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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 SEPTEMBER 30, 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 200 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 ̈



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

Yes ̈No  x



As of October 31, 2005 there were 31,705,793 shares of the registrants common stock outstanding.



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KINTERA, INC.

FORM 10-Q

FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

INDEX



|                              |  |                                                                                                                   |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                                  
|                              |  |                                                                                                                  
|Item 1.                       |  | Financial Statements                                                                                              |  |   
|                              |  |                                                                                                                  
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004 (unaudited)                     |  | 3 
|                              |  |                                                                                                                  
|                              |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (unaudited) |  | 4 
|                              |  |                                                                                                                  
|                              |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 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                                                        |  | 26
|                              |  |                                                                                                                  
|Item 4.                       |  | Controls and Procedures                                                                                           |  | 26
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                  
|                              |  |                                                                                                                  
|Item 1.                       |  | Legal Proceedings                                                                                                 |  | 27
|                              |  |                                                                                                                  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                               |  | 27
|                              |  |                                                                                                                  
|Item 5.                       |  | Other Information                                                                                                 |  | 28
|                              |  |                                                                                                                  
|Item 6.                       |  | Exhibits                                                                                                          |  | 28
|                              |  |                                                                                                                  
|                              |  | Signature                                                                                                         |  | 30
|                              |  |                                                                                                                  
|                              |  | Exhibit 10.17                                                                                                     |  |   
|                              |  | Exhibit 31.1                                                                                                      |  |   
|                              |  | Exhibit 31.2                                                                                                      |  |   
|                              |  | Exhibit 32.1                                                                                                      |  |   
|                              |  | Exhibit 32.2                                                                                                      |  |   



2



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PART I. FINANCIAL INFORMATION



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



KINTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                           |  | September 30, 2005 |         |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                                     |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                            |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                  |  | $                  | 18,900  |   |                   | $ | 20,862  |  
|Marketable securities                                                                                                                                                                      |  |                    | 14,656  |   |                   |   | 29,384  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,145 and $482, at September 30, 2005 and December 31, 2004,
respectively                                                  |  |                    | 7,227   |   |                   |   | 6,471   |  
|Prepaid expenses and other current assets                                                                                                                                                  |  |                    | 1,763   |   |                   |   | 1,970   |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                       |  |                    | 42,546  |   |                   |   | 58,687  |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Property and equipment, net                                                                                                                                                                |  |                    | 4,368   |   |                   |   | 3,576   |  
|Software development costs, net                                                                                                                                                            |  |                    | 2,424   |   |                   |   | 1,908   |  
|Other assets                                                                                                                                                                               |  |                    | 141     |   |                   |   | 191     |  
|Intangible assets, net                                                                                                                                                                     |  |                    | 11,796  |   |                   |   | 13,687  |  
|Goodwill                                                                                                                                                                                   |  |                    | 11,081  |   |                   |   | 8,889   |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                                                                                               |  | $                  | 72,356  |   |                   | $ | 86,938  |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Liabilities and stockholders equity                                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Accounts payable, trade                                                                                                                                                                    |  | $                  | 2,804   |   |                   | $ | 4,072   |  
|Accrued expenses                                                                                                                                                                           |  |                    | 802     |   |                   |   | 207     |  
|Accrued employee benefits                                                                                                                                                                  |  |                    | 1,700   |   |                   |   | 1,070   |  
|Donations payable                                                                                                                                                                          |  |                    | 7,796   |   |                   |   | 4,610   |  
|Deferred revenue                                                                                                                                                                           |  |                    | 11,587  |   |                   |   | 8,149   |  
|Notes payable                                                                                                                                                                              |  |                    | 70      |   |                   |   | 139     |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                  |  |                    | 24,759  |   |                   |   | 18,247  |  
|                                                                                                                                                                                           |  |                   
|Deferred rent and other                                                                                                                                                                    |  |                    | 118     |   |                   |   | 104     |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                          |  |                    | 24,877  |   |                   |   | 18,351  |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Commitments and Contingencies                                                                                                                                                              |  |                    |         |   |                   |   |         |  
|                                                                                                                                                                                           |  |                   
|Stockholders equity                                                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Preferred stock, $0.001 par value; 20,000,000 shares authorized at September 30, 2005 and December 31, 2004, no shares issued and
outstanding at September 30, 2005 and December 31, 2004. |  |                    |        |   |                   |   |        |  
|Common stock, $0.001 par value, authorized 60,000,000 shares authorized 31,700,585 and 31,138,387 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively  |  |                    | 32      |   |                   |   | 31      |  
|Additional paid-in capital                                                                                                                                                                 |  |                    | 135,469 |   |                   |   | 131,867 |  
|Deferred compensation                                                                                                                                                                      |  |                    | (4,792  | ) |                   |   | (10,067 | )
|Accumulated other comprehensive loss                                                                                                                                                       |  |                    | (102    | ) |                   |   | (179    | )
|Accumulated deficit                                                                                                                                                                        |  |                    | (83,128 | ) |                   |   | (53,065 | )
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                 |  |                    | 47,479  |   |                   |   | 68,587  |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                 |  | $                  | 72,356  |   |                   | $ | 86,938  |  
|                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  



See
accompanying notes to unaudited condensed consolidated financial statements.



3



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KINTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)



|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                             |  | 2005                             |        |   | 2004                            |   |        | 2005 |  |   | 2004    |  
|Net revenues                                 |  | $                                | 12,085 |   |                                 | $ | 7,001  |      |  | $ | 31,851  |   |  | $ | 15,965  |  
|Cost of revenue                              |  |                                  | 3,171  |   |                                 |   | 1,997  |      |  |   | 8,225   |   |  |   | 3,771   |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                 |  |                                  | 8,914  |   |                                 |   | 5,004  |      |  |   | 23,626  |   |  |   | 12,194  |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Sales and marketing                          |  |                                  | 7,248  |   |                                 |   | 3,988  |      |  |   | 21,811  |   |  |   | 9,914   |  
|Product development and support              |  |                                  | 3,958  |   |                                 |   | 1,661  |      |  |   | 11,089  |   |  |   | 5,345   |  
|General and administrative                   |  |                                  | 4,334  |   |                                 |   | 2,137  |      |  |   | 12,017  |   |  |   | 5,527   |  
|Depreciation and amortization of intangibles |  |                                  | 1,289  |   |                                 |   | 443    |      |  |   | 3,808   |   |  |   | 1,386   |  
|Stock-based compensation                     |  |                                  | 839    |   |                                 |   | 1,380  |      |  |   | 5,776   |   |  |   | 3,663   |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                     |  |                                  | 17,668 |   |                                 |   | 9,609  |      |  |   | 54,501  |   |  |   | 25,835  |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Operating loss                               |  |                                  | (8,754 | ) |                                 |   | (4,605 | )    |  |   | (30,875 | ) |  |   | (13,641 | )
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Other income (expense):                      |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Interest income (expense) and other, net     |  |                                  | 449    |   |                                 |   | 142    |      |  |   | 813     |   |  |   | 269     |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                     |  | $                                | (8,305 | ) |                                 | $ | (4,463 | )    |  | $ | (30,062 | ) |  | $ | (13,372 | )
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Loss per common share - basic and diluted    |  | $                                | (0.27  | ) |                                 | $ | (0.17  | )    |  | $ | (0.99   | ) |  | $ | (0.55   | )
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding   |  |                                  | 30,670 |   |                                 |   | 26,301 |      |  |   | 30,276  |   |  |   | 24,218  |  
|                                             |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



