**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

**x****                             ****Quarterly Report under Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For thequarterly period ended December 31, 2007**

 

**o****                                ****Transition Report Pursuant to Section 13or 15(d) of the Exchange Act**

 

**For the transitionperiod from       to**

 

**CommissionFile number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of small business issuer asspecified in its charter)

** **

| **Delaware**              | ** ** | **94-3046892**                     |
|---------------------------|------------|------------------------------------|
| (State  of Incorporation) |       | (IRS  Employer Identification No.) |

 

**25ATechnology DriveIrvine, CA 92618**

(Addressof principal executive offices)

 

**(949)442-4400**

(Issuer’stelephone number)

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x    No  o

 
| Indicate by check mark whether the issuer is a shell  company (as defined in Rule 12b-2 of the Exchange Act). |
|-------------------------------------------------------------------------------------------------------------------------|
|  Yes  o    No x                                                                 |

 

As of December 31, 2007, there were 26,204,149shares of issuer’s Common Stock, $.10 par value, outstanding.

 

Transitional Small Business Disclosure Format (Checkone): Yes  o    No    x

 

 

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**RAININGDATA CORPORATIONINDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                     | 3  |
|---------------|---------------------------------------------------------------------------------------------------------------------------|----|
| ITEM 1.       | FINANCIAL STATEMENTS                                                                                                      | 3  |
|          | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS — DECEMBER 31, 2007 AND MARCH 31,  2007                        | 3  |
|          | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — THREE AND NINE MONTHS ENDED  DECEMBER 31, 2007 AND 2006 | 4  |
|          | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — NINE MONTHS ENDED DECEMBER  31, 2007 AND 2006           | 5  |
|          | NOTES  TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                       | 6  |
| ITEM 2.       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                           | 10 |
| ITEM 3.       | CONTROLS AND PROCEDURES                                                                                                   | 23 |
| PART II. | OTHER INFORMATION                                                                                                         | 24 |
| ITEM 1.       | LEGAL PROCEEDINGS                                                                                                         | 24 |
| ITEM 6.       | EXHIBITS                                                                                                                  | 24 |

 

2

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** **

**PART I. FINANCIALINFORMATION**

 

ITEM 1. FINANCIAL STATEMENTS

 

**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                      | ** ** | **December 31,  2007** | ** ** | **March 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                      | ** ** | **(In thousands)**          | ** ** |
| ASSETS                                                                                          |       |                        |       |                     |       |
|                                                                                            |       |                        |       |                     |       |
| Current assets                                                                                  |       |                        |       |                     |       |
| Cash and cash equivalents                                                                       |       | $                           | 13,054     |                     | $          | 11,654 |   |
| Trade accounts receivable, less allowance  for doubtful accounts of $329 and $200, respectively |       | 1,979                       |       | 1,609                    |       |
| Other current assets                                                                            |       | 497                         |       | 461                      |       |
| Total current assets                                                                            |       | 15,530                      |       | 13,724                   |       |
|                                                                                            |       |                        |       |                     |       |
| Property, furniture and equipment, net                                                          |       | 876                         |       | 949                      |       |
| Goodwill                                                                                        |       | 26,622                      |       | 26,751                   |       |
| Other assets                                                                                    |       | 104                         |       | 112                      |       |
| Total assets                                                                                    |       | $                           | 43,132     |                     | $          | 41,536 |   |
|                                                                                            |       |                        |       |                     |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                      |       |                        |       |                     |       |
|                                                                                            |       |                        |       |                     |       |
| Current liabilities                                                                             |       |                        |       |                     |       |
| Accounts payable                                                                                |       | $                           | 307        |                     | $          | 130 |   |
| Accrued liabilities                                                                             |       | 2,241                       |       | 2,536                    |       |
| Deferred revenue                                                                                |       | 4,966                       |       | 4,801                    |       |
| Debt-net of discount                                                                            |       | 964                         |       | —                   |       |
| Total current liabilities                                                                       |       | 8,478                       |       | 7,467                    |       |
| Long-term debt-net of discount                                                                  |       | —                      |       | 24,150                   |       |
| Total liabilities                                                                               |       | 8,478                       |       | 31,617                   |       |
|                                                                                            |       |                        |       |                     |       |
| Commitments and contingencies                                                                   |       |                        |       |                     |       |
|                                                                                            |       |                        |       |                     |       |
| Stockholders’ equity                                                                       |       |                        |       |                     |       |
| Preferred stock                                                                                 |       | —                      |       | —                   |       |
| Common stock                                                                                    |       | 2,620                       |       | 2,118                    |       |
| Additional paid-in-capital                                                                      |       | 126,151                     |       | 101,385                  |       |
| Accumulated other comprehensive income                                                          |       | 1,404                       |       | 1,612                    |       |
| Accumulated deficit                                                                             |       | (95,521                     | )          | (95,196                  | )          |
| Total stockholders’ equity                                                                 |       | 34,654                      |       | 9,919                    |       |
|                                                                                            |       |                        |       |                     |       |
| Total liabilities and stockholders’ equity                                                 |       | $                           | 43,132     |                     | $          | 41,536 |   |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

 
| ** **                                                       | ** ** | **Three Months Ended December 31,** | ** ** | **Nine Months Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                                                    |       |                                                   |       |   |   |   |   |
| Net revenues                                                     |       |                                                    |       |                                                   |       |   |   |   |   |
| Licenses                                                         |       | $                                                       | 1,992      |                                                   | $          | 1,793 |   | $ | 5,953 |   | $ | 5,133 |   |
| Services                                                         |       | 2,913                                                   |       | 2,983                                                  |       | 8,871 |   | 8,911 |   |
| Total net revenues                                               |       | 4,905                                                   |       | 4,776                                                  |       | 14,824 |   | 14,044 |   |
| Operating expenses                                               |       |                                                    |       |                                                   |       |   |   |   |   |
| Cost of license revenues                                         |       | 8                                                       |       | 28                                                     |       | 29 |   | 68 |   |
| Cost of service revenues                                         |       | 444                                                     |       | 442                                                    |       | 1,383 |   | 1,583 |   |
| Selling and marketing                                            |       | 1,601                                                   |       | 1,387                                                  |       | 4,278 |   | 4,204 |   |
| Research and development                                         |       | 1,861                                                   |       | 2,175                                                  |       | 5,780 |   | 7,052 |   |
| General and administrative                                       |       | 1,115                                                   |       | 907                                                    |       | 3,486 |   | 2,916 |   |
| Total operating expenses                                         |       | 5,029                                                   |       | 4,939                                                  |       | 14,956 |   | 15,823 |   |
| Operating loss                                                   |       | (124                                                    | )          | (163                                                   | )          | (132 | ) | (1,779 | ) |
| Other income (expense)                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Interest income (expense)-net                                    |       | 124                                                     |       | (205                                                   | )          | (282 | ) | (636 | ) |
| Other income (expense)-net                                       |       | (108                                                    | )          | 6                                                      |       | 275 |   | 13 |   |
| Total other income (expense)                                     |       | 16                                                      |       | (199                                                   | )          | (7 | ) | (623 | ) |
| Loss before income taxes                                         |       | (108                                                    | )          | (362                                                   | )          | (139 | ) | (2,402 | ) |
| Provision for income taxes                                       |       | 109                                                     |       | 17                                                     |       | 186 |   | 57 |   |
| Net loss                                                         |       | $                                                       | (217       | )                                                      | $          | (379 | ) | $ | (325 | ) | $ | (2,459 | ) |
|                                                             |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic and diluted net loss per share                             |       | $                                                       | (0.01      | )                                                      | $          | (0.02 | ) | $ | (0.01 | ) | $ | (0.12 | ) |
|                                                             |       |                                                    |       |                                                   |       |   |   |   |   |
| Shares used in computing basic and diluted  net loss   per share |       | 25,909                                                  |       | 21,142                                                 |       | 22,785 |   | 20,928 |   |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                 | ** ** | **Nine Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | **(In thousands)**                                | ** ** |
| ** **                                                                                 | ** ** | ** **                                             | ** ** |
| Cash flows from operating activities:                                                      |       |                                                   |       |   |   |
| Net loss                                                                                   |       | $                                                      | (325       | ) | $ | (2,459 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                   |       |   |   |
| Depreciation and amortization of long-lived  assets                                        |       | 203                                                    |       | 232 |   |
| Provision for bad debt                                                                     |       | 111                                                    |       | 105 |   |
| Note discount amortization                                                                 |       | 90                                                     |       | 62 |   |
| Stock-based compensation expense                                                           |       | 888                                                    |       | 695 |   |
| Deferred income tax expense                                                                |       | 186                                                    |       | 57 |   |
| Foreign currency exchange gain                                                             |       | (226                                                   | )          | (16 | ) |
| Change in assets and liabilities:                                                          |       |                                                   |       |   |   |
| Trade accounts receivable                                                                  |       | (348                                                   | )          | (299 | ) |
| Other current and non-current assets                                                       |       | (50                                                    | )          | (218 | ) |
| Accounts payable                                                                           |       | 172                                                    |       | (182 | ) |
| Accrued liabilities                                                                        |       | 233                                                    |       | 400 |   |
| Deferred revenue                                                                           |       | (59                                                    | )          | 243 |   |
| Net cash provided by (used in) operating  activities                                       |       | 875                                                    |       | (1,380 | ) |
|                                                                                       |       |                                                   |       |   |   |
| Cash flows used in investing  activities-purchase of property, furniture and equipment     |       | (118                                                   | )          | (139 | ) |
|                                                                                       |       |                                                   |       |   |   |
| Cash flows from financing activities:                                                      |       |                                                   |       |   |   |
| Proceeds from exercise of stock options and  warrants                                      |       | 478                                                    |       | 1,005 |   |
| Proceeds from issuance of common stock                                                     |       | 52                                                     |       | 112 |   |
| Repayment of debt                                                                          |       | (1                                                     | )          | — |   |
| Net cash provided by financing activities                                                  |       | 529                                                    |       | 1,117 |   |
|                                                                                       |       |                                                   |       |   |   |
| Effect of exchange rate changes on cash                                                    |       | 114                                                    |       | 145 |   |
|                                                                                       |       |                                                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 1,400                                                  |       | (257 | ) |
| Cash and cash equivalents at beginning of  period                                          |       | 11,654                                                 |       | 10,789 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                      | 13,054     |   | $ | 10,532 |   |
|                                                                                       |       |                                                   |       |   |   |
| Other non-cash activities:                                                                 |       |                                                   |       |   |   |
| Accrued interest added to debt                                                             |       | $                                                      | 576        |   | $ | 863 |   |
| Conversion of debt to common stock                                                         |       | $                                                      | 23,898     |   | $ | — |   |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

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**RAINING DATA CORPORATION ANDSUBSIDIARIES**

**NOTES TOTHE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2007**

 

**1. INTERIMFINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidatedfinancial information furnished herein reflects all adjustments, consistingonly of normal recurring items, which in the opinion of management arenecessary to fairly state Raining Data Corporation and its subsidiaries’(collectively, “Company” or “we,” “us” or “our”) results of operations and cashflows for the dates and periods presented and to make such information notmisleading. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been omitted pursuantto SEC rules and regulations; nevertheless, management of the Companybelieves that the disclosures herein are adequate to make the informationpresented not misleading. These condensed consolidated financial statementsshould be read in conjunction with the Company’s audited financial statementsfor the year ended March 31, 2007, contained in the Company’s AnnualReport on Form 10-KSB. The results of operations for the three and ninemonths ended December 31, 2007, are not necessarily indicative of resultsto be expected for any other interim period or the fiscal year ending March 31,2008.

