2 million and $0 in internally developed software to be sold, leased or otherwise marketed, respectively.



Stock-Based Compensation



As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of the Companys employee
stock options is equal to or greater than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. Certain of the Companys stock options have been granted with exercise prices below the fair value of
the Companys common stock. For these stock options, the Company has recorded deferred stock-based compensation for the difference between their exercise prices and such fair values which is being amortized to expense on a straight-line method
over the stock options vesting period.



Compensation for
equity instruments issued to non-employees has been determined in accordance with SFAS No. 123, Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation,
and the EITF consensus on Issue 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, as the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably measured.



Pro forma information regarding net loss is required by SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), and has been determined as if the Company had
accounted for its employee stock options under the fair value method.



Future pro forma results of operations under SFAS No. 123 may be materially different from actual amounts reported. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting
period. The



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##### Table of Contents

KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



Companys expected dividends yield is 0% and has used an estimated volatility factor of 51% and 80% for the three months ended March 31, 2005 and 2004,
respectively.



The following table illustrates the effect on
net losses if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:



|                                                                                                                                                                      |  |                             |         |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                                                                      |  | Three months endedMarch 31, |        
|                                                                                                                                                                      |  | 2005                        |         |   | 2004 |  
|Net lossas reported                                                                                                                                                  |  | $                           | (9,930  | ) |      | $ | (4,754 | )
|Add: Stock-based employee compensation expense included in reported net loss (excludes amount of a non-cash charge for vesting stock related
to the CTSG acquisition) |  |                             | 1,124   |   |      |   | 1,144  |  
|Less: Total stock-based employee compensation expense determined under the fair value method for all awards                                                           |  |                             | (2,390  | ) |      |   | (1,385 | )
|                                                                                                                                                                      |  |                             |         |   |      |   |        |  
|Pro forma net loss                                                                                                                                                    |  | $                           | (11,196 | ) |      | $ | (4,995 | )
|                                                                                                                                                                      |  |                             |         |   |      |   |        |  
|Net loss per share:                                                                                                                                                   |  |                             |         |   |      |   |        |  
|Basic and dilutedas reported                                                                                                                                         |  | $                           | (0.33   | ) |      | $ | (0.21  | )
|                                                                                                                                                                      |  |                             |         |   |      |   |        |  
|Basic and dilutedpro forma                                                                                                                                           |  | $                           | (0.38   | ) |      | $ | (0.22  | )
|                                                                                                                                                                      |  |                             |         |   |      |   |        |  



Comprehensive Income (Loss)



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



|                                         |  |                             |        |   |      |   |        |  
|---------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                         |  | Three months endedMarch 31, |       
|                                         |  | 2005                        |        |   | 2004 |  
|Net loss                                 |  | $                           | (9,930 | ) |      | $ | (4,754 | )
|Other comprehensive income               |  |                             |        |   |      |   |        |  
|Change in unrealized gain on investments |  |                             | 23     |   |      |   | 26     |  
|                                         |  |                             |        |   |      |   |        |  
|Total comprehensive loss                 |  | $                           | (9,907 | ) |      | $ | (4,728 | )
|                                         |  |                             |        |   |      |   |        |  



Net Loss Per Share



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



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



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##### Table of Contents

KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



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



|                                                    |  |                              |            |   |      |   |            |  
|--------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                    |  | Three months ended March 31, |           
|                                                    |  | 2005                         |            |   | 2004 |  
|Numerator                                           |  |                              |            |   |      |   |            |  
|Net loss                                            |  | $                            | (9,930     | ) |      | $ | (4,754     | )
|Denominator                                         |  |                              |            |   |      |   |            |  
|Basic and diluted:                                  |  |                              |            |   |      |   |            |  
|Weighted average common shares outstanding          |  |                              | 31,204,251 |   |      |   | 23,886,776 |  
|Less: Weighted average shares subject to repurchase |  |                              | (1,427,739 | ) |      |   | (1,414,891 | )
|                                                    |  |                              |            |   |      |   |            |  
|Denominator on basic calculation                    |  |                              | 29,776,512 |   |      |   | 22,471,885 |  
|                                                    |  |                              |            |   |      |   |            |  
|Basic and diluted net loss per share                |  | $                            | (0.33      | ) |      | $ | (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:



|                                   |  |               |  |              
|---------------------------------- |  | ------------- |  | -------------
|Common Stock Equivalents           |  | March 31,2005 |  | March 31,2004
|Common stock subject to repurchase |  | 1,083,280     |  | 1,326,501    
|Options to purchase common stock   |  | 5,317,713     |  | 3,266,715    
|Warrants to purchase common stock  |  | 20,000        |  | 20,000       
|                                   |  |               |  |              
|                                   |  | 6,420,993     |  | 4,613,216    
|                                   |  |               |  |              



Segment Information



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



Contingent Consideration



In connection with certain of the Companys acquisitions, if certain
future internal performance goals are later satisfied, the aggregate consideration for the respective acquisition may be increased. Such additional consideration, if earned, will be paid in the form of additional shares of the Companys common
stock, which were reserved for that purpose. Any additional consideration paid will be allocated between goodwill, stock-based compensation expense and deferred compensation. 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 (SFAS 141) which superceded APB No. 16, Business Combinations (APB 16) as of July 1, 2001, contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes
issuable. The Company records the additional consideration issued or issuable in connection with the relevant acquisition when a specified internal performance goal is met. For additional consideration paid in stock, the Company calculates the
amount of additional consideration using the closing price of its common stock on the date the performance goal is satisfied.



Amount Allocated to Goodwill



In accordance with EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination (EITF 95-8) and FIN 44 Accounting for Certain Transactions Involving Stock Compensation(FIN 44), the portion of additional consideration issuable to holders of unrestricted common stock and fully
vested options as of the acquisition date is recorded as additional purchase price, as the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill.



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KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



Amount Allocated to Stock-Based Compensation Expense



In accordance with EITF 95-8, the intrinsic value associated with additional
consideration related to stock or options that vest between the acquisition date and the date at which the contingency is satisfied is recorded as an immediate charge to stock-based compensation expense because the consideration is related to
continuing employment with the Company.



Amount Allocated to Deferred
Compensation



Additional consideration related to options
and restricted stock that remain unvested when the contingency is satisfied is recorded as deferred compensation expense under EITF 95-8 and FIN 44, as such consideration will only be earned to the extent that the holder of such options or
restricted stock continues to be employed by the Company and meets the vesting requirements. The amount recorded as deferred compensation is based upon the intrinsic value of the restricted stock and unvested options at the date at which the
contingency is satisfied. The Company amortizes such deferred compensation over the remaining vesting period of the underlying restricted stock and unvested options. In the event that a holder does not fully vest in the restricted stock or unvested
options, the unamortized portion of deferred compensation is eliminated. No contingent consideration was earned during the three months ended March 31, 2005 or 2004.



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity
exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. In April
2005, the Securities and Exchange Commission approved a new rule that delays the effective date of Statement of Financial Accounting Standards (FAS) No. 123 (revised 2004), Share-Based Payments, which requires companies to expense the
value of employee and director stock options and similar awards. FAS 123(R) is now effective January 1, 2006, for the Company. The Company is reviewing the timing and methodology for implementation, as well as the fair value model to be used for
valuing share-based payments.



In December 2004, the FASB
issued SFAS No. 153, Exchanges of Nonmonetary Assets (FAS 153) which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception from fair value measurement for
exchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt FAS 153 for nonmonetary asset exchanges occurring in the first quarter of fiscal year 2006 and its adoption is not expected to have a significant
impact on the Companys results of operations, financial condition or cash flows.



2. Acquisitions



Gold Box, Inc.