|                                                 |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|------------------------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                 |  | Three months ended September 30, |       | Nine months ended September 30,
|                                                 |  | 2005                             |       | 2004                            |   | 2005  |  | 2004
|Depreciation and amortization of intangibles:    |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|Sales and marketing                              |  | $                                | 833   |                                 | $ | 184   |  | $    | 2,490 |  | $ | 662  
|Product development and support                  |  |                                  |      |                                 |   |      |  |      |      |  |   |     
|General administrative                           |  |                                  | 456   |                                 |   | 259   |  |      | 1,318 |  |   | 724  
|                                                 |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|                                                 |  | $                                | 1,289 |                                 | $ | 443   |  | $    | 3,808 |  | $ | 1,386
|                                                 |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|Stock-based compensation includes the following: |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|Sales and marketing                              |  | $                                | 340   |                                 | $ | 928   |  | $    | 4,284 |  | $ | 2,375
|Product development and support                  |  |                                  | 239   |                                 |   | 231   |  |      | 759   |  |   | 624  
|General administrative                           |  |                                  | 260   |                                 |   | 221   |  |      | 733   |  |   | 664  
|                                                 |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|                                                 |  | $                                | 839   |                                 | $ | 1,380 |  | $    | 5,776 |  | $ | 3,663
|                                                 |  |                                  |       |                                 |   |       |  |      |       |  |   |      



See
accompanying notes to unaudited condensed consolidated financial statements.



4



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)



|                                                                         |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                         |  | Nine months ended September 30, |        
|                                                                         |  | 2005                            |         |   | 2004 |  
|OPERATING ACTIVITIES                                                     |  |                                 |         |   |      |   |         |  
|Net loss                                                                 |  | $                               | (30,062 | ) |      | $ | (13,372 | )
|Adjustments to reconcile loss to net cash used in operating activities:  |  |                                 |         |   |      |   |         |  
|Allowance for doubtful accounts                                          |  |                                 | 663     |   |      |   | 81      |  
|Depreciation                                                             |  |                                 | 1,329   |   |      |   | 724     |  
|Amortization of software development costs                               |  |                                 | 289     |   |      |   | 54      |  
|Amortization of intangible assets                                        |  |                                 | 2,490   |   |      |   | 662     |  
|Forgiveness of employee notes                                            |  |                                 |        |   |      |   | 3       |  
|Write-off of notes payable                                               |  |                                 | 16      |   |      |   |        |  
|Interest expense associated with issuance of warrant                     |  |                                 |        |   |      |   | 83      |  
|Stock-based compensation for consultants                                 |  |                                 | 68      |   |      |   | 233     |  
|Amortization of deferred compensation                                    |  |                                 | 5,633   |   |      |   | 3,473   |  
|Changes in assets and liabilities:                                       |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                      |  |                                 | (1,419  | ) |      |   | 581     |  
|Prepaid expense and other current assets                                 |  |                                 | 207     |   |      |   | (415    | )
|Accounts payable and accrued expenses                                    |  |                                 | (673    | ) |      |   | (1,779  | )
|Accrued employee benefits                                                |  |                                 | 630     |   |      |   | (256    | )
|Donations payable to customers                                           |  |                                 | 3,186   |   |      |   | 1,505   |  
|Deferred revenue                                                         |  |                                 | 3,438   |   |      |   | 1,312   |  
|Deferred rent                                                            |  |                                 | 14      |   |      |   | 60      |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash used in operating activities                                        |  |                                 | (14,191 | ) |      |   | (7,051  | )
|                                                                         |  |                                 |         |   |      |   |         |  
|INVESTING ACTIVITIES                                                     |  |                                 |         |   |      |   |         |  
|Purchase of marketable securities                                        |  |                                 | (11,876 | ) |      |   | (39,004 | )
|Sales and maturities of marketable securities                            |  |                                 | 26,681  |   |      |   | 3,987   |  
|Acquisition costs, net of cash acquired                                  |  |                                 | (268    | ) |      |   | (1,653  | )
|Purchase of property and equipment                                       |  |                                 | (2,121  | ) |      |   | (1,195  | )
|Additions to software development costs                                  |  |                                 | (805    | ) |      |   | (1,181  | )
|Other assets                                                             |  |                                 | 50      |   |      |   | 569     |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash provided by (used in) investing activities                          |  |                                 | 11,661  |   |      |   | (38,477 | )
|                                                                         |  |                                 |         |   |      |   |         |  
|FINANCING ACTIVITIES                                                     |  |                                 |         |   |      |   |         |  
|Payment of line of credit obligation                                     |  |                                 | (7      | ) |      |   | (391    | )
|Notes payable                                                            |  |                                 | (78     | ) |      |   | (241    | )
|Payment of employee note                                                 |  |                                 |        |   |      |   | (45     | )
|Proceeds from sale of common stock                                       |  |                                 |        |   |      |   | 18,524  |  
|Proceeds from issuance of common stock and stock options                 |  |                                 | 496     |   |      |   |        |  
|Proceeds from exercise of common stock options and ESPP                  |  |                                 | 157     |   |      |   | 930     |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash provided by financing activities                                    |  |                                 | 568     |   |      |   | 18,777  |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                |  |                                 | (1,962  | ) |      |   | (26,752 | )
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, beginning of period                           |  |                                 | 20,862  |   |      |   | 38,480  |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                 |  | $                               | 18,900  |   |      | $ | 11,728  |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                        |  |                                 |         |   |      |   |         |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Cash paid for interest                                                   |  | $                               |        |   |      | $ | 14      |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Supplemental disclosure for non-cash investing and financing activities: |  |                                 |         |   |      |   |         |  
|                                                                         |  |                                 |         |   |      |   |         |  
|Issuance of common stock and options for acquisitions                    |  |                                 |        |   |      |   | 10,148  |  
|                                                                         |  |                                 |         |   |      |   |         |  



See
accompanying notes to unaudited condensed consolidated financial statements.



5



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)



1. Organization and Summary of Significant
Accounting Policies



Description of Business



Kintera, Inc. (the Company) was incorporated in the state of
Delaware on February 8, 2000. The Company is a provider of software and services that enable nonprofit organizations to use the Internet to increase donations, reduce fundraising costs, 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 primarily of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three- and nine-months
ended September 30, 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.



Reclassification



Certain previously reported amounts have been
reclassified to conform with the current periods presentation.



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 a customers inability to pay. The amount of the reserve is determined by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers 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, its software for non-profits, 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 September 30, 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



6



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Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



period these services are provided. As of September 30, 2005 and December 31, 2004, the Company had $11.6 million and $8.1 million, respectively,
of deferred revenue.