 

**2. RECENTLY ADOPTED ACCOUNTING STANDARDS**

 

*SAB No. 108*

 

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin (“SAB”) No. 108, *“Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”*(SAB No. 108”). We adopted SAB No. 108 in the fourth quarter offiscal 2007. In accordance with SAB No. 108, we recorded a cumulativeeffect adjustment to beginning retained earnings as of April 1, 2006, asfurther described in the Company’s audited financial statements for the yearended March 31, 2007, contained in the Company’s Annual Report on Form 10-KSB.For comparative purposes, the statement of operations for the three and ninemonths ended December 31, 2006 has been adjusted to reflect the adoption ofSAB No. 108 as described below. The adoption of SAB No. 108 did notrequire revision to cash flows from investing or financing activities for thenine months ended December 31, 2006. The net effect to the cash flows fromoperating activities as a result of the adoption of SAB No.108 for the ninemonths ended December 31, 2006, was an increase of $43,000 in net cash used inoperating activities.

 

For the three months ended December 31, 2006, the effect ofadopting SAB No. 108 was a decrease in general and administrative expensesof $55,000, and an increase in other expense of $13,000. The effect on net lossfor the three months ended December 31, 2006 was a decrease in net loss of$42,000 with no effect on basic or diluted net loss per share. For the nine monthsended December 31, 2006, the effect of adopting SAB No. 108 was anincrease in general and administrative expenses of $73,000, and an increase inother expense of $42,000. The effect on net loss was an increase in net loss of$115,000, with no effect on basic or diluted net loss per share.

 

*FIN 48*

 

In July 2006, the FASB issued FASBInterpretation No. 48, *“Accounting forUncertainty in Income Taxes - an interpretation of FASB Statement No. 109”*(“FIN 48”), which clarifies the accounting and disclosure for uncertainty intax positions by prescribing a minimum probability threshold a tax positionmust meet to be recognized in the financial statements. FIN 48 requires anentity to recognize all or a portion of the financial statement benefit of anuncertain income tax position only if the position, based solely on itstechnical merits and on all relevant information as of the reporting date,would have a greater than 50% probability of being sustained were the relevanttaxing authority to audit the applicable tax returns. If a tax position meetsthe threshold, then the entity will evaluate the benefits it would recognize atincreasing levels of cumulative probabilities, and will record the largestamount of benefit that would have a greater than 50% probability of beingsustained on audit (including resolution of any related appeals or litigation).An entity will not recognize any benefit of an uncertain income tax positionthat fails to meet the greater than 50% probability threshold.

 

The Company is subject to the provisions of FIN 48as of April 1, 2007, and has analyzed filing positions in the federal andstate jurisdictions where it is required to file income tax returns, as well asopen tax years in these jurisdictions. As a result of adoption, we haverecorded no additional tax liability. As of the date of adoption, the Company’suncertain tax positions totaled $94,000, all of which would affect our annualeffective income tax rate if recognized.

 

 

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TheCompany files consolidated and separate income tax return in the U.S.federaljurisdiction and in certain state jurisdictions as well as foreignjurisdictions including France, Germany, and the United Kingdom. With limitedexceptions, the Company is no longer subject to U.S. federal income taxexaminations for fiscal years before 2004 and is no longer subject to state andlocal income tax examinations by tax authorities for fiscal years before 2003.

 

Neitherthe Company nor its subsidiaries is currently under examination by any taxingauthorities.

 

TheCompany recognizes potential accrued interest and penalties related touncertain tax positions in income tax expense. During the nine months ended December 31,2007, the Company did not recognize a significant amount in potential interestand penalties associated with uncertain tax positions. As of December 31,2007, the Company has accrued approximately $18,000 in interest and penalties.To the extent interest and penalties are not assessed with respect to uncertaintax positions, amounts accrued will be reduced and reflected as a reduction ofthe overall income tax provision.

 

TheCompany does not anticipate that total unrecognized tax benefits willsignificantly change due to the settlement of audits or the expiration ofstatutes of limitations prior to December 31, 2008.

 

**3.STOCK-BASED COMPENSATION**

 

TheCompany has a stock option plan (“1999 Plan”) that provides for the granting ofstock options, restricted stock and restricted stock units to directors, employeesand consultants. The Company also has an Employee Stock Purchase Plan (“ESPP”)which allows the employees to purchase the Company’s common stock at adiscount.

 

Totalstock-based compensation expense included in the unaudited condensedconsolidated statements of operations for the three and nine months ended December 31,2007 and 2006, (in thousands) were as follows:

 
| ** **                             | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                                                |       |                                               |       |   |   |   |   |
| Cost of revenue                        |       | $                                                   | 2          |                                               | $          | — |   | $ | 4 |   | 5 |   |
| Operating expense:                     |       |                                                |       |                                               |       |   |   |   |   |
|                                   |       |                                                |       |                                               |       |   |   |   |   |
| Selling and marketing                  |       | 140                                                 |       | 94                                                 |       | $ | 373 |   | 274 |   |
| Research and development               |       | 94                                                  |       | 69                                                 |       | 236 |   | 209 |   |
| General and administrative             |       | 96                                                  |       | 75                                                 |       | 275 |   | 207 |   |
| Total stock-based compensation expense |       | 332                                                 |       | 238                                                |       | 888 |   | 695 |   |
| Income tax benefit                     |       | —                                              |       | —                                             |       | — |   | — |   |
| Net stock-based compensation expense   |       | $                                                   | 332        |                                               | $          | 238 |   | $ | 888 |   | $ | 695 |   |
|                                        |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

As of December 31,2007, there was approximately $2.9 million of total unrecognized compensationcost related to nonvested share-based compensation arrangements granted underthe plans. That cost is expected to be recognized over a weighted-averageperiod of 2.7 years.

 

**4. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS No. 157”). Thisstatement defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles, and expands disclosures about fairvalue measurements. It also applies under other accounting pronouncements thatrequire or permit fair value measurement as a relevant attribute. SFAS No. 157is effective for financial statements issued for fiscal years beginning after November 15,2007, and all interim periods within that fiscal year. Management of theCompany is evaluating the impact of this pronouncement on the Company’sconsolidated results of operations and financial condition.

 

 

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**5.DEBT**

 

Astoria Capital Partners, L.P. (“Astoria”), GFAM HedgePartnership (“GFAM”) and CAM Small Cap Fund L.P. (“CAM”) were each holders of a5% Convertible Subordinated Note Due in May 2008. The interest rate of theConvertible Subordinated Notes is 5% per annum, payable quarterly, which hasbeen refinanced through increases to the outstanding principal of theConvertible Subordinated Notes. The Convertible Subordinated Notes have amaturity date of May 30, 2008. The Convertible Subordinated Notes areconvertible into common stock, at the option of the holder, at a price of $5.00per share, at any time through May 29, 2008.

 

On October 4, 2007, the Company received aconversion notice from Astoria and on October 5, 2007, the Companyreceived a conversion notice from GFAM, each electing to convert itsConvertible Subordinated Note in full. As a result, $22,917,000 of outstandingprincipal owed to Astoria under its Convertible Subordinate Note was convertedinto 4,583,400 shares of the Company’s common stock, and $981,000 of outstandingprincipal owed to GFAM under its Convertible Subordinated Note was convertedinto 196,200 shares of the Company’s common stock. Per the terms of theConvertible Subordinated Notes, the Company made a cash payment to Astoria andGFAM of approximately $13,181 and $1,264, respectively, for amounts outstandingunder the Convertible Subordinated Notes that were not converted into shares ofcommon stock. Following the conversion of such Convertible Subordinated Notesand the cash payment to Astoria and GFAM, the Convertible Subordinated Notesheld by Astoria and GFAM were cancelled. After the conversion by Astoria andGFAM, one Convertible Subordinated Note held by CAM remains outstanding, with aprincipal balance of approximately $1 million.

 

As of December 31,2007 and March 31, 2007, the outstanding amounts under such notes were asfollows (in thousands):

 
| ** **                             | ** ** | **December 31,****2007** | ** ** | **March 31,****2007** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| Subordinated convertible notes payable |       | $                             | 953        |                       | $          | 23,946 |   |
| Plus accrued interest                  |       | 12                            |       | 295                        |       |
| Less unamortized discount              |       | (1                            | )          | (91                        | )          |
| Total notes payable                    |       | $                             | 964        |                       | $          | 24,150 |   |

 

**6.STOCKHOLDERS’ EQUITY**

 

Basic loss per share is computed using the net lossand the weighted average number of common shares outstanding during the period.Diluted loss per share is computed using the net loss and the weighted averagenumber of common shares and dilutive potential common shares outstanding duringthe period when the potential common shares are not anti-dilutive. Potentialdilutive common shares include outstanding stock options and convertible debt.There were outstanding options to purchase 4,215,946 shares of the Company’scommon stock with exercise prices ranging from $0.75 to $17.00 per share as of December 31,2007.  There were outstanding options topurchase 4,138,679 shares of the Company’s common stock with exercise pricesranging from $0.75 to $17.00 per share as of December 31, 2006. There was convertible debt outstanding at December 31, 2007 and 2006,which was convertible into 192,787 and 4,729,600 shares of common stock,respectively.  The effects of these items were not included in thecomputation of diluted earnings per share because such effects would have beenanti-dilutive.

