** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-QSB**
| **(Mark One)**                                                                                                              | ** **                                                                                  |
|-----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| **x**                                                                                                                       | **Quarterly Report under  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                  | ** **                                                                                  |
| **For the  quarterly period ended June 30, 2006**                                                                      |
| ** **                                                                                                                  | ** **                                                                                  |
| **o**                                                                                                                       | **Transition Report Pursuant to Section 13 or  15(d) of the Exchange Act**             |
| ** **                                                                                                                  | ** **                                                                                  |
| **For the  transition period from                to** |

**CommissionFile number 0-16449**

**RAINING DATA CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                               |   | **94-3046892**                     |
|--------------------------------------------|--------|------------------------------------|
| (State of  Incorporation)                  |   | (IRS Employer  Identification No.) |
|                                       |   |                               |
| **25A Technology Drive  Irvine, CA 92618** |
| (Address of principal executive offices)   |
|                                       |
| **(949) 442-4400**                         |
| (Registrant’s telephone number)       |

Checkwhether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o   No x

As of June 30, 2006,there were  20,687,726  shares of registrant’s Common Stock, $.10 parvalue, outstanding.

Transitional Small BusinessDisclosure Format (Check one): Yes o  No x

 

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**RAINING DATACORPORATIONINDEX**
| PART I.   | FINANCIAL  INFORMATION                                                                                      |   |
|-----------|-------------------------------------------------------------------------------------------------------------|--------|
| ITEM  1.  | FINANCIAL  STATEMENTS                                                                                       |   |
|      | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS —  JUNE 30, 2006 AND MARCH 31, 2006          |   |
|      | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS — THREE MONTHS ENDED JUNE 30, 2006 AND 2005 |   |
|      | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS — THREE MONTHS ENDED JUNE 30, 2006 AND 2005 |   |
|      | NOTES TO THE  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         |   |
| ITEM 2.   | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF  OPERATION                                             |   |
| ITEM 3.   | CONTROLS AND PROCEDURES                                                                                     |   |
| PART  II. | OTHER  INFORMATION                                                                                          |   |
| ITEM  1.  | LEGAL  PROCEEDINGS                                                                                          |   |
| ITEM 6.   | EXHIBITS                                                                                                    |   |

 

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**PART I.  FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

**RAINING DATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                                        | ** ** | **June 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                        | ** ** | **(In thousands)**     | ** ** |
| **ASSETS**                                                                        |       |                        |       |                         |       |
|                                                                              |       |                        |       |                         |       |
| Current assets                                                                    |       |                        |       |                         |       |
| Cash and cash  equivalents                                                        |       | $                           | 9,974      |                         | $          | 10,789 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $223 and $182 |       | 1,680                       |       | 2,019                        |       |
| Other current  assets                                                             |       | 483                         |       | 355                          |       |
| Total current  assets                                                             |       | 12,137                      |       | 13,163                       |       |
|                                                                              |       |                        |       |                         |       |
| Property, furniture and  equipment-net                                            |       | 1,137                       |       | 1,055                        |       |
| Goodwill                                                                          |       | 26,845                      |       | 26,845                       |       |
| Other assets                                                                      |       | 98                          |       | 96                           |       |
| Total assets                                                                      |       | $                           | 40,217     |                         | $          | 41,159 |   |
|                                                                              |       |                        |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                    |       |                        |       |                         |       |
| Current liabilities                                                               |       |                        |       |                         |       |
| Accounts payable                                                                  |       | $                           | 293        |                         | $          | 399 |   |
| Accrued  liabilities                                                              |       | 2,234                       |       | 2,885                        |       |
| Deferred revenue                                                                  |       | 5,026                       |       | 4,886                        |       |
| Total current  liabilities                                                        |       | 7,553                       |       | 8,170                        |       |
|                                                                              |       |                        |       |                         |       |
| Long-term debt-net of  discount                                                   |       | 23,201                      |       | 22,893                       |       |
| Total liabilities                                                                 |       | 30,754                      |       | 31,063                       |       |
|                                                                              |       |                        |       |                         |       |
| Commitments and  contingencies                                                    |       |                        |       |                         |       |
|                                                                              |       |                        |       |                         |       |
| Stockholders’ equity                                                         |       |                        |       |                         |       |
| Preferred stock                                                                   |       | —                      |       | —                       |       |
| Common stock                                                                      |       | 2,069                       |       | 2,064                        |       |
| Additional  paid-in-capital                                                       |       | 99,634                      |       | 99,341                       |       |
| Accumulated  other comprehensive income                                           |       | 1,395                       |       | 1,234                        |       |
| Accumulated  deficit                                                              |       | (93,635                     | )          | (92,543                      | )          |
| Total  stockholders’ equity                                                  |       | 9,463                       |       | 10,096                       |       |
| ** **                                                                        | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Total liabilities and  stockholders’ equity                                  |       | $                           | 40,217     |                         | $          | 41,159 |   |

See accompanying notes to the unauditedcondensed consolidated financial statements.