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. When not sold in conjunction with other products the
Company recognizes revenues from its wealth profiling business primarily from three sources: (1) software licensing; (2) post-contract 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 97-2, Software Revenue Recognition (SOP 97-2). 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 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.



The Companys software line offers products designed to manage complex
finances for nonprofit organizations and governments, including cities, towns, countries, governmental agencies and schools. The Company recognizes revenue from its accounting software product line and related services in accordance with SOP
97-2, as modified by SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. For other offerings, the Company follows Accounting Bulletin, No. 104, Revenue Recognition
(SAB 104). The Company recognizes revenue when persuasive evidence of an arrangement exists; the product has been shipped or the service has been performed or, in the case of certain agreements, when the products are delivered to
resellers; the fee is fixed or determinable and collectibility is probable. The Company offers technical support plans and recognizes support revenue over the life of the plan. Other revenue in the software business consists primarily of revenue
from revenue-sharing arrangements with third-party service providers and from online advertising agreements. Transaction fees are recognized from revenue-sharing arrangements as end-user sales are reported to us by these partners. Revenue from
online advertising agreements is recognized as the lesser of when the advertisements are published or pro-rata based on the contractual time period. For arrangements where undelivered services are essential to the functionality of delivered
software, we recognize both the product license revenues and service revenues under the percentage of completion contract method in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction Type and Certain Production
Type Contracts (SOP 81-1). To date, license and service revenues recognized pursuant to SOP 81-1 have not been significant.



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.



7



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



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 consensus on Issue 99-19, Reporting
Revenue Gross as a Principal verses Net as an Agent (EITF 99-19).



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.



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 (EITF 99-17). 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. The amount of revenue recognized in
connection with co-marketing arrangements has been immaterial.



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. During the three- and nine-months ended September 30, 2005, the Company recognized $0.2 million as an impairment loss for projects terminated in the second quarter of 2005. The impairment loss is included in cost
of sales in the accompanying statement of operations.



The
Company accounts for the development cost of software that is marketed to customers in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed (SFAS 86). SFAS 86 requires product development costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when software has completed a detail program
design for its intended use. Capitalized 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. No impairment loss was recognized in the third quarter of 2005.



8



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



The Company capitalized the following costs related to internally developed internal use software and
internally developed software to be sold, leased, or otherwise marketed:



Capitalized Software Development Costs



|                                                                    |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |      
|------------------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | ---- | - | ---- |  | - | ---- | - |  | - | -----
|                                                                    |  | Three months endedSeptember 30, |     | Nine months endedSeptember 30,
|                                                                    |  | 2005                            |     |                                | 2004 |   | 2005 |  |   | 2004
|SOP 98-1                                                            |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |      
|Software Development Costs                                          |  | $                               | (9  | )                              |      | $ | 99   |  | $ | (161 | ) |  | $ | 285  
|SFAS 86                                                             |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |      
|Costs of Computer Software to be Sold, Leased or Otherwise Marketed |  | $                               | 246 |                                |      | $ | 734  |  | $ | 677  |   |  | $ | 1,052



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 (FIN 44), 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 (EITF 96-18), 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.



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.



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 Companys expected dividends yield is 0% and has used an estimated volatility factor of 61%, 80%, 69% and 80% for the three and nine months ended September 30, 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 endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                                                            |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Net loss, as reported                                                                                       |  | $                               | (8,305 | ) |                                | $ | (4,463 | )    |  | $ | (30,062 | ) |  | $ | (13,372 | )
|Add: Stock-based employee compensation expense included in reported net loss                                |  |                                 | 837    |   |                                |   | 1,393  |      |  |   | 2,847   |   |  |   | 3,706   |  
|Less: total stock-based employee compensation expense determined under the fair value method for all awards |  |                                 | (1,905 | ) |                                |   | (1,500 | )    |  |   | (6,162  | ) |  |   | (4,340  | )
|                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                                          |  | $                               | (9,373 | ) |                                | $ | (4,570 | )    |  | $ | (33,377 | ) |  | $ | (14,006 | )
|                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share:                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted, as reported                                                                              |  | $                               | (0.27  | ) |                                | $ | (0.17  | )    |  | $ | (0.99   | ) |  | $ | (0.55   | )
|                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted, pro forma                                                                                |  | $                               | (0.31  | ) |                                | $ | (0.17  | )    |  | $ | (1.10   | ) |  | $ | (0.58   | )
|                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



9



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



Comprehensive Income (Loss)



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



|                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Net loss                                        |  | $                               | (8,305 | ) |                                | $ | (4,463 | )    |  | $ | (30,062 | ) |  | $ | (13,372 | )
|Other comprehensive income (loss)               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Change in unrealized gain (loss) on investments |  |                                 | 17     |   |                                |   | (25    | )    |  |   | 102     |   |  |   | 183     |  
|                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive (loss)                      |  | $                               | (8,288 | ) |                                | $ | (4,488 | )    |  | $ | (29,960 | ) |  | $ | (13,189 | )
|                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



Net Loss Per Share



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



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



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



|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three months endedSeptember 30, |            |   | Nine months endedSeptember 30, |  
|                                                    |  | 2005                            |            |   | 2004                           |   |            | 2005 |  |   | 2004       |  
|Numerator                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                            |  | $                               | (8,305     | ) |                                | $ | (4,463     | )    |  | $ | (30,062    | ) |  | $ | (13,372    | )
|Denominator                                         |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted                                   |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding          |  |                                 | 31,665,100 |   |                                |   | 27,532,865 |      |  |   | 31,447,851 |   |  |   | 25,437,599 |  
|Less: Weighted average shares subject to repurchase |  |                                 | (994,782   | ) |                                |   | (1,231,811 | )    |  |   | (1,171,661 | ) |  |   | (1,219,834 | )
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Denominator on basic calculation                    |  |                                 | 30,670,318 |   |                                |   | 26,301,054 |      |  |   | 30,276,190 |   |  |   | 24,217,765 |  
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                |  | $                               | (0.27      | ) |                                | $ | (0.17      | )    |  | $ | (0.99      | ) |  | $ | (0.55      | )
|                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  



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:



|                                   |  |               |  |          
|---------------------------------- |  | ------------- |  | ---------
|                                   |  | September 30,
|Common Stock Equivalents           |  | 2005          |  | 2004     
|Common stock subject to repurchase |  | 994,816       |  | 1,503,896
|Options to purchase common stock   |  | 4,990,285     |  | 4,871,368
|Warrants to purchase common stock  |  | 20,000        |  | 20,000   
|                                   |  |               |  |          
|                                   |  | 6,005,101     |  | 6,395,264
|                                   |  |               |  |          



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.



10



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



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 is accounted for using the following
principles:



Measurement and Recognition



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



Amount Allocated to Goodwill



In accordance with EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination (EITF 95-8) and FIN 44, the portion of additional consideration issuable to holders of unrestricted common stock and fully vested options as of the acquisition date is recorded as additional purchase price, as
the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill. The Company recorded $2.0 million in additional consideration in the third quarter relating to the PIN acquisition.



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- and nine-months ended September 30, 2005, or 2004.