In February 2005, the Company completed the acquisition of Gold Box, Inc.
(Gold Box), a business which allows an individual to create a personalized charity gift card or gift certificate. The Company issued approximately 98,000 shares of restricted common stock and paid approximately $250,000 in cash. The
approximately 98,000 shares of restricted common stock are being held in escrow and may be released to the stockholders of Gold Box if the revenue generated from Gold Boxs business during the year following the closing meets certain targets.



The aggregate purchase price for Gold Box of approximately
$0.9 million plus acquisition costs of approximately $65,000 was primarily allocated as follows:



|                          |  |               |    
|------------------------- |  | ------------- | ---
|                          |  | March 31,2005
|Gold Box, Inc.            |  |               |    
|Intangible assets         |  | $             | 576
|Goodwill                  |  |               | 345
|                          |  |               |    
|Total assets acquired     |  |               | 921
|Deferred compensation     |  |               | 35 
|                          |  |               |    
|Total net assets acquired |  | $             | 956
|                          |  |               |    



The acquired
intangible assets represent the intellectual property of Gold Box and were assigned an estimated useful life of five years for amortization purposes. The Company is performing purchase price allocation studies. Any differences between the initial
purchase price allocation and the final purchase price allocation will primarily be related to the distribution between intangible assets and goodwill of the excess purchase price over net tangible assets acquired.



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KINTERA, INC.

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)



3. Legal Proceedings



From time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this report, the
Company is not a party to any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or operating results.



4. Recent Event



In April 2005, the Company released and accelerated vesting on 258,483 shares of common stock, formerly held in escrow, to
the former shareholders of Carol/Trevelyan Strategy Group (CTSG) upon the fulfillment of certain milestones. As a result of such vesting, the Company realized a stock compensation charge of approximately $3.0 million in the quarter ended
March 31, 2005.



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##### Table of Contents

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



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



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



The following discussion should be read in conjunction
with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to
advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, under the
caption Risk Factors, and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2004 and other reports and filings made with the Securities and
Exchange Commission.



Overview



We are an innovative provider of software that enables nonprofit
organizations to use the Internet to increase donations, reduce fundraising costs, improve operations and build awareness and affinity for their causes by bringing employees, volunteers and donors together in online, interactive communities. Our
flagship product, Kintera Sphere, is managed as a single system and offered to nonprofit organizations as a service accessed with a web browser. We were incorporated in the State of Delaware in February 2000 and launched our service in the first
quarter of 2001. Nonprofit organizations pay Kintera service fees for access to Kintera Sphere and transaction-based fees tied to the donations and purchases.



Since inception, we have significantly increased our revenues through a combination of factors, including (i) obtaining new customers, (ii) expanding
existing customer relationships, (iii) acquiring complementary businesses, (iv) expanding the features of Kintera Sphere, (v) increasing the number and amount of donations we process that result in transaction-based fees and (vi) offering new and
improved products and services. Although our revenues have increased substantially in recent periods, we have experienced significant net losses and negative cash flows from operations in each fiscal period since inception, and as of March 31, 2005,
we had an accumulated deficit of $63.0 million.



We have
derived the majority of our historical revenues from fees paid by nonprofit organizations for their use of Kintera Sphere, and we anticipate that fees related to Kintera Sphere will account for the majority of our revenues in future periods. The
fees we receive for Kintera Sphere include upfront and monthly service fees that nonprofit organizations pay for access to Kintera Sphere as well as transaction-based fees tied to donations and purchases we process. 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. We also generate revenues from our services offerings for wealth profiling and screening, advocacy campaigns and
directed giving, as well as from licensing of our accounting software.



We derive a significant amount of our Kintera Sphere revenues from upfront service fees, which are deferred and recognized as revenue over the entire term of our contracts. Conversely, we recognize the operating expenses associated with
generation of revenues from upfront service fees as they are incurred. Our operating expenses continue to increase as we expand our selling and marketing efforts and administrative infrastructure to support increased sales that we will recognize as
revenue in subsequent periods. We anticipate that our operating expenses will continue to grow in the near term. As a result, because of the deferral of recognition of a portion of our revenues, our revenues and operating results may not increase at
the same rate as our operating expenses incurred to support revenue recognized in future periods.