 

Thechange in accumulated other comprehensive income during the three- and nine- monthperiods ended December 31, 2007 and 2006, is the result of the effect offoreign exchange rate changes. The following table reconciles net loss asreported with total comprehensive loss (in thousands):

 
| ** **                       | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss reported                |       | $                                                   | (217       | )                                                  | $          | (379 | ) | $ | (325 | ) | $ | (2,459 | ) |
| Translation adjustments—net |       | 99                                                  |       | 100                                                |       | (208 | ) | 184 |   |
| Total comprehensive loss         |       | $                                                   | (118       | )                                                  | $          | (279 | ) | $ | (533 | ) | $ | (2,275 | ) |

 

 

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**7.BUSINESS SEGMENT**

 

TheCompany operates in one reportable segment. International operations consistprimarily of foreign sales offices selling software developed in the UnitedStates of America combined with local maintenance revenue. The following table summarizesconsolidated financial information of the Company’s operations by geographiclocation (in thousands):

 
| ** **           | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net revenue** | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America        |       | $                                                   | 3,194      |                                               | $          | 3,314 |   | $ | 9,886 |   | $ | 9,750 |   |
| Europe/Africa        |       | 1,711                                               |       | 1,462                                              |       | 4,938 |   | 4,294 |   |
| Total                |       | $                                                   | 4,905      |                                               | $          | 4,776 |   | $ | 14,824 |   | $ | 14,044 |   |

 
| ** **                 | ** ** | **December 31, 2007** | ** ** | **March 31,2007** | ** ** |
|----------------------------|------------|---------------------------------|------------|------------------------|------------|
| **Long-lived assets** |       |                            |       |                   |       |
| North America              |       | $                               | 26,981     |                   | $          | 27,174 |   |
| Europe/Africa              |       | 621                             |       | 638                    |       |
| Total                      |       | $                               | 27,602     |                   | $          | 27,812 |   |

 

The Company operates inone reportable segment and is engaged in the design, development, sale, andsupport of three software product lines: 1) XML Data Management Servers (“XDMS”),2) Multidimensional Database Management Systems (“MDMS”), and3) Rapid Application Development (“RAD”) software tools. The followingtable represents the net revenue from the Company’s segment by product line (inthousands):

 
| ** ** | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|       |       |                                                |       |                                               |       |   |   |   |   |
| Databases  |       | $                                                   | 3,601      |                                               | $          | 3,644 |   | $ | 11,172 |   | $ | 10,916 |   |
| RAD Tools  |       | 1,304                                               |       | 1,132                                              |       | 3,652 |   | 3,128 |   |
| Total      |       | $                                                   | 4,905      |                                               | $          | 4,776 |   | $ | 14,824 |   | $ | 14,044 |   |

 

**8.COMMITMENTS AND CONTINGENCIES**

 

The Company is subject from time to time tolitigation, claims and suits arising in the ordinary course of business. As of December 31,2007 the Company was a party to the following legal proceedings:

 

*RainingData v. Intrametrics*. On or about January 19, 2007, the Company filed a complaint in OrangeCounty Superior Court that sets forth allegations that Intrametrics threatensto and has misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that Intrametrics has obtained the Company’ssource code in violation of the Parties’ OEM (Original Equipment Manufacturer)Distribution Agreement and in violation of California’s laws prohibiting themisappropriation of trade secrets.  The Company seeks injunctive relieffrom Intrametrics, including, but not limited to, compelling Intrametrics tofully comply with all of the termination provisions set forth in the OEMAgreement; enjoining Intrametrics and its employees and agents from using ordisclosing the Company’s trade secrets; prohibiting Intrametrics fromsoliciting the Company’s current or potential customers for 3 years, and fromsoliciting or employing certain of the Company’s former employees for 3years.  Intrametrics filed a motion to quash the Complaint, which theCompany opposed, but on the morning of the hearing, Intrametrics first notifiedthe Company that it filed Chapter 11 bankruptcy, effectively staying thelitigation in Orange County Superior Court.  The Company is pursuingfurther discovery and litigation in the bankruptcy court in Houston, TX.

 

*RainingData v. Soheil Raissi (formerly the Company’s Vice President, ProductDevelopment and Professional Services), Mario Barrenechea (formerly the Company’sSenior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),and Adevnet, LLC*. On or about December 8, 2006, the Company filed a complaint in OrangeCounty Superior Court that sets forth allegations that the defendants threatento and have misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that the individual defendants have usedand/or disclosed the Company’s

 

9

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trade secrets (in theform of source code and licenses and other trade secret information) inviolation of their agreements with the Company to maintain the confidentialityof such trade secret information, and in violation of California lawsprohibiting the misappropriation of trade secrets. The Company seeks injunctiverelief from the defendants, including, but not limited to, compelling thedefendants to immediately return all of the Company’s trade secrets andproperty; enjoining the defendants and their employees and agents from using ordisclosing the Company’s trade secrets, including the Company’s source code;ordering the defendants to disclose all gains and profits they have derivedfrom the misappropriation of the Company’s trade secrets; enjoining thedefendants from directly or indirectly supplying, selling or promoting anyproduct that incorporates the Company’s trade secrets.

 

*Cross-Complaintby Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.*On or about January 10, 2007, thedefendants filed a cross-complaint against the Company and Carlton Baab (theCompany’s President and Chief Executive Officer) for the following claims:  unfair business practices, violation of civilrights, intentional interference with prospective economic advantage, negligentinterference with prospective economic advantage, malicious prosecution, abuseof process, negligence, and civil conspiracy. Cross-complainants allegegeneral, compensatory, special, and punitive and exemplary damages in amounts “accordingto proof”, and seek to enjoin the Company from engaging in improper andunlawful conduct.  The Company and Carlton Baab (the “Cross-Defendants”)contend that all of the claims are baseless, and filed a special motion tostrike all of the claims in the cross-complaint.  The Company’s specialmotion to strike is scheduled to be heard in June 2008.  TheCross-Defendants will continue to vigorously defend their rights in thislitigation.  We are unable to estimate any loss or range of loss atthis time. Management believes that the ultimate disposition of this matterwill not have a material adverse effect on the Company’s consolidated financialstatements, results of operations, cash flows or liquidity.

 

*Indemnification*

 

TheCompany’s standard customer license and software agreements containindemnification and warranty provisions which are generally consistent withpractice in the Company’s industry. The duration of the Company’s servicewarranties generally does not exceed 30 days following completion of itsservices. The Company has not incurred significant obligations under customerindemnification or warranty provisions historically and does not expect toincur significant obligations in the future. Accordingly, the Company does notmaintain accruals for potential customer indemnification or warranty-relatedobligations. The maximum potential amount of future payments that the Companycould be required to make is generally limited under the indemnificationprovisions in its customer license and service agreements.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

** **

This Form 10-QSBcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thesestatements may generally be identified by the use of such words as “expect,” “anticipate,”“believe,” “intend,” “plan,” “will,” or “shall,” or the negative of thoseterms. We have based these forward-looking statements on our currentexpectations and projections about future events. Forward-looking statementsinvolve certain risks and uncertainties and actual results may differmaterially from those discussed in any such statement. Factors that could causeactual results to differ materially from such forward-looking statementsinclude the risks described under the heading “Risk Factors” in Item 2 ofthis Form 10-QSB and elsewhere in this Form  10-QSB. Theforward-looking statements contained in this Form 10-QSB include, but arenot limited to statements about the following: (1) our future success, (2) ourresearch and development efforts, (3) our future operating results andcash flow, (4) our competitive ability and position, (5) the marketsin which we operate, (6) our revenue, (7) cost of license revenue andcost of service revenue, (8) our selling and marketing costs, (9) ourbacklog, (10) the adoption of certain critical accounting policies and therelated judgments and estimates , (11) our belief that our existing cashbalances combined with our cash flow from operating activities will be sufficientto meet our operating and capital expenditure requirements for the remainder ofthe fiscal year ending March 31, 2008, (12) our focus on the continueddevelopment and enhancement of the TigerLogic XDMS product line, andidentification of new and emerging application areas and discussions withchannel partners for the sale and distribution of the TigerLogic product line,(13) the sales cycle for our products being longer than anticipated and (14)the effect of ongoing litigation on our financial condition or liquidity.  All forward-looking statements in thisdocument are made as of the date hereof, based on information available to usas of the date hereof, and we assume no obligation to update any forward-lookingstatement.

 

**Overview**

** **

We were incorporated inthe State of Delaware in August 1987. We were originally incorporated asBlyth Holdings, Inc. and our name was changed to Omnis TechnologyCorporation in September 1997. Effective December 1, 2000, wecompleted the acquisition of PickAx, Inc., a Delaware corporation (“PickAx”).Concurrent with the acquisition, we changed our name to Raining DataCorporation.

 

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**Products**

** **

Ourprincipal business is the design, development, sale and support of softwareinfrastructure. Our products allow customers to create and enhance flexiblesoftware applications for their own needs, and our software may be categorizedinto three product lines: XDMS, MDMS and RAD software tools.

 

Manyof our products are based on the Pick Universal Data Model (“Pick UDM”), whichwe created, and are capable of handling data from many sources. The Pick UDM isa core component across the XDMS and MDMS product lines.

 

Beginningin 2001, we began an extensive effort to leverage our time-proven Pick UDM andcore intellectual property to create an enterprise class XML databasemanagement system for the emerging XML market, the growing need for native XMLdata stores and the ability to handle structured and unstructured data. Thissignificant investment of time and resources resulted in the TigerLogic XDMSproduct line. We are focused on the continued development and enhancement ofthis product line, identification of new and emerging application areas anddiscussions with channel partners for the sale and distribution of theTigerLogic product line.