Recent Accounting Pronouncements



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154), a replacement of APB Opinion
No. 20 Accounting Changes and FASB Statement No. 3. SFAS 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle, unless it is impractical. Opinion No. 20
previously required that most voluntary changes in accounting principles be recognized by including, in net income, for the period of the change, the cumulative effect of changing to the newly adopted accounting principle. SFAS 154 also requires
that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. Opinion No. 20 previously
required that such a change be reported as a change in accounting principle. SFAS 154 also requires that any errors in the financial statements of a prior period shall be reported as a prior-period adjustment by restating the prior period financial
statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not currently expect this statement to have an impact on our financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment (SFAS 123(R)), 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 SFAS 123(R),



11



---

Kintera, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share Data)

(Unaudited)



which requires companies to expense the value of employee and director stock options and similar awards. SFAS 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 SFAS 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. Legal Proceedings



On August 11, 2005, a shareholder filed a purported shareholder
derivative lawsuit action on behalf of the Company against several of its principal executive officers and directors. The lawsuit,Drogin v. Gruber, et al., Case No. GIC 852285, is pending in the Superior Court of the State of California,
County of San Diego. The Company is a nominal defendant in the lawsuit, which alleges various breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment principally based upon the
Companys announcement of the restatement of its financial statements for the three months ended March 31, 2005. The Company filed a demurrer to the complaint on the ground that plaintiff does not have standing to bring the case on behalf
of the Company. The individual defendants joined in the Companys demurrer and filed a separate demurrer on the grounds that the complaint does not state a legal claim against them. The demurrers are scheduled for hearing on
December 2, 2005. The Company is unable to predict the ultimate outcome of the lawsuit or whether it will or will not have a material adverse effect on the Company.



3. Comparative Figures



Certain of the comparative figures have been reclassified to conform to the current periods presentation.



12



---

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



Special Note About Forward-Looking Statements



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



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



The following discussion should be read in conjunction
with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to
advise interested parties of the factors which affect our business, including (without limitation) the disclosures made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, under
the caption Risk Factors, and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 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 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 in recent periods, we have experienced significant net losses and negative cash flows from operations in each fiscal period since inception, and as of
September 30, 2005, we had an accumulated deficit of $83.1 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. During the third quarter ended September 30, 2005, fees from processing
transactions were $5.0 million compared to $3.1 million in the third quarter of calendar year 2004. Our revenue for the third quarter of 2005 increased by 73% from the third quarter of 2004 and 16% from the second quarter of 2005. 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 have increased as we have expanded our
selling and marketing efforts and administrative infrastructure to support increased sales that we expect to recognize as revenue in subsequent periods. 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. As discussed further below, we intend to further review and implement plans to help reduce our overall
operating expenses to bring them better in line with our expected revenue growth.



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



13



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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 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.



Looking ahead to the rest of the 2005 fiscal year, we intend to further review and implement plans to help us to continue to
reduce our overall operating expenses to bring them better in line with our expected revenue growth. With this goal in mind the Company made strategic reductions in our personnel by eliminating certain positions in sales, marketing and
administration and reduced our use of certain outside consultants during the third quarter. During the third quarter ended September 30, 2005, we recorded an aggregate of $0.3 million in general and administration expense for final salaries and
severance costs associated with the reduction in force. We do not believe we will have any further obligations associated with this reduction in staff.



In addition to these reductions, we reworked the commission arrangements we have used with certain members of our sales force, which permitted them to
receive a reduced upfront commission on certain of their sales contracts, notwithstanding the fact that we recognized the majority of the revenues generated by those contracts over their entire term. We are also in the process of consolidating
certain of our data center services, as well as reprioritizing certain of our engineering projects, the efforts of which we expect will help us reduce our operating expenses. In addition to these measures, we intend to review and implement other
strategic initiatives to help reduce our overall operating expenses.



With respect to our overall margins, we are continuing to shift 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.



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 five categories: sales and marketing, product development and support, general
and administrative, depreciation and amortization of intangibles 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 and communication charges.



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 discussed above, we have reduced our overall sales and marketing force and client service personnel to eliminate certain positions and reduce costs.



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 allocation. We expect to continue to devote substantial resources to product development and support.



14



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General and administrative expenses consist primarily of salaries, benefits and related expenses for our
executive, accounting, information technology and administrative personnel, third party professional service fees and allocated facilities. We expect to continue to devote substantial resources to general and administrative expenses in the future,
as necessary to support growth in our operations, increased expenses associated with being a public company and other factors. However, as indicated above, we have eliminated certain general and administrative personnel positions in order to help
reduce operating expenses. We have included within our presentation of general and administrative expenses certain information technology expenses that in previous quarters were allocated among sales and marketing, product development and support
and general and administrative expense. Management believes that consolidating the reporting of these information technology expenses within general and administrative better reflects the nature of the associated expenses. Comparative figures for
the three and nine months ended September 30, 2004 have been reclassified to conform to the current periods presentation.



Depreciation and amortization of intangibles expense (excluding depreciation and amortization of software recorded in cost of revenue) consists of the
depreciated property and equipment using the straight-line method over the estimated useful lives related to assets ranging from three to five years. Amortization expense consist of costs associated with the acquired intangibles such as contact
list, customer files, etc. that are expensed using the straight-line method over the estimated useful lives of five years. In previous quarters these amounts were recorded in sales and marketing, product development and support and general and
administrative expenses in the consolidated statements of operations. Management believes that reporting depreciation and amortization of intangible expenses as a distinct reporting category provides better and more complete disclosure regarding the
associated expense. Comparative figures for the three and nine months ended September 30, 2004 have been reclassified to conform to the current periods presentation.



Stock-based compensation expense consists primarily of the consideration related to stock or options that vest between the
acquisition date and the date at which the contingency is satisfied is recorded as a charge to stock compensation expense as the options vest because the consideration is related to continuing employment with the Company.



Application of Critical Accounting Policies



Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to the allowance for doubtful
accounts, goodwill and intangible assets, income taxes, commitments and accrued liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



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



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



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



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



| |  |  | accounting for stock-based compensation.
| | - |  | ----------------------------------------



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 software development costs, accounting for stock-based compensation and accounting for income taxes. See Note 1 to our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q for the discussion of our revenue recognition policies.



Results of Operations



Comparison of results for the three and nine months ended September 30, 2005 and 2004.