Our wealth profiling business provides a prospect-screening tool designed for the fundraising community to find, profile, monitor, and dynamically rank
the wealth in a nonprofit organizations prospect database. We recognize revenues from the wealth profiling business from primarily three sources: (1) software licensing; (2) post consumer support services of the software licenses; and (3)
consulting services and related data processing fees. Our awareness campaign business specializes in melding offline and online strategies and tools to build membership, affinity and impact for nonprofit organizations, political campaigns and
unions. We recognize revenue from the awareness campaign business from primarily four sources: (1) software licensing; (2) website development and customization; (3) messaging services (email/fax); and (4) consulting services. Through our FundWare
business, we



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##### Table of Contents

derive revenue from license fees for the FundWare accounting software package, as well as related product support, professional services and outsourced
payroll services.



We currently market Kintera Sphere and our
other products and services through a direct sales force that includes personnel located in our corporate headquarters and throughout the United States. We also market and sell our FundWare products and services through a value added reseller
network. We hope to grow this value added resale channel to reduce marketing and sales costs per contract revenue generated and to reduce deployment costs. Our customers include health organizations, educational institutions, religious institutions,
professional associations, political organizations, civic organizations and other charities, at both a local and national level. A small group of nonprofit organizations in each fiscal period may account for a large portion of our revenues. The
significance of a particular customer or group of customers in a given period will depend on the nature and size of their fundraising events in that period as well as the scope of their use of Kintera Sphere. To continue our revenue growth, we must
both obtain new customers and expand our existing customer relationships through usage of Kintera Sphere.



We are currently shifting our pricing strategy from one focused primarily on building market share to one more focused on higher margins. We believe that
this shift in focus can be successful due to our current brand visibility and product and market leadership. To implement this business strategy, we have developed and implemented a new pricing structure, with a focus on increased margins and
tighter cost controls.



Completion of Acquisitions in 2005



In February 2005, the Company completed the acquisition of Gold Box, Inc.
(Gold Box), a business which allows an individual to create a personalized charity gift card or gift certificate. The Company issued approximately 98,000 shares of restricted common stock and paid approximately $250,000 in cash. The
approximately 98,000 shares of restricted common stock are being held in escrow and may be released to the stockholders of Gold Box if the revenue generated from Gold Boxs business during the year following the closing meets certain targets.



Cost of Revenues and Operating Expenses



Cost of revenues consists primarily of salaries, benefits and related
expenses of operations and database support personnel, depreciation allocations and communications charges associated with the delivery of our software as a service.



Our operating expenses are classified into four categories: sales and marketing, product development and support, general
and administrative and stock-based compensation. We allocate the costs of overhead and facilities to each of the functional areas that use the overhead and facilities services based on their headcount. These allocated charges include facilities rent
for corporate offices, communication charges and depreciation expenses for office furniture and equipment.



Sales and marketing expenses consist primarily of salaries, commissions, benefits and related expenses of personnel engaged in selling, marketing and
customer support functions as well as public relations, advertising and promotional costs. As we expand our sales and marketing force, we expect sales and marketing expenses to increase significantly due to new personnel expenses in 2005.



Product development and support expenses consist primarily of
salaries and benefits and related expenses for engineers, developers and quality assurance personnel as well as facilities and depreciation allocation. We expect to continue to devote substantial resources to product development and support such
that these expenses will increase in absolute dollars.



General
and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, accounting, and administrative personnel, third party professional service fees and allocated facilities and depreciation expenses. We expect
general and administrative expenses to increase in the future, reflecting growth in our operations, increased expenses associated with being a public company and other factors.



We had 512 employees as of March 31, 2005 and intend to hire a significant number of employees in the future. This expansion
will likely place significant demands on our management and operational resources. To manage rapid growth and increased customer demand for our service, we must continue to invest in and implement additional operational systems, procedures and
controls.