 

***TigerLogic XDMS***

* *

TigerLogic XML DataManagement Server provides high-performance management and query of XML data byleveraging the time-proven Pick UDM. TigerLogic also enables the ability toquery external data sources as if they were one logical database and maintainsreferential integrity across data sources. TigerLogic’s patent-pending XMLIndexing and Profiling technology enables it to access XML data via XQuerybetween 10x to 150x faster in internal tests than relational databases, XMLrepositories or XML Index and Search engines. TigerLogic provides XML, Java,..NET, WSDL and SOAP compatibility for simplified plug-in and integration withdevelopment environments of choice.

 

TigerLogic provides anextensible and flexible development and deployment environment. Unlike otherXML data management alternatives, TigerLogic XDMS does not need to know theschema or structure of data before processing and storing it. We believe theability to make XML schemas optional is a vital innovation because thestructures of operational systems frequently change, and mapping schemas forthe purpose of linking to a new data source is both difficult andtime-consuming. The system also enables support for schema versioning, which iscritical when addressing evolving standards and XML schemas. The GeneralAvailability Release of TigerLogic XDMS version 2.6, which included support forenhanced XQuery features, including XQuery stored procedures and full-textsearch and support for High Availability clustering, was released in July 2006.Version 3.0, which is the third generation release of the product and includescompliance with the XML Query 1.0 specification, released in January 2007,cache management of data sources, in-memory cache, support for Geospatial data,enhanced APIs and data replication was released for beta testing in June 2007.

 

***Multi-dimensional Databases (MDMS)***

* *

The MDMS product lineconsists principally of the D3 Data Base Management System (“D3”), which runson many operating systems, such as IBM AIX, Linux and Windows NT. D3 allowsapplication programmers to create new business solution software in less timethan it normally takes in many other environments. This can translate intolower costs for the developer, lower software prices for the customer andreduced costs of ownership for both the developer and end user. Our MDMSproducts also include mvEnterprise, a scalable multi-dimensional databasesolution that allows the user to leverage the capabilities of the UNIXoperating system, and mvBase, a multi-dimensional database solution that runson all Windows platforms.

 

MDMS components includethe Pick Data Provider for .Net (“PDP”) and our Pick Reporting ServicesConnector. The PDP component for the Microsoft .NET Framework is tightlyintegrated with Microsoft Visual Studio .NET. It allows software developersusing IBM’s Universe and Unidata databases and our D3 database platform tobuild client/server applications, Web applications or Web services using any ofthe languages and technologies that run on the Microsoft .NET Framework, suchas Microsoft ASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET. OurPick Reporting Services Connector enables a data connection that allows Pickdatabase users to unlock the benefits of Microsoft Reporting Services to takeadvantage of a comprehensive, server-based reporting solution that can author,manage, and deliver both paper-oriented and interactive, Web-based reports.This solution also allows access to IBM UniVerse, IBM UniData and Pick D3 data.

 

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***Rapid Application Development (RAD) Tools***

* *

Our RAD products supportthe full life cycle of software application development and are designed forrapid prototyping, development and deployment of graphical user interface (“GUI”)client/server and Web applications. The RAD products include Omnis Studio,Omnis Studio for SAP and Omnis Classic, and are object-oriented andcomponent-based, providing the ability to deploy applications on operatingsystem platforms such as Windows, Unix and Linux, as well as databaseenvironments such as MySQL, Oracle, DB2, Sybase, Microsoft SQL Server and otherOpen Data Base Connectivity (“ODBC”) compatible database management systems.

 

**Technical Support**

** **

Our products are used byour customers to build and deploy applications that may become a criticalcomponent of their business operations. As a result, continuing to providecustomer technical support services is an important element of our businessstrategy. Customers who participate in our support programs receive periodicmaintenance releases on a when-and-if available basis and direct technicalsupport when required.

 

**Sales and Distribution**

** **

Inthe United States, we sell our products through established distributionchannels consisting of OEMs, system integrators, specialized verticalapplication software developers and consulting organizations. We also sell ourproducts directly through our sales personnel to end user organizations. Outsidethe United States, we maintain direct sales offices in the United Kingdom,France and Germany. Approximately 35% and 33% of our revenue came from salesthrough our offices located outside the United States for the three and ninemonths ended December 31, 2007, respectively, compared to 31% for the sameperiods in 2006.

 

We sell our products inU.S. Dollars in North America, British Pounds Sterling in the United Kingdomand Euros in France and Germany. Because we recognize revenue and expense inthese various currencies but report our financial results in U.S. Dollars,changes in exchange rates may cause variances in our period-to-period revenueand results of operations in future periods.

 

We license our softwareon a per-CPU, per-server, per-port or per-user basis. Therefore, the additionof CPU’s, servers, ports or users to existing systems increases our revenuefrom our installed base of licenses. In addition to software products, weprovide continuing maintenance and other services to our customers, includingprofessional services, technical support and training to help plan, analyze,implement and maintain application software based on our products.

 

**Customers**

** **

Our customers may beclassified into two general categories:

 

·                   Independent Software Vendors andSoftware Developers. The majority of our revenue is derived from independentsoftware vendors, which typically write their own vertical application softwarethat they sell as a complete package to end user customers. This categoryincludes value added resellers (“VARs”) and software-consulting companies thatprovide contract programming services to their customers.

 

·                   Corporate Information Technology (“IT”)Departments.

 

Foreach of the three and nine months ended December 31, 2007 and 2006, nosingle customer accounted for more than 10% of our revenue.

 

**Research and Development**

 

We have devoted significant resources to theresearch and development of our products and technology. We believe that ourfuture success will depend largely on a strong development effort with respectto both our existing and new products. These development efforts have resultedin updates and upgrades to existing MDMS and RAD products and the launch of newproducts including the XDMS product line. New product releases in all of ourproduct lines are currently in progress. We expect to continue our research anddevelopment efforts in all product lines for the foreseeable future. We intendfor these efforts to improve our future operating results and increase cashflow. However, such efforts may not result in additional new products orrevenue, and we can make no assurances that the recently announced products orfuture products will be successful. We recognized $1.9 million and $5.8 millionof research and development expense for the three and nine months ended December 31,2007, respectively, compared to $2.2 million and $7.1 million for the sameperiods in 2006.

 

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**Competition**

 

The application developmenttools software market is rapidly changing and intensely competitive. Our MDMSproducts compete with products developed by companies such as Oracle, Microsoftand IBM. Our RAD products currently encounter competition from several directcompetitors, including Microsoft, and competing development environments,including JAVA. Competition is developing and evolving in the XML market forwhich our XDMS products are intended. Companies that do or are expected tocompete in this market include Oracle, IBM, Microsoft and Sybase, as well as anumber of smaller companies with products that directly and indirectly competewith our XDMS products. Most of our competitors have significantly morefinancial, technical, marketing and other resources than we do. As a result,these competitors may be able to respond more quickly to new or emergingtechnologies, evolving markets and changes in customer requirements, and maydevote greater resources to the development, promotion and sale of theirproducts.

 

We believe that ourability to compete in the various MDMS, RAD, and XDMS markets depends onfactors both within and outside our control, including the timing of release,performance and price of new products developed by both us and our competitors.Although we believe that we currently compete favorably with respect to most ofthese factors, we may not be able to maintain our competitive position againstcurrent and potential competitors, especially those with greater resources.

 

**Intellectual Property and Other Proprietary Rights**

** **

We rely primarily on acombination of trade secret, copyright and trademark laws and contractualprovisions to protect our intellectual property and proprietary rights. Ourtrademarks include Raining Data, Pick, TigerLogic, D3, Omnis, Omnis Studio,mvEnterprise, mvBase, and mvDesigner, among others. We also have one pendingU.S. patent application as of December 31, 2007.

 

We license our productsto end users on a “right to use” basis pursuant to a perpetual licenseagreement that restricts use of products to a specified number of users. Wegenerally rely on “click-wrap” licenses that become effective when a customerdownloads and installs the software on its system. In order to retain exclusiveownership rights to our software and technology, we generally provide oursoftware in object code only, with contractual restrictions on copying,disclosure, and transferability. There can be no assurance that theseprotections will be adequate, or that our competitors will not independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.

 

**Backlog**

** **

We generally shipsoftware products as orders are received and have historically operated withlittle backlog. As a result, our license revenue in any given quarter isdependent upon orders received and product shipped during the quarter.Historically, there has been a short cycle between receipt of an order andshipment. Consequently, we do not believe that our backlog as of any particulardate is meaningful.

 

**Employees**

** **

At December 31,2007, we had 106 employees worldwide of which 77 were in the United States and29 were in our international offices. Of the 106 employees, 100 are full-timeand approximately 45% are in research and development, 20% in technicalsupport, 16% in sales and marketing and 19% in general and administrativefunctions.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses and disclosure ofcontingent liabilities.

 

On an on-going basis, weevaluate our estimates, including those related to revenue recognition andaccounting for goodwill. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

We have identified theaccounting policies below as the policies critical to our business operationsand the understanding of our results of operations. We believe the followingcritical accounting policies and the related judgments and estimates affect thepreparation of our consolidated financial statements:

 

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REVENUE RECOGNITION. We recognize revenueusing the residual method pursuant to the requirements of Statement of PositionNo. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended. Underthe residual method, revenue is recognizedin a multiple element arrangement when company-specific objective evidence offair value exists for all of the undelivered elements in the arrangement, butdoes not exist for one or more of the delivered elements in the arrangement. Atthe outset of the arrangement with the customer, we defer revenue for the fairvalue of our undelivered elements (e.g., maintenance) based on company-specificobjective evidence of the amount such items are sold individually to ourcustomers and recognize revenue for the remainder of the arrangement feeattributable to the elements initially delivered in the arrangement (e.g.,software license) when the basic criteria in SOP 97-2 have been met.

 

Under SOP 97-2, revenueattributable to an element in a customer arrangement is recognized whenpersuasive evidence of an arrangement exists and delivery has occurred,provided the fee is fixed or determinable, collectibility is probable and thearrangement does not require significant customization of the software. If, atthe outset of the customer arrangement, we determine that the arrangement feeis not fixed or determinable, we defer the revenue and recognize the revenuewhen the arrangement fee becomes due and payable.

 

Service revenue relatesprimarily to consulting services, maintenance and training. Maintenance revenueis initially deferred and then recognized ratably over the term of themaintenance contract, typically 12 months. Consulting and training revenueis recognized as the services are performed and is usually calculated on a timeand materials basis. Such services primarily consist of implementation servicesrelated to the installation of our products and do not include significantcustomization to or development of the underlying software code. We do not haveprice protection programs, conditional acceptance agreements, and sales of ourproducts are made without right of return.