Presented below is a summary of revenues by product line:



|                                     |  |                                 |        |                |   |       |                                |    |                |  |   |        |  |   |        |  |     |  
|------------------------------------ |  | ------------------------------- | ------ | -------------- | - | ----- | ------------------------------ | -- | -------------- |  | - | ------ |  | - | ------ |  | --- | -
|                                     |  | Three months endedSeptember 30, |        | Percent Change |   |       | Nine months endedSeptember 30, |    | Percent Change | 
|(In thousands, except percentages)   |  | 2005                            |        | 2004           |   |       | 2005                           |    | 2004           | 
|Transaction and data processing fees |  | $                               | 5,070  |                | $ | 3,082 |                                | 65 | %              |  | $ | 12,386 |  | $ | 7,080  |  | 75  | %
|Monthly service fees                 |  |                                 | 5,212  |                |   | 2,988 |                                | 74 | %              |  |   | 15,019 |  |   | 6,405  |  | 134 | %
|Amortization and upfront fees        |  |                                 | 1,803  |                |   | 931   |                                | 94 | %              |  |   | 4,446  |  |   | 2,480  |  | 79  | %
|                                     |  |                                 |        |                |   |       |                                |    |                |  |   |        |  |   |        |  |     |  
|Total                                |  | $                               | 12,085 |                | $ | 7,001 |                                | 73 | %              |  | $ | 31,851 |  | $ | 15,965 |  | 100 | %
|                                     |  |                                 |        |                |   |       |                                |    |                |  |   |        |  |   |        |  |     |  



Revenues.
Revenues for the three months ended September 30, 2005 were $12.1 million, which represented a 73% increase over the $7.0 million in revenues for the three months ended September 30, 2004. The increase in revenue was due to increased sales
of our Kintera Sphere and FundWare products and services resulting in an increase of $2.2 million in monthly service fees, a $2.0 million increase in transaction and data processing fees and an increase of $0.9 million in amortized and recognizable
upfront fees.



For the nine months ended September 30,
2005, we reported total revenues of $31.9 million, a 100% increase from total revenues of $16.0 million for the nine months of ended September 30, 2004. The increase in revenue was driven by growth in monthly service fees of $8.6 million from
new and existing customers, an increase of $5.3 million in transaction and data processing fees derived from an increase in the number of events and data records screened from new and existing customers and an increase of $2.0 million for amortized
and recognizable upfront fees.



At September 30, 2005, we
had $11.6 million in deferred revenue and customer deposits for existing contracts, agreements and licenses, an increase of $8.1 million from December 31, 2004.



15



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Presented below is a summary of cost of revenue as a percentage of revenue:



|                                   |  |                                  |       |   |                |   |       |                                 |      |    |                |      |   |       |   |  |   |       |   |  |     |  
|---------------------------------- |  | -------------------------------- | ----- | - | -------------- | - | ----- | ------------------------------- | ---- | -- | -------------- | ---- | - | ----- | - |  | - | ----- | - |  | --- | -
|                                   |  | Three months ended September 30, |       |   | Percent Change |   |       | Nine months ended September 30, |      |    | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |       |   | 2004           |   |       |                                 | 2005 |    |                | 2004 |   |      
|Cost of revenue                    |  | $                                | 3,171 |   |                | $ | 1,997 |                                 |      | 59 | %              |      | $ | 8,225 |   |  | $ | 3,771 |   |  | 118 | %
|As a percentage of revenue         |  |                                  | 26    | % |                |   | 29    | %                               |      | -3 | %              |      |   | 26    | % |  |   | 24    | % |  | 2   | %



Cost of
Revenues. Cost of revenues increased 59% for the three months ended September 30, 2005 to $3.2 million, compared to $2.0 million for the three months ended September 30, 2004.



Cost of revenues for the nine months ended September 30, 2005 increased
118% to $8.2 million, compared to $3.8 million for the nine months ended September 30, 2004. The increase in costs of revenue for each period can be attributed to the increase in expenses incurred to service customers and support revenue
growth.



Presented below is a summary of sales and marketing
expenses as a percentage of revenue:



|                                   |  |                                  |       |   |                |   |       |                                |      |    |                |      |   |        |   |  |   |       |   |  |     |  
|---------------------------------- |  | -------------------------------- | ----- | - | -------------- | - | ----- | ------------------------------ | ---- | -- | -------------- | ---- | - | ------ | - |  | - | ----- | - |  | --- | -
|                                   |  | Three months ended September 30, |       |   | Percent Change |   |       | Six months ended September 30, |      |    | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |       |   | 2004           |   |       |                                | 2005 |    |                | 2004 |   |       
|Sales and marketing                |  | $                                | 7,248 |   |                | $ | 3,988 |                                |      | 82 | %              |      | $ | 21,811 |   |  | $ | 9,914 |   |  | 120 | %
|As a percentage of revenue         |  |                                  | 60    | % |                |   | 57    | %                              |      | -4 | %              |      |   | 68     | % |  |   | 62    | % |  | -3  | %



Sales and
Marketing.Sales and marketing expenses for the three months ended September 30, 2005 increased 82% to $7.2 million, compared to $4.0 million for the three months ended September 30, 2004. The $3.2 million increase resulted primarily
from increases in headcount and related costs from the expansion of our sales force and customer service support staff, both internally and from acquisitions, increased commissions from increased sales and increased travel, advertising and trade
show expenses. However, as discussed further above, during the third quarter we reduced our overall sales and marketing force and client service personnel to eliminate certain position and reworked the commission arrangements with certain members of
our sales force, which measures helped reduce our overall sales and marketing expense from $9.2 million for the three-month period ending June 30, 2005.



Sales and marketing expenses for the nine months ended September 30, 2005 increased 93% to $21.8 million, compared to
$9.9 million for the nine months ended September 30, 2004. The $11.9 million increase for the nine months ended September 30, 2005 is primarily attributable to the following:



| |  |  | $7.3 million of increased personnel and related expense due to increases in headcount and normal salary increases in combination with the addition of personnel due to the Fundware,
Carol/Trevelyan Strategy Group and PIN acquisitions which occurred during 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.2 million of increased commission expense resulting from growth in contracts and renewed license/service agreements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | $1.1 million of increased advertising and trade show expenses as a result of increased sales efforts.
| | - |  | -----------------------------------------------------------------------------------------------------



This reduction in sales and marketing expenses as a percentage of total revenue for the three and nine months ended
September 30, 2005 reflects the reductions in personnel and reworking of commission arrangements, discussed further above, that we implemented during the third quarter.



Presented below is a summary of product development and support expenses as a percentage of revenue:



|                                   |  |                                  |       |   |                |   |       |                                 |      |     |                |      |   |        |   |  |   |       |   |  |     |  
|---------------------------------- |  | -------------------------------- | ----- | - | -------------- | - | ----- | ------------------------------- | ---- | --- | -------------- | ---- | - | ------ | - |  | - | ----- | - |  | --- | -
|                                   |  | Three months ended September 30, |       |   | Percent Change |   |       | Nine months ended September 30, |      |     | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |       |   | 2004           |   |       |                                 | 2005 |     |                | 2004 |   |       
|Product development and support    |  | $                                | 3,958 |   |                | $ | 1,686 |                                 |      | 138 | %              |      | $ | 11,084 |   |  | $ | 5,345 |   |  | 107 | %
|As a percentage of revenue         |  |                                  | 33    | % |                |   | 24    | %                               |      | 9   | %              |      |   | 35     | % |  |   | 33    | % |  | 2   | %



Product Development
and Support.Product development and support expenses increased 138% to $4.0 million, for the three months ended September 30, 2005 compared to $1.7 million for the three months ended September 30, 2004. This $2.3 million increase can
be attributed to a $2.0 million increase in personnel and related costs associated with a general increase in headcount and $0.3 million increase in personnel and related costs associated with the acquisition of American Fundware.