Application of Critical Accounting Policies



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



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##### Table of Contents

We consider the following accounting policies 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 income taxes.
| | - |  | ----------------------------



You should refer to our Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005 for a discussion of our policies on
revenue recognition, accounting for goodwill and other intangible assets, accounting for stock-based compensation and accounting for income taxes. See Note 1 to our condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q for an updated discussion of our revenue recognition policies.



Results of Operations



Comparison of Results for the
Three Months Ended March 31, 2005, to the Three Months Ended March 31, 2004



Revenues. Revenue increased to $9.5 million, an increase of 208% for the three months ended March 31, 2005, from $3.1 million for the three months ended March 31, 2004. The revenues for each of these periods
were as follows:



|                                       |  |                                     |       |      |   |               |  |     |  
|-------------------------------------- |  | ----------------------------------- | ----- | ---- | - | ------------- |  | --- | -
|                                       |  | For the three monthsended March 31, |       |      |  
|(in thousands, except percent change)  |  | 2005                                |       | 2004 |   | Percentchange | 
|Transaction and data processing fees   |  | $                                   | 3,720 |      | $ | 1,380         |  | 170 | %
|Monthly service fees                   |  |                                     | 4,567 |      |   | 943           |  | 384 | %
|Amortization of upfront fees and other |  |                                     | 1,181 |      |   | 748           |  | 58  | %
|                                       |  |                                     |       |      |   |               |  |     |  
|Total                                  |  | $                                   | 9,468 |      | $ | 3,071         |  |     |  
|                                       |  |                                     |       |      |   |               |  |     |  



The increase in
revenue for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily related to internal growth, revenue generated from acquired businesses such as Fundware and increased processing of online donations
related to tsunami relief and included increases in transaction fees and data purchases of $2.3 million, monthly service fees of $3.6 million, and amortization of upfront fees and other of $0.4 million. Billings made or payments received in advance
of providing services are deferred until the period these services are provided. As of March 31, 2005, and December 31, 2004, we had $8.4 million and $8.1 million, respectively, of deferred revenue.



Cost of Revenues. Cost of revenues increased to $2.7 million, or 381%,
for the three months ended March 31, 2005, from $0.6 million for the three months ended March 31, 2004. The $2.1 million increase resulted primarily from the increase in customer service personnel and customer support requirements due to increased
sales contracts from internal growth and completed acquisitions as well as increased salaries.



Sales and Marketing.Sales and marketing expenses increased to $7.3 million, or 145%, for the three months ended March 31, 2005, from $3.0 million for the three months ended March 31, 2004. The $4.4 million
increase resulted primarily from the expansion of our sales force and customer support staff, both internally and from completed acquisitions, higher than anticipated labor costs, increased commissions from increased sales, and increased travel,
advertising and trade show expenses.



Product Development
and Support.Product development and support expenses increased to $2.4 million, or 54%, for the three months ended March 31, 2005, from $1.6 million for the three months ended March 31, 2004. The $0.9 million increase is primarily related to
the increase in personnel and related costs, both internally and from completed acquisitions, to support the development and enhancement of Kintera Sphere and the expenses net of costs capitalized as internally developed software.



General and Administrative.General and administrative expenses
increased to $3.1 million, or 89%, for the three months ended March 31, 2005, from $1.6 million for the three months ended March 31, 2004. The $1.4 million increase resulted primarily from the increase in personnel and higher than anticipated costs
and professional fees related to audit, Sarbanes-Oxley compliance and legal activities.



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Stock-based Compensation. Stock-based compensation increased to $4.1 million for the three months
ended March 31, 2005, compared to $1.1 million for the three months ended March 31, 2004 due to a non-cash charge of approximately $3.0 million in connection with the CTSG shareholders vesting stock, related to the fulfillment of certain milestones.