 

For contracts thatrequire significant modification or customization to the software in accordancewith customers’ specifications, we recognize revenue using thecompleted-contract method pursuant to the requirements of Statement of PositionNo. 81-1, “*Accounting for Performanceof Construction-Type and Certain Production-Type Contracts.*” Under this method, revenue and expenses are deferred until customer acceptanceof the finished product occurs.

 

GOODWILL. We assess theimpairment of goodwill whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. We also assess the value ofgoodwill at least annually. Factors we consider to be important which couldtrigger an impairment review include the following:

 

·                   Significantunderperformance relative to expected historical or projected future operatingresults;

 

·                   Timing of ourrevenue, significant changes in the manner of use of the acquired assets or thestrategy for the overall business;

 

·                   Significantnegative industry or economic trends;

 

·                   Significantdecline in our stock price for a sustained period; and

 

·                   Our marketcapitalization relative to net book value.

 

In accordance withStatement of Financial Accounting Standards No. 142, “*Goodwill and Other Intangible Assets*” (“SFASNo. 142”), we do not amortize goodwill, but test for goodwill impairmentfollowing a two-step process. The first step is used to identify potentialimpairment by comparing the fair value of a reporting unit with its net bookvalue (or carrying amount), including goodwill. If the fair value exceeds thecarrying amount, goodwill of the reporting unit is considered not impaired andthe second step of the impairment test is unnecessary. If the carrying amountof a reporting unit exceeds its fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, if any.The second step of the goodwill impairment test compares the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill. Ifthe carrying amount of the reporting unit’s goodwill exceeds the implied fairvalue of that goodwill, an impairment loss is recognized in an amount equal tothat excess. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. That is,the fair value of the reporting unit is allocated to all of the assets andliabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit. Currently, we have one reporting unit for goodwill impairmenttesting.

 

Determining the fairvalue of a reporting unit under the first step of the goodwill impairment testand determining the fair value of individual assets and liabilities of areporting unit (including unrecognized intangible assets) under the second stepof the goodwill impairment test is judgmental in nature and often involves theuse of significant estimates and assumptions. These estimates and assumptionscould have a significant impact on whether or not an impairment charge isrecognized and the magnitude of any such charge. Estimates of fair value arecurrently based on our stock price as reported by Nasdaq.

 

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EMPLOYEESTOCK-BASED COMPENSATION. We account for stock-based compensation in accordancewith SFAS No. 123(R). Under the fair value recognition provisions of thisstatement, share-based compensation cost is measured at the grant date based onthe value of the award and is recognized as expense over the requisite serviceperiod. We estimate the fair value of stock-based awards using a Black-Scholesvaluation model. Determining the fair value of share-based awards at the grantdate requires judgment, including estimating volatility, expected terms, andforfeitures. If actual results differ significantly from these estimates,stock-based compensation expense and our results of operations could bematerially impacted. See footnote 3 in the accompanying unaudited condensedconsolidated financial statements.

 

**Resultsof Operations**

 

Thefollowing table sets forth certain Condensed Consolidated Statement ofOperations data in total dollars, as a percentage of total net revenues and asa percentage change from the same period in the prior year. Cost of licenserevenues and cost of service revenues are expressed as a percentage of therelated revenues. This information should be read in conjunction with theCondensed Consolidated Financial Statements included elsewhere in this Form 10-QSB.

 
| ** **                                             | ** ** | **Three Months Ended  December 31, 2007** | ** ** | **Three Months Ended  December 31, 2006** | ** ** | **Nine Months Ended  December 31, 2007** | ** ** | **Nine Months Ended  December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Results**                                                   | ** ** | **% of Net  Revenues**                              | ** ** | **Percent  Change**                                          | ** ** | **Results**                                                  | ** ** | **% of Net  Revenues** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| ** **                                             | ** ** | **(In  thousands)**                                           | ** ** | ** **                                                    | ** ** | ** **                                                   |       | **(In  thousands)**                                          |       |   |   | **(In  thousands)** |   |   |   |   |   | **(In  thousands)** |   |   |   |
| Net revenues                                           |       |                                                          |       |                                                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                               |       | $                                                             | 1,992      |                                                          | 41%        |                                                         | 11%        |                                                         | $          | 1,793 |   | 38% |   | $ | 5,953 |   | 40% |   | 16% |   | $ | 5,133 |   | 37% |   |
| Services                                               |       | 2,913                                                         |       | 59%                                                           |       | (2)%                                                         |       | 2,983                                                        |       | 62% |   | 8,871 |   | 60% |   | 0% |   | 8,911 |   | 63% |   |
| Total net  revenues                                    |       | 4,905                                                         |       | 100%                                                          |       | 3%                                                           |       | 4,776                                                        |       | 100% |   | 14,824 |   | 100% |   | 6% |   | 14,044 |   | 100% |   |
| Operating  expenses                                    |       |                                                          |       |                                                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues:                                      |       |                                                          |       |                                                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license  revenues (as a % of license revenues) |       | 8                                                             |       | 0%                                                            |       | (71)%                                                        |       | 28                                                           |       | 2% |   | 29 |   | 0% |   | (57)% |   | 68 |   | 1% |   |
| Cost of service  revenues (as a % of service revenues) |       | 444                                                           |       | 15%                                                           |       | 0%                                                           |       | 442                                                          |       | 15% |   | 1,383 |   | 16% |   | (13)% |   | 1,583 |   | 18% |   |
| Selling and  marketing                                 |       | 1,601                                                         |       | 33%                                                           |       | 15%                                                          |       | 1,387                                                        |       | 29% |   | 4,278 |   | 29% |   | 2% |   | 4,204 |   | 30% |   |
| Research and  development                              |       | 1,861                                                         |       | 38%                                                           |       | (14)%                                                        |       | 2,175                                                        |       | 46% |   | 5,780 |   | 39% |   | (18)% |   | 7,052 |   | 50% |   |
| General and  administrative                            |       | 1,115                                                         |       | 23%                                                           |       | 23%                                                          |       | 907                                                          |       | 19% |   | 3,486 |   | 24% |   | 20% |   | 2,916 |   | 21% |   |
| Total operating  expenses                              |       | 5,029                                                         |       | 103%                                                          |       | 2%                                                           |       | 4,939                                                        |       | 103% |   | 14,956 |   | 101% |   | (5)% |   | 15,823 |   | 113% |   |
| Operating loss                                         |       | (124)                                                         |       | (3)%                                                          |       | (24)%                                                        |       | (163)                                                        |       | (3)% |   | (132) |   | (1)% |   | (93)% |   | (1,779) |   | (13)% |   |
| Other income  (expense)-net                            |       | 16                                                            |       | 0%                                                            |       | 108%                                                         |       | (199)                                                        |       | (4)% |   | (7) |   | 0% |   | 99% |   | (623) |   | (4)% |   |
| Loss before  income taxes                              |       | (108)                                                         |       | (2)%                                                          |       | (70)%                                                        |       | (362)                                                        |       | (8)% |   | (139) |   | (1)% |   | (94)% |   | (2,402) |   | (17)% |   |
| Provision for  income taxes                            |       | 109                                                           |       | 2%                                                            |       | 541%                                                         |       | 17                                                           |       | 0% |   | 186 |   | 1% |   | 226% |   | 57 |   | 0% |   |
| Net loss                                               |       | $                                                             | (217)      |                                                          | (4)%       |                                                         | (43)%      |                                                         | $          | (379) |   | (8)% |   | $ | (325) |   | (2)% |   | (87)% |   | $ | (2,459) |   | (18)% |   |

 

**REVENUE**

 

NETREVENUE. Our revenue is derived principally from two sources: fees fromsoftware licensing and fees for post contract technical support. We license oursoftware on a per-CPU, per-server, per-port or per-user basis. Therefore, theaddition of CPU’s, servers, ports or users to existing systems increases ourrevenue from our installed base of licenses. The increase in revenue for thethree and nine month periods ended December 31, 2007, as compared to thesame periods in the prior year is due to an increase in license revenue fromadditional users on certain existing accounts. In the longer term, we expectthat the MDMS and RAD markets will eventually contract as customers adopt newertechnologies, and, therefore, the revenue generated from sales of our MDMS andRAD products is expected to decrease.

 

We have been activelydeveloping and marketing our XDMS product line. Should our development effortsand the adoption of these product lines be successful, we anticipate additionalrevenues in future periods related to the sale of these products. However, wecan give no assurances as to customer acceptance of any new products orservices, or the ability of the current or any new products and services togenerate revenue. While we are committed to research and development effortsthat are intended to allow us to penetrate new markets and generate new sourcesof revenue, such efforts may not result in additional products, services orrevenue.

 

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**OPERATINGEXPENSES**

 

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costsassociated with software license sales including software packaging and relatedpersonnel cost, documentation, physical media costs and royalties. Cost oflicense revenue decreased in the three and nine month periods ended December 31,2007, as compared to the same periods in the prior year due to reducedheadcount. We anticipate that the cost of license revenue, as a percentage oflicense revenue and in absolute dollars, will be relatively stable in futureperiods.

 

COST OF SERVICE REVENUE.Cost of service revenue includes primarily personnel costs relating toproviding consulting, technical support and training services. Cost of servicerevenue remains consistent for the three month period ended December 31,2007, when compared to the same period in prior year.  Cost of service revenue decreased for thenine month period ended December 31, 2007, as compared to the same periodin the prior year due to reduced headcount. We anticipate that the cost ofservice revenue, as a percentage of service revenue and in absolute dollars,will be relatively stable in future periods.

 

SELLINGAND MARKETING. Selling and marketing expense consists primarily of salaries,benefits, advertising, tradeshows, travel and overhead costs for our sales andmarketing personnel. The increase in selling and marketing expense in the threemonth period ended December 31, 2007, as compared to the same period inthe prior year was due to increased marketing expense relating to XDMS andTigerLogic products. We anticipate that selling and marketing costs related toXDMS products may increase as we further develop the sales channel for theseproducts and if customer acceptance of these products increases. In addition,if our continued research and development efforts are successful, includingwith respect to our XDMS products, and new products or services are created, wemay incur increased sales and marketing expense to promote those new productsin future periods.