Product development and support expenses increased 107% to $11.1 million, for
the nine months ended September 30, 2005 compared to $5.3 million for the nine months ended September 30, 2004. The $5.7 million increase can be attributed to an increase in non-capitalizable software development costs and personnel and
related costs associated with



16



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increased headcount and $1.4 million related to the correction of our software development costs previously capitalized in error during the three months
ended March 31, 2005 and prior periods.



Presented below
is a summary of general and administration expenses as a percentage of revenue:



|                                   |  |                                  |       |   |                |   |       |                                 |      |     |                |      |   |        |   |  |   |       |   |  |     |  
|---------------------------------- |  | -------------------------------- | ----- | - | -------------- | - | ----- | ------------------------------- | ---- | --- | -------------- | ---- | - | ------ | - |  | - | ----- | - |  | --- | -
|                                   |  | Three months ended September 30, |       |   | Percent Change |   |       | Nine months ended September 30, |      |     | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |       |   | 2004           |   |       |                                 | 2005 |     |                | 2004 |   |       
|General and administrative         |  | $                                | 4,334 |   |                | $ | 2,137 |                                 |      | 103 | %              |      | $ | 12,017 |   |  | $ | 5,527 |   |  | 117 | %
|As a percentage of revenue         |  |                                  | 36    | % |                |   | 31    | %                               |      | 13  | %              |      |   | 38     | % |  |   | 35    | % |  | 3   | %



General and
Administrative.General and administrative expenses increased 103% to $4.3 million, for the three months ended September 30, 2005 compared to $2.1 million for the three months ended September 30, 2004. This $2.2 million increase can be
attributed to an increase in personnel and an increase in professional fees associated with our Sarbanes-Oxley compliance efforts. As discussed above, however, during the third quarter we eliminated certain general and administrative personnel
positions in order to help reduce operating expenses, which measures helped reduce our overall general and administrative expense from the $4.2 million spent in the second quarter.



General and administrative expenses increased 117% to $12.0 million, for the nine months ended September 30, 2005
compared to $5.5 million for the nine months ended September 30, 2004. The $6.5 million increase for the nine months ended September 30, 2005 is primarily attributable to the following:



| |  |  | $2.3 million in increased personnel and related costs associated with an increase in headcount.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | $1.1 million in connection of increased professional fees related to audit and higher than anticipated legal expenses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | $0.7 million in information technology and support costs which are being reported as general and administrative expense but were previously among the three reporting departments.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.0 million in increased consulting services.
| | - |  | ----------------------------------------------



| |  |  | $0.8 million in increased bad debt expense.
| | - |  | -------------------------------------------



| |  |  | $0.4 million in increased insurance and other related facilities costs.
| | - |  | -----------------------------------------------------------------------



Presented below is a summary of depreciation and amortization expenses as a percentage of revenue:



|                                   |  |                                  |       |   |                |   |     |                                 |      |     |                |      |   |       |   |  |   |       |   |  |     |  
|---------------------------------- |  | -------------------------------- | ----- | - | -------------- | - | --- | ------------------------------- | ---- | --- | -------------- | ---- | - | ----- | - |  | - | ----- | - |  | --- | -
|                                   |  | Three months ended September 30, |       |   | Percent Change |   |     | Nine months ended September 30, |      |     | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |       |   | 2004           |   |     |                                 | 2005 |     |                | 2004 |   |      
|Depreciation and amortization      |  | $                                | 1,289 |   |                | $ | 443 |                                 |      | 191 | %              |      | $ | 3,808 |   |  | $ | 1,386 |   |  | 175 | %
|As a percentage of revenue         |  |                                  | 11    | % |                |   | 6   | %                               |      | 5   | %              |      |   | 12    | % |  |   | 9     | % |  | 3   | %



Depreciation and
amortization expense. Depreciation and amortization of intangibles increased 191% to $1.3 million for the three months ended September 30, 2005 compared to $0.4 million for the three months ended September 30, 2004. The $0.9 million
increase can be attributed to the deprecation associated with the increase in fixed assets purchased to support the addition in personnel and acquisitions.



Depreciation and amortization increased 175% to $3.8 million for the nine months ended September 30, 2005 compared to $1.4 million for the nine
months ended September 30, 2004. The increase of $2.4 million can be attributed to the deprecation associated with the increase in fixed assets purchased to support the addition in personnel and acquisitions.



Depreciation and amortization of intangible expense is being reported as a
single line item on the Companys statement of operations but was previously reported among sales and marketing, product development and support and general and administrative expense. Comparative figures for the three and nine months ended
September 30, 2004 have been reclassified to conform to the current periods presentation.



Presented below is a summary of stock-based compensation expenses as a percentage of revenue:



|                                   |  |                                  |     |   |                |   |       |                                 |      |     |                |      |   |       |   |  |   |       |   |  |    |  
|---------------------------------- |  | -------------------------------- | --- | - | -------------- | - | ----- | ------------------------------- | ---- | --- | -------------- | ---- | - | ----- | - |  | - | ----- | - |  | -- | -
|                                   |  | Three months ended September 30, |     |   | Percent Change |   |       | Nine months ended September 30, |      |     | Percent Change |     
|(In thousands, except percentages) |  | 2005                             |     |   | 2004           |   |       |                                 | 2005 |     |                | 2004 |   |      
|Stock-based compensation           |  | $                                | 839 |   |                | $ | 1,380 |                                 |      | -39 | %              |      | $ | 5,776 |   |  | $ | 3,663 |   |  | 58 | %
|As a percentage of revenue         |  |                                  | 7   | % |                |   | 20    | %                               |      | -13 | %              |      |   | 18    | % |  |   | 23    | % |  | -5 | %





Stock-based Compensation. Stock-based compensation decreased 39% to $0.8 million for the three months ended September 30, 2005 compared to
$1.4 million for the three months ended September 30, 2004. The decrease of $0.5 million can be attributed to the vesting of stock issued in prior acquisitions in the first quarter of 2005.



Stock-based compensation increased 58% to $5.8 million for the nine months
ended September 30, 2005 compared to $3.7 million for the nine months ended September 30, 2004. The increase of $2.1 million can be attributed to a non-cash charge



17



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realized in connection with the vesting of stock held by former shareholders of Carol/Trevelyan Strategy Group, related to the fulfillment of certain
milestones recognized in the first quarter of 2005.



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 September 30, 2005, we had cash, cash equivalents and marketable securities totaling approximately $33.6 million.



At September 30, 2005, we had working capital of $18.8 million, compared
to working capital of $40.4 million at December 31, 2004. At September 30, 2004, we had working capital of $42.8 million. This decrease in working capital can be largely attributed to our use of cash in our operating activities. Our net
cash used in operating activities was $14.2 million for the nine months ended September 30, 2005, compared to $7.1 million for the nine months ended September 30, 2004. For the nine months ended September 30, 2005, the net loss of
$30.1 million included certain expenses not requiring the use of cash totaling $10.5 million. For the nine months ended September 30, 2005 cash used in operations was affected by an increase of $3.2 million in donations payable, a $1.4 million
increase in accounts receivable, an increase of $0.6 million for accrued employee benefits and a $3.4 million increase in deferred revenue.