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, including $4.9 million from the exercise of the underwriters over allotment option. In July 2004, we sold 2,500,000
shares of our common stock in a private placement at a price of $8.00 per share for net proceeds of approximately $18.5 million. We completed another private placement in December 2004 and sold 2,500,000 shares of common stock at a price of $7.00
per share for net proceeds of approximately $16.3 million. As of March 31, 2005, we had cash, cash equivalents and short-term investments totaling approximately $39.4 million.



At March 31, 2005, we had working capital of $33.3 million compared to a working capital of $40.4 million at December 31,
2004. Cash used in operating activities for the three month period ended March 31, 2005 was $8.2 million resulting primarily from the $9.9 million loss for the period, a decrease of $1.7 million in accounts payable and accrued expenses, a decrease
of $2.0 in donations payable to customers and an increase of $0.3 in customer deposits offset by an increase of $0.6 in accounts receivables, a $0.5 increase in accrued salaries and an increase of $0.3 for deferred revenue, net of customer deposits.



Net cash provided by investing activities was $3.6 million for
the three months ended March 31, 2005. This was primarily the result of the sale of $7.8 million of marketable securities, partially offset by the purchase of marketable securities of $1.5 million, purchases of property and equipment of $0.7
million, development of internal software of $1.4 million and acquisition and other costs of $0.6 million.



Net cash used in investing activities was $23.3 million for the three months ended March 31, 2004. This was primarily the result of the purchase of
marketable securities of approximately $22.7 million partially offset by purchases of property and equipment of $0.3 million and acquisition and other costs of $0.2 million.



Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2005. This was primarily the
result from exercise of stock options. Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2004 and was primarily from sale of our stock in our Employee Stock Purchase Plan.



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



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



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



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RISK FACTORS



You should consider each of the following factors as well
as the other information in this Quarterly Report in evaluating our business and our prospects. 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 consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline. You should
also refer to the other information set forth in this Quarterly Report, including our financial statements and the related notes.



Risks Related to Our Business



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



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



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



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



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



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



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



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



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



We have experienced operating and net losses in each fiscal quarter since our inception, and as of March 31, 2005, we had an accumulated deficit of $63.0 million. We incurred net losses of $10.0 million for the three
months ended March 31, 2005, and $4.8 million for the three months ended March 31, 2004. We will need to increase revenues to achieve profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis in the future. We also may fail to accurately estimate our increased operating expenses as we grow. If our operating expenses exceed our expectations, our financial performance will be
adversely affected.



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



Our operating results have varied significantly in the past and will likely vary in the future as the result of fluctuations in our revenues and operating
expenses. For example, our revenues increased to $9.5 million for the three months ended March 31, 2005, from $3.1 million for the three months ended March 31, 2004, and our net loss increased to $10.0 million for the three months ended March 31,
2005, from $4.8 million for the three months ended March 31, 2004. We expect that our operating expenses may increase in the future as we expand our selling and marketing activities and hire additional personnel. Our revenues in any period depend
substantially on monthly service fees, on the number and size of donations that we process in that period for customer sponsored fundraising events and on the sale and license of our software products. In addition, the number and size of
transactions we process tends to be seasonal, with the first calendar quarter representing the seasonal low for non-profit fundraising. As a result, it is possible that in some future periods, our revenues may not meet our expectations or, due to
our increased expense levels, our results of operations may be below the expectations of current or potential investors. If this occurs, the price of our common stock may decline.



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



Acquisitions have been an important part of our development to date. During 2004, we completed acquisitions of several complementary businesses including
Prospect Information Network, Carol/Trevelyan Strategy Group, BNW, Inc., Kindmark, Kamtech, Inc., Giving Capital, Inc. and American Fundware, Inc. In 2005, we completed the acquisition of Gold Box, Inc. We are in the process of integrating the
operations of these businesses with ours and finalizing the purchase price allocation for each of these acquisitions. We



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cannot assure you that we will succeed in completing these integration efforts on a timely basis, or at all. As part of our business strategy, we may acquire
companies, services and technologies that we feel could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with important customer contacts or otherwise offer growth opportunities.
Acquisitions and investments involve numerous risks, including:



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



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



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



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



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



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



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



Since commencing operations in 2000, we
have experienced significant growth, and we anticipate that significant expansion will continue to be required to address potential market opportunities. We anticipate significantly expanding the size of our sales and marketing and product
development staff. There can be no assurance that our infrastructure will be sufficiently scalable to manage our projected growth. For example, our anticipated growth will result in a significant increase in the volume of transactions handled by our
payment processing system. If we are unable to sufficiently enhance and improve this system to handle this increased volume, our profitability and growth may suffer. There also can be no assurance that if we continue to expand our operations,
management will be effective in expanding our physical facilities or that our systems, procedures or controls will be adequate to support such expansion. Our inability to manage our growth may harm our business.



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



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



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



We have primarily sold our Kintera Sphere solution to nonprofit organizations in the health and human services, religion and education sectors, in part
because they rely on special events for fundraising. Based on our experience, we believe that many nonprofit organizations in all nonprofit sectors are still unaware of the benefits that can be achieved through the use of Kintera Sphere. We intend
to commit significant resources to promote awareness of Kintera Sphere, but we cannot assure you that we will be successful in this effort. Developing and maintaining awareness of Kintera Sphere is important to our success. If we fail to
successfully promote Kintera Sphere, our financial condition could suffer.



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We have also begun, and intend to continue, to market Kintera Sphere to nonprofit organizations in
additional nonprofit sectors. Organizations in these other sectors may not rely on special events or be as willing to purchase our solutions as health and human services nonprofit organizations. If we are unable to increase awareness of Kintera
Sphere and expand sales to other sectors of the nonprofit industry, our revenue may not increase as we expect.



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



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



We seek to generate a high volume of traffic and
transactions on the websites we host for our customers. A portion of our revenues depends on the number of donations raised by our customers using Kintera Sphere. Accordingly, the satisfactory performance, reliability and availability of our
solution, including its processing systems and network infrastructure, are critical to our reputation and our ability to attract and retain new customers. Any system interruptions that result in the unavailability of our solution or reduced donor
activity would reduce the volume of donations and may also diminish the attractiveness of our solution to our customers. Furthermore, our inability to add software and hardware or to develop and further upgrade our existing technology, payment
processing systems or network infrastructure to accommodate increased traffic or increased transaction volume may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality of the
users experience, and delays in reporting accurate financial information. There can be no assurance that we will be able to effectively upgrade and expand our systems or to integrate smoothly any new technologies with our existing systems. Any
inability to do so would have an adverse effect on our ability to maintain customer relationships and grow our business.



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



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



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



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



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



It is possible that the payment processing component of Kintera Sphere and certain services we provide are subject to
various governmental regulations. In addition, we may be subject to the privacy provisions of the Gramm-Leach-Bliley Act and related



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regulations. Pending and enacted legislation at the state and federal levels 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.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In addition, we recently appointed Richard Davidson as
our new Chief Financial Officer and hired a new corporate controller. Because of these changes, these newly-hired employees have not worked with our senior management team and finance personnel for a significant length of time, and we cannot assure
you that these management transitions will not result in some disruption of our business. If our new senior management team and finance department are unable to work together effectively to implement our strategies, manage our operations and
accomplish our objectives, our business, operations and financial results could be severely impaired.



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



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



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



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



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



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



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



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



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



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



Our success and ability to compete depend in part on our internally developed technology and software applications. We rely on patent, trademark,
copyright and trade secret laws and restrictions in the United States and other jurisdictions, together with contractual restrictions on our employees, strategic partners and customers, to protect our proprietary rights. Any of our trademarks may be
challenged by others or invalidated through administrative process or litigation. As of March 31, 2005, we have three issued patents, one patent pending and waiting issuance and 18 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



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scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to
us in every country in which our solution is available. As a result, we cannot assure you that our means of protecting our proprietary rights will be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property. Any such infringement or misappropriation could have a material adverse effect on our revenues and prospects for growth.