 

RESEARCHAND DEVELOPMENT. Research and development expense consists primarily ofsalaries and other personnel-related expenses and overhead costs forengineering personnel including employees in the US and the UK and contractorsin the US and India. The decrease in research and development expense in thethree and nine month periods ended December 31, 2007, as compared to thesame periods in the prior year was mainly due to reduced headcount andtermination of contracted professional technical services in India. We arecommitted to our research and development efforts and expect research anddevelopment expense will remain at the current level in future periods orincrease if we believe that additional spending is warranted. Such efforts maynot result in additional new products and any new products, including the XDMSproducts, may not generate sufficient revenue, if any, to offset the researchand development expense.

 

GENERALAND ADMINISTRATIVE. General and administrative expense consists primarily ofcosts associated with our finance, human resources, legal and other administrativefunctions. These costs consist principally of salaries and otherpersonnel-related expenses, professional fees, depreciation and overhead costs.The increase in general and administrative expense in the three and nine monthperiods ended December 31, 2007, as compared to the same periods in prioryear was mainly due to costs incurred in legal services related to pendinglitigation matters and professional service expenses.

 

OTHERINCOME (EXPENSE). Other income (expense) consists primarily of net interestexpense and gains and losses on foreign currency transactions. The change inother income (expense) during the three and nine month periods ended December 31,2007, as compared to the same periods in the prior year was mainly due to lessinterest expense as a result of the conversion of certain long term debt intoequity in October 2007, and foreign currency exchange gains. Due to theuncertainty in exchange rates, we may experience transaction gains or losses infuture periods, the effect of which cannot be determined at this time.

 

PROVISION FOR INCOMETAXES. The provision for income taxes reflects the tax on earnings anddividends from foreign subsidiaries. We are able to reduce the current taxliability of foreign subsidiaries with net operating loss carryforwards.However, certain carryforwards were acquired in our acquisition in December 2000.Therefore, the benefit realized from utilizing those net operating losscarryforwards reduced goodwill instead of income tax expense. Due touncertainties surrounding the timing of realizing the benefits of the netoperating loss carryforwards in the future, we have established a fullvaluation allowance against the related net deferred tax assets. Additionally,for the quarter ended December 31, 2007, we received a dividend ofapproximately $0.8 million from one of our foreign subsidiaries and paidapproximately $40,000 in withholding tax associated with the dividend amount.

 

16

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**LIQUIDITY AND CAPITAL RESOURCES**

 

In connection with theacquisition of PickAx, we assumed a Secured Promissory Note issued to Astoriadated November 30, 2000, in the amount of $18.5 million. In January 2003,we entered into a Note Exchange Agreement (the “Exchange Agreement”) withAstoria to replace the existing Secured Promissory Note, as amended, with aConvertible Subordinated Note. Under the terms of the Exchange Agreement, theSecured Promissory Note was exchanged and replaced with a Convertible SubordinatedNote having a principal amount of $22.1 million, which principal amount wasequal to the outstanding principal and accrued interest payable on the SecuredPromissory Note as of the date of the Exchange Agreement. In October 2005,Astoria assigned a portion of its common stock holdings totaling 870,536 sharesand a portion of the Subordinated Convertible Note, totaling $1,751,832, to twoof its limited partners, including GFAM. As such, we issued an Amended andRestated Note to Astoria for $20,749,581 and corresponding notes directly tothe limited partners for $862,979 and $888,853, respectively. The ConvertibleSubordinated Notes are convertible into common stock at any time, at the optionof the holder, at a price of $5.00 per share. The Convertible SubordinatedNotes mature on May 30, 2008. The interest rate of the ConvertibleSubordinated Notes is 5% per annum as compared to an interest rate of 10% perannum under the Secured Promissory Note. The interest is payable quarterly atour option in cash or through increases to the outstanding principal of theConvertible Subordinated Notes.

 

On December 14,2004, we entered into an Agreement Regarding Amended and Restated Common StockPurchase Warrant and 5% Convertible Subordinated Note Due 2008 with Astoriawhereby we could redeem, in part, the Convertible Subordinated Note in advanceof January 30, 2005. On December 14, 2004, Astoria exercised itswarrant in the amount of $2,670,904. In lieu of a cash payment, we used theproceeds of the exercise to pay down a portion of the indebtedness to Astoria.The pay down consisted of $247,129 for accrued and unpaid interest, and$2,423,775 as a reduction of principal of the Convertible Subordinated Note.

 

On October 4, 2007, the Company received aconversion notice from Astoria and on October 5, 2007, the Companyreceived a conversion notice from GFAM, each electing to convert itsConvertible Subordinated Note in full. As a result, $22,917,000 of outstandingprincipal owed to Astoria under its Convertible Subordinate Note was convertedinto 4,583,400 shares of the Company’s common stock, and $981,000 ofoutstanding principal owed to GFAM under its Convertible Subordinated Note wasconverted into 196,200 shares of the Company’s common stock. Per the terms ofthe Convertible Subordinated Notes, the Company made a cash payment to Astoriaand GFAM of approximately $13,181 and $1,264, respectively, for amountsoutstanding under the Convertible Subordinated Notes that were not convertedinto shares of common stock. Following the conversion of such ConvertibleSubordinated Notes and the cash payment to Astoria and GFAM, the ConvertibleSubordinated Notes held by Astoria and GFAM were cancelled. After theconversion by Astoria and GFAM, one Convertible Subordinated Note remainsoutstanding, with a principal balance of approximately $1 million.

 

Astoria is a majorstockholder of ours, holding a majority of our outstanding common stock.Richard W. Koe, Chairman of the Board of Directors, serves as the ManagingGeneral Partner for Astoria. Carlton H. Baab, our President and ChiefExecutive Officer and a member of the Board of Directors, served as a ManagingPrincipal of ACM, which is a general partner of Astoria, until taking a formalleave of absence to join us in August 2001. Gerald F. Chew, a member ofour Board of Directors, is the cousin of Mr. Koe.

 

As of December 31,2007, we had $13.1 million in cash. We believe that our existing cashbalances combined with our cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements for thenext twelve months. We are committed to research and development efforts thatare intended to allow us to penetrate new markets and generate new sources ofrevenue and improve operating results. However, our research and developmentefforts have required, and will continue to require, cash outlays without theimmediate or short-term receipt of related revenue. Our ability to meet ourexpenditure requirements is dependent upon our future financial performance,which will be affected by, among other things, prevailing economic conditions,our ability to penetrate new markets and attract new customers, marketacceptance of our new and existing products and services, the success ofresearch and development efforts and other factors beyond our control. On February 11,2004, we entered into a two year credit facility with Silicon Valley Bank whichprovided us with the ability to borrow up to $1.5 million at an annual interestrate of Prime plus 1.0%, provided that the annual interest rate shall never beless than 5%. Werenewed this credit facility on February 11, 2006. The credit facility iscollateralized by our assets and expires on February 11, 2008. Thecredit facility contains financial and reporting covenants that require us tomaintain certain financial ratios only when we have outstanding borrowings onthe line. There were no outstanding borrowings as of December 31, 2007. Weare currently in the process of finalizing the renewal of our credit facilitywith Silicon Valley Bank and anticipate a high likelihood of success.

 

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On November 9,2004, we entered into a lease agreement with The Irvine Company whereby weleased one building in Irvine, California, comprisingapproximately 29,000 square feet, to replace our then headquartersfacility. The lease commenced in November 2005 and has a five-yearterm. If certain conditions are met, we have the option to extend the term ofthe lease for an additional thirty-six months. The total basic rentover the five-year term is approximately $2.6 million. The annual basic rentduring the five-year term ranges from approximately $475,000during the first year to approximately $545,000 during the fifth year. The rentexpense is being recognized on a straight line basis over the lease term.

 

We had no materialcommitments for capital expenditures as of December 31, 2007.

 

Net cash provided by(used in) operating activities was $0.9 million and ($1.4) million for thenine-month periods ended December 31, 2007 and 2006, respectively.

 

Ourearnings before interest, taxes, depreciation and amortization (EBITDA) was$0.3 million, or 6% of total net revenue for the three months ended December 31,2007, and $1.0 million, or 6% of total net revenue for the nine monthsended December 31, 2007. Our EBITDA was $0.2 million, or 3% of total netrevenue for the three months ended December 31, 2006, and ($0.9) million,or (6%) of total net revenue for the nine months ended December 31, 2006.The increase in EBITDA for the three and nine months ended December 31,2007, compared to the same periods in the prior year was a result of increasedlicense revenue and reduced personnel costs.

 

EBITDA is defined as netincome (loss) with an add-back for depreciation and amortization, non-cashstock-based compensation expense, interest income (expense)- net, other income(expense)- net, and income taxes. The following table reconciles EBITDA to thereported net loss:

 

**RECONCILIATIONOF EBITDA TO NET LOSS**

**(in thousands)**

** **
| ** **                    | ** ** | **For the Three Months Ended  December 31,** | ** ** | **For the Nine Months Ended  December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                                              | ** ** | **2006**                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | ** **                                                            | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported net loss             |       | $                                                                     | (217       | )                                                                    | $          | (379 | ) | $ | (325 | ) | $ | (2,459 | ) |
| Depreciation and amortization |       | 71                                                                    |       | 78                                                                   |       | 203 |   | 232 |   |
| Stock-based compensation      |       | 332                                                                   |       | 238                                                                  |       | 888 |   | 695 |   |
| Interest (income) expense-net |       | (124                                                                  | )          | 205                                                                  |       | 282 |   | 636 |   |
| Other (income) expense-net    |       | 108                                                                   |       | (6                                                                   | )          | (275 | ) | (13 | ) |
| Provision for income taxes    |       | 109                                                                   |       | 17                                                                   |       | 186 |   | 57 |   |
| EBITDA                        |       | $                                                                     | 279        |                                                                 | $          | 153 |   | $ | 959 |   | $ | (852 | ) |

 

EBITDA does not representfunds available for management’s discretionary use and is not intended torepresent cash flow from operations. EBITDA should not be construed as asubstitute for net loss or as a better measure of liquidity than cash flow fromoperating activities, which are determined in accordance with United Statesgenerally accepted accounting principles (“GAAP”). EBITDA excludes componentsthat are significant in understanding and assessing our results of operationsand cash flows. In addition, EBITDA is not a term defined by GAAP and as aresult our measure of EBITDA might not be comparable to similarly titledmeasures used by other companies.