Net cash provided by investing activities was $11.7 million for the nine months ended September 30, 2005. This was primarily the result of the sale
of $26.7 million of marketable securities, offset by the purchase of $11.9 million of marketable securities, purchases of $2.1 million of property and equipment and $0.3 million of acquisition costs.



Net cash used in investing activities was $38.5 million for the nine months
ended September 30, 2004. This resulted from the purchase of $39.0 million of marketable securities, purchases of $1.2 million in property and equipment and $1.7 million of acquisition costs, offset by the sale of $4.0 million of marketable
securities.



Net cash provided by financing activities was $0.6
million for the nine months ended September 30, 2005, which was primarily the result of proceeds received from the exercise of stock options of $0.5 million and proceeds received from the issuance of common stock under our Employee Stock
Purchase Plan of $0.2 million.



Net cash used in financing
activities was $18.8 million for the nine months ended September 30, 2004, which was primarily provided by the private placement of securities of $18.5 million and proceeds from sale of common stock through our Employee Stock Purchase Plan and
exercise of stock options of $0.9 million offset by the payment of the line of credit of $0.4 million.



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.



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



18



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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.



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 September 30, 2005, we had an accumulated deficit of $83.1 million. We incurred net losses of $8.3 million for
the three months ended September 30, 2005 and $4.5 million for the three months ended September 30, 2004. We incurred net losses of $30.1 million for the nine months ended September 30, 2005 and $13.4 million for the nine months ended
September 30, 2004. We will need to increase revenues and reduce operating expenses to achieve profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. We 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 $12.1 million for the three months
ended September 30, 2005, from $7.0 million for the three months ended September 30, 2004 and our net loss increased to $8.3 million for the three months ended September 30, 2005, from $4.5 million for the three months ended
September 30, 2004. Although we have reviewed and implemented plans to help reduce our overall operating expenses and will continue to do so, operating expenses may increase in the future as we expand 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 licensing of our
software products. In addition, the number and size of transactions we process tends to be seasonal, with the first calendar quarter representing the seasonal low for non-profit fundraising. As a result, it is possible that in some future periods,
our revenues may not meet our expectations or, due to our increased expense levels, our results of operations may be below the expectations of current or potential investors. If this occurs, the price of our common stock may decline.



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



Acquisitions have been an important part of our development to date. During
2004, we completed acquisitions of several complementary businesses including Prospect Information Network, Carol/Trevelyan Strategy Group, BNW, Inc., Kindmark, Kamtech, Inc., Giving Capital, Inc. and American Fundware, Inc. In 2005, we have
completed the acquisition of Gold Box, Inc. and Collaborative Standards, 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 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;
| | - |  | -----------------------------------------------------------------------------------------



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



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



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



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



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



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



Any failure to manage and accurately account for 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



20



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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 regulations. Pending and enacted legislation at the state and federal levels, including those related to fundraising activities, may also restrict further our information gathering and disclosure practices, for
example, by requiring us to comply with extensive and costly registration, reporting or disclosure requirements. Existing and potential future privacy laws may limit our ability to develop new products and services that make use of data gathered
through our service. The provisions of these laws and related regulations are complicated, and we do not have extensive experience with these laws and related regulations. Even technical violations of these laws can result in penalties that are
assessed for each non-compliant transaction. Given the high volumes of transactions we process, if we were found to be subject to and in violation of any of these laws or regulations, our business would suffer and we would likely have to change our
business practices. In addition, these laws and regulations could impose significant compliance costs on us and make it more difficult for donors to make online donations.



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



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, in the past six months, we 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



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together effectively to implement our strategies, manage our operations and accomplish our objectives, our business, operations and financial results could
be severely impaired.



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



To execute our growth plan, we have significantly increased the size of our sales force and software development staff. To
successfully meet our objectives, we must continue to attract and retain highly qualified sales and software development personnel with specialized skill sets focused on the nonprofit industry. Competition for qualified sales and software
development personnel can be intense, and we cannot assure you that we will be successful in retaining current employees or attracting and retaining new ones. The pool of qualified personnel with experience working with or selling to 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 September 30, 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 scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every
country in which our solution is available. As a result, we cannot assure you that our means of protecting our proprietary rights will be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property. Any such infringement or misappropriation could have a material adverse effect on our revenues and prospects for growth.



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | general economic conditions.
| | - |  | ----------------------------



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



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



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



If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.



As discussed in Note 2 to the consolidated financial
statements contained in the Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 2005, during our prior review of our consolidated financial statements for the second fiscal quarter of 2005, we restated our previously
published consolidated financial statements as of and for the quarter ended March 31, 2005, which we determined indicated ineffective controls over the application of accounting policies with respect to the capitalization of software
developments costs and therefore represented a material weakness in our internal controls. Although we have made significant changes in our internal controls and operations that we believe will help prevent the occurrence of financial reporting
problems in the future, there can be no assurances that we will not discover additional instances of breakdowns in our internal controls and operations of the types that led to the previous restatement of our financial statements.



Any failure to remediate the conditions reported or to implement new or
improved controls, or any difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Inferior controls and
procedures could also cause our customers to lose confidence in our internal controls and investors to lose confidence in our reported financial information, all of which could have a negative impact on our revenues as well as the trading price of
our stock.



24



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Litigation brought against us as a result of our recent quarterly restatement could cause us to
incur significant expenditures, distract our management and adversely affect our results of operations.



As discussed in Note 2 to the consolidated financial statements contained in the Quarterly Report on Form 10-Q/A for the fiscal quarter ended
March 31, 2005, we restated our consolidated financial statements for the fiscal quarter ended March 31, 2005. As a result of this restatement, we may be subject to lawsuits that could be very costly and substantially disrupt our business.



On August 11, 2005, a shareholder filed a purported
shareholder derivative lawsuit action on behalf of the Company against several of its principal executive officers and directors. The lawsuit,Drogin v. Gruber, et al., Case No. GIC 852285, is pending in the Superior Court of the State of
California, County of San Diego. The Company is a nominal defendant in the lawsuit, which alleges various breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment principally based upon the
Companys announcement of the restatement of its financial statements for the three months ended March 31, 2005. The Company filed a demurrer to the complaint on the ground that plaintiff does not have standing to bring the case on behalf
of the Company. The individual defendants joined in the Companys demurrer and filed a separate demurrer on the grounds that the complaint does not state a legal claim against them. The demurrers are scheduled for hearing on
December 2, 2005. We are unable to predict the ultimate outcome of the lawsuit or whether it will or will not have a material adverse effect on the Company.



In addition to the shareholder derivative action, the Company may be subject to additional lawsuits and actions as a result
of the restatement. There can be no assurances that we will be successful in defending against such additional lawsuits or actions. If we are unsuccessful in defending against such matters, we may be subject to significant damages. Even if
we are successful in defending against such lawsuits or other similar actions, such efforts may be expensive, may divert managements attention from other business concerns and have a material adverse impact on our results of operations and the
trading price of our common stock.