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;
| | - |  | ----------------------------------------------------------------



| |  |  | announcements of technological innovations or technology standards by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------



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



Our publicly-filed reports are reviewed from time to time by the SEC
and any significant changes or amendments required as a result a 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.



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



Our executive officers, directors and their affiliates own, in the aggregate, approximately 35.9% of our outstanding common stock. As a result, these persons, acting together, have the ability to exercise significant influence the outcome
of all matters submitted to our stockholders for approval, including the election and removal of directors and any significant transaction involving us. In addition, these persons, acting together, have the ability to control the management and
affairs of our company. This concentration of ownership may harm the market price of our common stock by, among other things:



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



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



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



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



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



Our capital requirements will depend on many factors, including:



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



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



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



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



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



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



Our certificate of incorporation authorizes our board of directors to
issue new series of preferred stock that may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.



Our certificate of incorporation, as amended, provides that our board of directors will be authorized to issue from time to
time, without further stockholder approval, up to 20,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or
designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change of
control of our company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding
shares having voting rights, and by the creation of class or series voting rights.



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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. In addition, our certificate of incorporation, as amended, and our bylaws, as amended, provide that our board of directors is classified into three classes of directors, with each class elected at a separate election. The
existence of a staggered board could delay a potential acquiror from obtaining majority control of our board, and thus deter potential acquisitions that might otherwise provide our stockholders with a premium over the then current market price for
their shares.



In addition, we are 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 substantial premium over the then current market price for their shares.



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



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



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



Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of our management, including Harry A. Gruber, M.D., our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, Harry A. Gruber, M.D.,
our principal executive officer and our principal financial officer, has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.



Changes in Internal Control over Financial Reporting



During the quarterly period ended March 31, 2005, we transitioned to using a
new financial accounting software system produced by Great Plains for our internal financial accounting functions. In addition, we revised our policies and procedures regarding reimbursement of employee expenses to require additional monitoring and
verification of expenses prior to their repayment. Other than these items, there has been no change in our internal control over financial reporting during the quarterly period ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



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



From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is not currently aware of any such legal proceedings or claims that the Company
believes it will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



Unregistered Sales of Equity Securities



In February 2005, the Company issued 98,412 unregistered shares of our common stock in connection with our acquisition of Gold Box, Inc. (Gold
Box). The shares of common stock, all of which are being held in escrow and may be released if certain revenue targets are met, were issued to 10 former stockholders of Gold Box pursuant to an Agreement and Plan of Merger and Reorganization
entered into by and among us, Charitygift Acquisition Corporation, Gold Box and certain Gold Box stockholders. The shares of common stock were issued in reliance on an exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, and/or Regulation D promulgated under the Securities Act, as the issuance of such shares did not involve a public offering.



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



(a) Exhibits



|              |  |                                                                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                             
|              | 
|2.4(1)        |  | Agreement and Plan of Merger and Reorganization by and among the Registrant, Sunday Acquisition Corporation, Carol/Trevelyan Strategy Group, Inc. and Dan Carol, Stryder Thompkins, Greg Nelson
and Stuart Trevelyan
|              | 
|3.2(2)        |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                                                                                 
|              | 
|3.4(2)        |  | Amended and Restated Bylaws of the Registrant                                                                                                                                                                       
|              | 
|4.1(2)        |  | Specimen Common Stock Certificate,                                                                                                                                                                                  
|              | 
|31.1          |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                              
|              | 
|32.1          |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                              

---

|(1) | Previously filed on Current Report on Form 8-K/A on November 3, 2004
|--- | --------------------------------------------------------------------



|(2) | Previously filed with Amendment No. 4 to Registration Statement on Form S-1 (File No. 333-109169) dated December 10, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------



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SIGNATURE



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



KINTERA, INC.By:

/s/ Harry E. Gruber, M.D.Harry E. Gruber, M.D. President and Chief Executive Officer




Date: May 10, 2005



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