 

However, EBITDA is usedby management to evaluate, assess and benchmark our operational results and webelieve that EBITDA is relevant and useful information, which is often reportedand widely used by analysts, investors and other interested parties in ourindustry. Accordingly, we are disclosing this information to permit a morecomprehensive analysis of our operating performance, to provide an additionalmeasure of performance and liquidity and to provide additional information withrespect to our ability to meet future debt service, capital expenditure andworking capital requirements.

 

 

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Our EBITDA financialinformation is also comparable to net cash provided by (used in) operatingactivities. The table below reconciles EBITDA to the GAAP disclosure of netcash provided by (used in) operating activities:

 

**RECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USED IN) OPERATINGACTIVITIES**

**(in thousands)**

** **
| ** **                                          | ** ** | **For the Nine Months Ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                             | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | ** **                                                           | ** ** | ** ** | ** ** |
| Net cash provided by (used in) operating activities |       | $                                                                    | 875        |   | $ | (1,380 | ) |
| Interest expense-net                                |       | 282                                                                  |       | 636 |   |
| Other income-net                                    |       | (275                                                                 | )          | (13 | ) |
| Change in trade accounts receivable                 |       | 348                                                                  |       | 299 |   |
| Change in other current and non-current assets      |       | 50                                                                   |       | 218 |   |
| Change in accounts payable                          |       | (172                                                                 | )          | 182 |   |
| Change in accrued liabilities                       |       | (233                                                                 | )          | (400 | ) |
| Change in deferred revenue                          |       | 59                                                                   |       | (243 | ) |
| Foreign currency exchange gain                      |       | 226                                                                  |       | 16 |   |
| Note payable discount amortization                  |       | (90                                                                  | )          | (62 | ) |
| Provision for bad debt                              |       | (111                                                                 | )          | (105 | ) |
| EBITDA                                              |       | $                                                                    | 959        |   | $ | (852 | ) |

** **

**RISK FACTORS**

** **

We operate in a rapidlychanging environment that involves numerous risks and uncertainties. Thefollowing section lists some, but not all, of these risks anduncertainties that may have a material adverse effect on our business,financial condition or results of operation.

 

**IF WE DO NOT DEVELOP NEW PRODUCTSAND ENHANCE EXISTING PRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY ANDINDUSTRY STANDARDS, OUR REVENUE MAY DECLINE.**

 

We have devotedsignificant resources to the research and development of products andtechnologies. We believe that our future success will depend in large part on astrong research and development effort with respect to both our existing andnew products. Beginning in 2001, we began an extensive effort to leverage ourtime-proven Pick UDM and core intellectual property to create an enterpriseclass XML database management server for the emerging XML market. Thissignificant investment of time and resources resulted in the TigerLogic XDMSproduct line. While we intend for these efforts to improve our future operatingresults and increase cash flow, such efforts may not result in new products orrevenue, and any new products that do result may not be successful. Thedevelopment of new or enhanced software products is a complex and uncertainprocess requiring high levels of innovation, as well as accurate anticipationof customer and technical trends. In developing new products and services, wemay fail to develop and market products that respond to technological changesor evolving industry standards in a timely or cost-effective manner, orexperience difficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customerordering patterns and to ensure that adequate supplies of new products can bedelivered to meet customer demand. Failure to develop and introduce newproducts, or enhancements to existing products, in a timely manner in responseto changing market conditions or customer requirements, or lack of customeracceptance of our products, will materially and adversely affect our business,results of operations and financial condition.

 

**OUR FAILURE TOCOMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

** **

The market for ourproducts is highly competitive, diverse and subject to rapid change. Ourproducts and services compete on the basis of the following keycharacteristics: performance; inter-operability; scalability; functionality;reliability; pricing; post sale customer support; quality; compliance withindustry standards; and overall total cost of ownership.

 

The applicationdevelopment tools software market is rapidly changing and intenselycompetitive. Our MDMS products compete with products developed by companiessuch as Oracle, Microsoft and IBM. Our RAD products currently encountercompetition from several direct competitors, including Microsoft, and competingdevelopment environments, including

 

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JAVA. Competition isdeveloping and evolving in the XML market for which our XDMS products areintended. Companies that do or are expected to compete in this market includeOracle, IBM, Microsoft and Sybase, as well as a number of smaller companieswith products that directly and indirectly compete with our XDMS products.Additionally, as we expand our business, we expect to compete with a differentgroup of companies, including smaller, highly focused companies offering singleproducts.

 

Most of our competitorshave significantly more financial, technical, marketing and other resourcesthan we do. As a result, these competitors may be able to respond more quicklyto new or emerging technologies, evolving markets and changes in customerrequirements and may devote greater resources to the development, promotion andsale of their products. While we currently believe that our products andservices compete favorably in the marketplace, our products and services couldfall behind marketplace demands at any time. If we fail to address thecompetitive challenges, our business would suffer materially.

 

**BECAUSE THE MARKETFOR OUR MDMS AND RAD TOOLS PRODUCTS MAY BE DECLINING, OUR REVENUE MAY DECLINEIF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEWCUSTOMERS.**

** **

We believe that themarkets for our MDMS and RAD products may be declining as customers adopt othertechnologies. As a result, to maintain or grow our revenue in these markets, wewill need to maintain our sales to existing customers and to generate sales tonew customers, including corporate development teams, commercial applicationdevelopers, system integrators, independent software vendors and independentconsultants. If we fail to attract new customers, if we lose our customers tocompetitors, or if the MDMS or RAD markets further decline, our revenue may beadversely affected. In the longer term, it is expected that the MDMS and RADmarkets will eventually decline as customers adopt newer technologies.

 

**OUR PRODUCTS HAVEA LONG SALES CYCLE WHICH COULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

** **

The sales cycle for ourMDMS and RAD products typically ranges from three to nine months or longer andthe sales cycle for our XDMS products is anticipated to be significantly longersince these markets are emerging and the products are still in the process ofbeing adopted by the marketplace. Our products are typically used byapplication developers, system integrators and value added resellers to developapplications that are critical to their corporate end user’s business. Becauseour products are often part of an end user’s larger business process,re-engineering initiative, or implementation of client/server or web-basedcomputing, the end users frequently view the purchase of our products as partof a long-term strategic decision regarding the management of theirworkforce-related operations and expenditures. Thus, this sometimes results inend users taking a significant period of time to assess alternative solutionsby competitors or to defer a purchase decision as a result of an unrelatedstrategic issue beyond our control. As a result, a significant period of timemay elapse between our research and development efforts and recognition ofrevenue, if any.

 

**THE CONCENTRATION OF OUR STOCK OWNERSHIP GIVES ONE STOCKHOLDERSIGNIFICANT CONTROL OVER OUR BUSINESS.**

** **

As of December 31,2007, Astoria beneficially owned approximately 56% of our outstanding commonstock. Richard W. Koe, Chairman of the Board of Directors, serves as theManaging General Partner for Astoria Capital Management, which is a generalpartner of Astoria. Carlton H. Baab, our President, Chief ExecutiveOfficer, and Director, served as a Managing Principal of Astoria CapitalManagement until taking a formal leave of absence to join us in August 2001.This concentration of stock ownership allows Astoria, acting alone, to blockany actions that require approval of our stockholders, including the electionof members to the Board of Directors and the approval of significant corporatetransactions. Moreover, this concentration of ownership may delay or prevent achange in control.

 

**WE MAY EXPERIENCEQUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITYOF OUR STOCK PRICE.**

** **

We expect to continue tospend substantial amounts of money in the area of research and development,sales and marketing and operations in order to promote new product developmentand introduction. Because the expenses associated with these activities arerelatively fixed in the short-term, we may be unable to timely adjust spendingto offset any unexpected shortfall in revenue growth or any decrease in revenuelevels. Operating results may also fluctuate due to factors such as:

 

 

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·     thesize and timing of customer orders;

 

·     changesin pricing policies by us or our competitors;

 

·     ourability to develop, introduce, and market new and enhanced versions of ourproducts;

 

·     thenumber, timing, and significance of product enhancements and new productannouncements by our competitors;

 

·     thedemand for our products;

 

·     non-renewalof customer support agreements;

 

·     softwaredefects and other product quality problems; and

 

·     personnelchanges.

 

We operate without asignificant backlog of orders. As a result, the quarterly sales and operatingresults in any given quarter are dependent, in large part, upon the volume andtiming of orders booked and products shipped during that quarter. Accordingly,we may be unable to adjust spending in a timely manner to compensate for anyunanticipated decrease in orders, sales or shipments. Therefore, any decline indemand for our products and services, in relation to the forecast for any givenquarter, could materially and negatively impact the results of our operations.As a result, our quarterly operating results may fluctuate, which may cause ourstock price to be volatile. In addition, we believe that period-to-periodcomparisons of our operating results should not be relied upon as indicationsof future performance.

 

**THE SUCCESS OF OURBUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEYPERSONNEL AND MANAGEMENT.**

** **

The majority of ourexecutive officers joined us subsequent to the acquisition of PickAx, includingour President, Chief Executive Officer, and Director, Carlton H. Baab, whojoined us in August 2001. The loss of one or more of these or otherexecutives could adversely affect our business. In addition, we believe thatour future success will depend to a significant extent on our ability torecruit, hire and retain highly skilled management and employees withexperience in engineering, product management, business development, sales,marketing and customer service. Competition for such personnel in the softwareindustry can be intense, and there can be no assurance that we will besuccessful in attracting and retaining such personnel. If we are unable to doso, we may experience inadequate levels of staffing to develop and license ourproducts and perform services for our customers, which could adversely affectour business.

 

**THE INABILITY TOPROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TO COMPETE.**

** **

Our ability to competesuccessfully will depend, in part, on our ability to protect our proprietarytechnology and operations without infringing upon the rights of others. We mayfail to do so. In addition, the laws of certain countries in which our productsare, or may be, licensed may not protect our proprietary rights to the sameextent as the laws of the United States. We rely primarily on a combination oftrade secret, copyright and trademark laws and contractual provisions toprotect our intellectual property and proprietary rights. Our trademarksinclude Raining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase,mvDesigner and TigerLogic, among others. We also have one pending U.S. patentapplication as of December 31, 2007. In addition to trademark andcopyright protections, we license our products to end users on a “right to use”basis pursuant to a perpetual license agreement that restricts use of productsto a specified number of users.