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



Our executive officers, directors and their affiliates own, in the aggregate, approximately 35% 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.



25



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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.



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



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.



Under the supervision and
with the participation of our management, including Harry E. Gruber, M.D., our principal executive officer, and Richard Davidson, our 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 upon the evaluation our principal executive officer and our principal financial officer 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 period covered by this Quarterly Report, in response to certain accounting errors made in connection with the application of generally accepted accounting principles relating to our classification of software development costs,



26



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we restated our consolidated financial statements for the quarterly period ended March 31, 2005. As a result, as described in Part I, Item 4 of the
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005, we determined that the restatement of our previously published financial statements as of and for the three months ended March 31, 2005 indicated ineffective
controls over related to the capitalization of software development costs.



As a result of these findings, we have refined our process for capitalizing software development costs and established more definitive criteria to permit the capitalization of such costs. This analysis has been
improved by enhanced documentation and oversight by finance personnel who are experienced in the application of GAAP relating to the classification of software development costs, which personnel report to our principal financial officer. We have
also automated our financial systems to help us determine those instances in which we may capitalize software development costs.



In addition, as part of the process related to the identification and correction of the financial statement errors addressed in the restatement of our
consolidated financial statements for the three months ended March 31, 2005, we implemented enhanced control over our processes relating to the accounting for salaries and wages, revenue attributable to terminated contracts and the timing of
the conversion accounts receivable to cash.



Other than as
summarized above, there were no changes in our internal control over financial reporting during the quarterly period ended September 30, 2005 that have materially affected or are reasonably likely to materially affect, our internal control over
financial reporting.



PART II. OTHER INFORMATION



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



Refer to Note 3 of our unaudited consolidated financial statements included within this Quarterly Report.



In addition to the foregoing matters, 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. Other than the foregoing matters, 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 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------



At the Companys Annual Meeting of Stockholders held on July 21, 2005, the following individuals, all of the members of the Board of Directors
were elected: Allen B. Gruber, M.D., Robert J. Korzeniewski, CPA, and Deborah D. Rieman, Ph.D. For each elected director, the results of the voting were:



|                               |  |                   |  |               
|------------------------------ |  | ----------------- |  | --------------
|                               |  | Affirmative Votes |  | Votes Withheld
|Allen B. Gruber, M.D.          |  | 20,530,896        |  | 2,483,328     
|Robert J. Korzeniewski, C.P.A. |  | 21,762,168        |  | 1,252,056     
|Deborah D. Rieman, Ph.D.       |  | 21,619,633        |  | 1,394,591     



Our stockholders also
voted to approve the amendment to the 2003 Equity Incentive Plan to increase the maximum aggregate number of shares that may be issued thereunder by 3,000,000. The results of the voting on this proposal were:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|14,471,841        |  | 3,738,616      |  | 36,248      |  | 4,767,519       



The foregoing proposal was approved
and accordingly ratified.



Our stockholders also voted to
approve the amendment to the 2000 Stock Option Plan, 2003 Equity Incentive Plan and 2004 Equity Incentive Plan (Fundware) authorizing the Board of Director to effect a repricing of outstanding stock to options under these plans. The results of the
voting on this proposal were:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|14,214,756        |  | 3,993,156      |  | 38,793      |  | 4,767,519       



The foregoing proposal was approved
and accordingly ratified.



27



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Our stockholders also voted to ratify Ernst & Young, LLP as the Companys independent
auditors for the fiscal year ending December 31, 2005. The results of the voting on this proposal were:



|                  |  |                |  |             |  |                 
|----------------- |  | -------------- |  | ----------- |  | ----------------
|Affirmative Votes |  | Negative Votes |  | Abstentions |  | Broker Non-Votes
|22,850,825        |  | 160,899        |  | 2,500       |  | -0-             



The foregoing proposal was approved
and accordingly ratified.



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



Entry into a Material Definitive Agreement.



As reported in Part II, Item 4 of this Quarterly Report, at the Companys Annual Meeting of Stockholders held on July 21, 2005 (the Annual Meeting), our stockholders approved an amendment to
the 2003 Equity Incentive Plan (the 2003 Plan) to increase the maximum number of shares that may be issued thereunder by 3,000,000. Following the amendment, the maximum number of shares of common stock issuable under the 2003 Plan was
increased to a total of 8,600,000 shares (subject to adjustment upon certain changes in our capital structure), which number of shares will be reduced, at all times, by the number of shares subject to outstanding stock options, and the number of
shares issued upon exercise of outstanding options granted, under our 2000 Stock Option Plan (the 2000 Plan).



In addition, at the Annual Meeting, our stockholders also approved an amendment to our 2000 Plan, 2003 Plan and 2004 Equity Incentive Plan (Fundware) (the
2004 Plan (Fundware)), to authorize the Compensation Committee of the Companys Board of Directors to, without obtaining stockholder approval, effect one or more programs to cancel stock options outstanding on or prior to
January 1, 2006 and grant new options with a lower exercise price and/or amend these stock options to reduce their exercise price.



The foregoing description of the amendment to our 2000 Plan is qualified in its entirety by reference to the Amendment to 2000 Stock Option Plan, a copy
of which is attached to this Quarterly Report. The foregoing description of the amendments to our 2003 Plan and 2004 Plan (Fundware) are qualified in their entirety by reference to the Amended and Restated 2003 Equity Incentive Plan and Amended and
Restated 2004 Equity Incentive Plan (Fundware), copies of which are attached to our Registration Statement on Form S-8 (File No. 333-128927) filed with the Securities and Exchange Commission on October 11, 2005.



Non-Reliance on Previously Issued Financial Statements or Related Audit Report or
Completed Interim Review.



As discussed in Part I,
Item 4 of this Quarterly Report, in response to certain accounting errors made in connection with the application of generally accepted accounting principles relating to our classification of software development costs, on August 8, 2005,
the Audit Committee of the Companys Board of Directors, upon the recommendation of the Companys management and with the concurrence of the Companys independent registered public accounting firm, Ernst & Young LLP,
concluded that the previously issued financial statements contained in the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005 should no longer be relied upon. Following such determination, we thereafter
restated our unaudited consolidated financial statements for this period. The Audit Committee and authorized officers of the Company discussed the matters disclosed in this paragraph with the Companys independent auditors.



|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                                                                                                                                                                                   
|              | 
|10.17         |  | Amendment to 2000 Stock Option Plan                                                                                                                                                                                 
|              | 
|10.18(3)      |  | Amended and Restated 2003 Equity Incentive Plan                                                                                                                                                                     
|              | 
|10.19 (3)     |  | Amended and Restated 2004 Equity Incentive Plan (Fundware)                                                                                                                                                          



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|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|32.1 |  | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|32.2 |  | Certification of 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.
|--- | --------------------------------------------------------------------------------------------------------------------------



|(3) | Previously filed with Registration Statement on Form S-8 (File No. 333- 28927) dated October 11, 2005
|--- | -----------------------------------------------------------------------------------------------------



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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/ RICHARD DAVIDSONRichard DavidsonChief Financial Officer




Date: November 9, 2005



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