 

We generally rely on “click-wrap”licenses that become effective when a customer downloads and installs softwareon its system. In order to retain exclusive ownership rights to our softwareand technology, we generally provide our software in object code only, withcontractual restrictions on copying, disclosure and transferability. There canbe no assurance that these protections will be adequate, or that ourcompetitors will not independently develop technologies that are substantiallyequivalent or superior to our technology.

 

As further described in Part II,Item 1 hereof, the Company has filed complaints in Orange County Superior Courtthat sets forth allegations that certain parties threaten to and havemisappropriated the Company’s trade secrets, including the possible release ofcertain source code.

 

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**OUR PRODUCTS MAY CONTAINSOFTWARE DEFECTS WHICH COULD HARM OUR BUSINESS.**

 

Our enterprise applications software may contain undetected errors orfailures. This includes our XDMS products, which are at higher risk given theseproducts are in the earliest stages of the product life cycle. This may resultin loss of, or delay in, customer acceptance of our products and could harm ourreputation and our business. Undetected errors or failures in computer softwareprograms are not uncommon. While we make every effort to thoroughly test oursoftware, in the event that we experience significant software errors, we couldexperience delays in release, customer dissatisfaction and lost revenue. Any ofthese errors or defects could harm our business.

 

**IF THE REGISTRATION RIGHTS HELD BY ASTORIA AND OTHER SECURITIES HOLDERSARE EXERCISED, OR THESE SECURITIES HOLDERS SELL A SUBSTANTIAL AMOUNT OFRESTRICTED SECURITIES IN THE OPEN MARKET, OUR STOCK PRICE MAY DECLINE.**

** **

Asof December 31, 2007, we had 26,204,149 outstanding shares of common stock,of which approximately 15 million shares were restricted securities held byAstoria and other holders. Restricted securities may be sold in the publicmarket only if they are registered or if they qualify for an exemption fromregistration promulgated under the Securities Act. At present, all of ouroutstanding restricted securities are either entitled to registration rights oreligible for public sale under Rule 144, subject to volume limitations andother requirements of Rule 144. If Astoria or other holders decide toexercise their demand registration rights, we would incur costs and expensesassociated with the registration of securities.

 

Furthermore,sales of a substantial number of shares by Astoria or other securities holdersin the public market, or the perception that those sales may occur, could causethe market price of our common stock to decline. In addition, if we registershares of our common stock in connection with a public offering of securities,we may be required to include shares of restricted securities in theregistration, which may have an adverse effect on our ability to raise capital.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGESASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.**

** **

Weoperate on a global basis with offices or distributors in Europe, Africa, Asia,Latin America, South America, Australia and North America and developmentefforts in North America and Europe. Approximately 35% and 33% of our revenuefor the three and nine months ended December 31, 2007, respectively, wasgenerated from our international offices. We face several risks inherent inconducting business internationally, including but not limited to thefollowing:

 

·      fluctuations in interest rates or currencyexchange rates;

 

·      language and cultural differences;

 

·      local and governmental requirements;

 

·      difficulties and costs of staffing andmanaging international operations;

 

·      differences in intellectual property protections;

 

·      difficulties in collecting accounts receivableand longer collection periods;

 

·      seasonal business activities in certain partsof the world; and

 

·      trade policies.

 

Any of these factorscould harm our international operations and, consequently, affect theinternational growth or maintenance of our business. These factors or anycombination of these factors may adversely affect our revenue or our overallfinancial performance.

 

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**THE FAILURE OF OURPRODUCTS TO CONTINUE TO CONFORM TO INDUSTRY STANDARDS MAY HARM OUROPERATING RESULTS.**

 

A key factor in our future success will continue to be the ability ofour products to operate and perform well with existing and future leading,industry-standard enterprise software applications intended to be used inconnection with our MDMS, RAD, and XDMS products. Inter-operability may requirethird party licenses, which may not be available to us on favorable terms or atall. Failure to meet existing or future inter-operability and performancerequirements of industry standard applications in a timely manner couldadversely affect our business. Uncertainties relating to the timing and natureof new product announcements or introductions or modifications of third partysoftware applications could delay our product development, increase our productdevelopment expense or cause customers to delay evaluation, purchase, anddeployment of our products.

 

**THIRD PARTIESCOULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE ON THEIRINTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION, CAUSEPRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSING OR REQUIRE US TO ENTER INTOROYALTY OR LICENSING AGREEMENTS.**

** **

There has been asubstantial amount of litigation in the software industry regardingintellectual property rights. Third parties may claim that our current orpotential future products and services infringe upon their intellectualproperty. We expect that software product developers and providers of softwareapplications will increasingly be subject to infringement claims as the numberof products and competitors in our industry segment grow and the functionalityof products in different industry segments overlap. Any claims, with or withoutmerit, could be time consuming, result in costly litigation, cause productshipment delays, prohibit product licensing or require us to enter into royaltyor licensing agreements. Royalty or licensing agreements, if required, may notbe available on terms acceptable to us or at all, which could seriously harmour business.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourprincipal executive officer and principal financial officer evaluated theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on such evaluation, our principalexecutive officer and principal financial officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) are effective, as of the end of theperiod covered by this report, to ensure that information required to bedisclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and accumulated andcommunicated to the Company’s management, including its principal executiveofficer and principal financial officer, to allow timely decisions regardingrequired disclosure.

 

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.Management necessarily applied its judgment in assessing the benefits ofcontrols relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within the Company have been detected.

 

**Changes in Internal Control over Financial Reporting**

 

There was no change inour internal control over financial reporting that occurred during our lastfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

The Company is subject from time to time tolitigation, claims and suits arising in the ordinary course of business. As of December 31,2007 the Company was a party to the following legal proceedings:

 

*RainingData v. Intrametrics*. On or about January 19, 2007, the Company filed a complaint in OrangeCounty Superior Court that sets forth allegations that Intrametrics threatensto and has misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that Intrametrics has obtained the Company’ssource code in violation of the Parties’ OEM (Original Equipment Manufacturer)Distribution Agreement and in violation of California’s laws prohibiting themisappropriation of trade secrets.  The Company seeks injunctive relieffrom Intrametrics, including, but not limited to, compelling Intrametrics tofully comply with all of the termination provisions set forth in the OEMAgreement; enjoining Intrametrics and its employees and agents from using ordisclosing the Company’s trade secrets; prohibiting Intrametrics fromsoliciting the Company’s current or potential customers for 3 years, and fromsoliciting or employing certain of the Company’s former employees for 3years.  Intrametrics filed a motion to quash the Complaint, which theCompany opposed, but on the morning of the hearing, Intrametrics first notifiedthe Company that it filed Chapter 11 bankruptcy, effectively staying thelitigation in Orange County Superior Court.  The Company is pursuingfurther discovery and litigation in the bankruptcy court in Houston, TX.

 

*RainingData v. Soheil Raissi (formerly the Company’s Vice President, ProductDevelopment and Professional Services), Mario Barrenechea (formerly the Company’sSenior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),and Adevnet, LLC*. On or about December 8, 2006, the Company filed a complaint in OrangeCounty Superior Court that sets forth allegations that the defendants threatento and have misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that the individual defendants have usedand/or disclosed the Company’s trade secrets (in the form of source code andlicenses and other trade secret information) in violation of their agreementswith the Company to maintain the confidentiality of such trade secretinformation, and in violation of California laws prohibiting themisappropriation of trade secrets. The Company seeks injunctive relief from thedefendants, including, but not limited to, compelling the defendants toimmediately return all of the Company’s trade secrets and property; enjoiningthe defendants and their employees and agents from using or disclosing theCompany’s trade secrets, including the Company’s source code; ordering thedefendants to disclose all gains and profits they have derived from themisappropriation of the Company’s trade secrets; enjoining the defendants fromdirectly or indirectly supplying, selling or promoting any product thatincorporates the Company’s trade secrets.

 

*Cross-Complaintby Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.*On or about January 10, 2007, thedefendants filed a cross-complaint against the Company and Carlton Baab (theCompany’s President and Chief Executive Officer) for the following claims:  unfair business practices, violation of civilrights, intentional interference with prospective economic advantage, negligentinterference with prospective economic advantage, malicious prosecution, abuseof process, negligence, and civil conspiracy. Cross-complainants allegegeneral, compensatory, special, and punitive and exemplary damages in amounts “accordingto proof”, and seek to enjoin the Company from engaging in improper andunlawful conduct.  The Company and Carlton Baab (the “Cross-Defendants”)contend that all of the claims are baseless, and filed a special motion tostrike all of the claims in the cross-complaint.  The Company’s specialmotion to strike is scheduled to be heard in June 2008.  TheCross-Defendants will continue to vigorously defend their rights in thislitigation.  We are unable to estimate any loss or range of loss atthis time. Management believes that the ultimate disposition of this matterwill not have a material adverse effect on the Company’s consolidated financialstatements, results of operations, cash flows or liquidity.

 

An unfavorable resolution of these legal proceedingscould have a material adverse effect on the Company’s business, results ofoperations, financial condition and cash flows.

 

**ITEM 6. EXHIBITS**

 
| Exhibits:  | ** ** | ** **                                                                                                                                                                    |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                    |
| 31.1       |       | Certification of Chief  Executive Officer.                                                                                                                                    |
| 31.2       |       | Certification of Chief  Financial Officer.                                                                                                                                    |
| 32.1       |       | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date: February 13,  2008 | ** ** | **RAINING DATA CORPORATION**                         |
|------------------------------------|------------|------------------------------------------------------|
| ** **                         | ** ** | ** **                                           |
|                               |       | /s/ Thomas Lim                                       |
|                               |       | Thomas Lim                                           |
|                               |       | Chief Financial Officer  and Duly Authorized Officer |

 

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**EXHIBITINDEX**

 
| 31.1 |   | Certification of Chief  Executive Officer                                                                                                                                     |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief  Financial Officer                                                                                                                                     |
| 32.1 |   | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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