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**RAINING DATACORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(In thousands,   except per share amounts)**      | ** ** |
| Net revenues                                                   |       |                                                |       |   |   |
| Licenses                                                       |       | $                                                   | 1,654      |   | $ | 2,311 |   |
| Services                                                       |       | 3,018                                               |       | 2,982 |   |
| Total net revenues                                             |       | 4,672                                               |       | 5,293 |   |
|                                                           |       |                                                |       |   |   |
| Operating  expenses                                            |       |                                                |       |   |   |
| Cost of license revenues                                       |       | 21                                                  |       | 64 |   |
| Cost of service revenues                                       |       | 653                                                 |       | 620 |   |
| Selling and marketing                                          |       | 1,456                                               |       | 1,329 |   |
| Research and development                                       |       | 2,646                                               |       | 2,244 |   |
| General and administrative                                     |       | 806                                                 |       | 901 |   |
| Total operating expenses                                       |       | 5,582                                               |       | 5,158 |   |
|                                                           |       |                                                |       |   |   |
| Operating income  (loss)                                       |       | (910                                                | )          | 135 |   |
|                                                           |       |                                                |       |   |   |
| Other expense                                                  |       |                                                |       |   |   |
| Interest expense — net                                    |       | (223                                                | )          | (247 | ) |
| Other income (expense) — net                              |       | 22                                                  |       | (51 | ) |
| Total other expense                                            |       | (201                                                | )          | (298 | ) |
| Loss before  income taxes                                      |       | (1,111                                              | )          | (163 | ) |
| Benefit from  income taxes                                     |       | (19                                                 | )          | — |   |
| Net loss                                                       |       | $                                                   | (1,092     | ) | $ | (163 | ) |
|                                                           |       |                                                |       |   |   |
| Basic and  diluted net loss per share                          |       | $                                                   | (0.05      | ) | $ | (0.01 | ) |
|                                                           |       |                                                |       |   |   |
| Shares used in  computing basic and diluted net loss per share |       | 20,649                                              |       | 19,764 |   |
|                                                           |       |                                                |       |   |   |

See accompanying notes to the unauditedcondensed consolidated financial statements.

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**RAINING DATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**                             | ** ** |
| ** **                                                                                        | ** ** | ** **                                          | ** ** |
| Cash flows from  operating activities:                                                            |       |                                                |       |   |   |
| Net loss                                                                                          |       | $                                                   | (1,092     | ) | $ | (163 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                      |       |                                                |       |   |   |
| Depreciation and amortization of long-lived assets                                                |       | 75                                                  |       | 82 |   |
| Note payable discount amortization                                                                |       | 21                                                  |       | 21 |   |
| Stock-based compensation expense                                                                  |       | 211                                                 |       | 6 |   |
| Income tax benefit                                                                                |       | (19                                                 | )          | — |   |
| Change in assets and liabilities:                                                                 |       |                                                |       |   |   |
| Trade accounts receivable                                                                         |       | 217                                                 |       | (129 | ) |
| Other current and non-current assets                                                              |       | (112                                                | )          | 24 |   |
| Accounts payable                                                                                  |       | (111                                                | )          | (217 | ) |
| Accrued liabilities                                                                               |       | (341                                                | )          | 125 |   |
| Deferred revenue                                                                                  |       | 351                                                 |       | 75 |   |
| Net cash used in operating activities                                                             |       | (800                                                | )          | (176 | ) |
|                                                                                              |       |                                                |       |   |   |
| Cash flows used  in investing activities — purchase of property, furniture and equipment     |       | (133                                                | )          | (91 | ) |
|                                                                                              |       |                                                |       |   |   |
| Cash flows from  financing activities — proceeds from exercise of stock options and warrants |       | 86                                             |       | 34  |   |
|                                                                                              |       |                                                |       |   |   |
| Effect of  exchange rate changes on cash                                                          |       | 32                                                  |       | (51 | ) |
|                                                                                              |       |                                                |       |   |   |
| Net decrease in  cash and cash equivalents                                                        |       | (815                                                | )          | (284 | ) |
|                                                                                              |       |                                                |       |   |   |
| Cash and cash equivalents  at beginning of period                                                 |       | 10,789                                              |       | 10,625 |   |
| Cash and cash equivalents  at end of period                                                       |       | $                                                   | 9,974      |   | $ | 10,341 |   |
|                                                                                              |       |                                                |       |   |   |
| Non-cash  financing activities:                                                                   |       |                                                |       |   |   |
| Issuance of notes  for accrued interest                                                           |       | $                                                   | 288        |   | $ | 274 |   |

See accompanying notes to the unauditedcondensed consolidated financial statements.

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**RAINING DATA CORPORATION ANDSUBSIDIARIES****CONDENSEDNOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006**

**1.   INTERIMFINANCIAL STATEMENTS**

The unaudited interimcondensed consolidated financial information furnished herein reflects alladjustments, consisting only of normal recurring items, which in the opinion ofmanagement are necessary to fairly state Raining Data Corporation andsubsidiaries’ (the “Company”) consolidated financial position, the results oftheir operations and their cash flows for the dates and periods presented andto make such information presented not misleading. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to SEC rules and regulations;nevertheless, management of the Company believes that the disclosures hereinare adequate to make the information presented not misleading. These condensed consolidatedfinancial statements should be read in conjunction with the Company’s auditedfinancial statements for the year ended March 31, 2006 contained in the Company’sAnnual Report on Form 10-KSB.The results of operations for the period ended June 30, 2006 arenot necessarily indicative of results to be expected for any other interimperiod or the fiscal year ending March 31, 2007.

Certain amounts in the prior period’s consolidatedfinancial statements have been reclassified to be consistent with the currentyear presentation.

**2. STOCK-BASED COMPENSATION**

The Company has a stockoption plan (“1999 Plan”) that provides for the granting of stock options,restricted stock and restricted stock units to directors, employees andconsultants.  The Company also has anEmployee Stock Purchase Plan (“ESPP”) which allows employees to purchase theCompany’s common stock at at discount.  Atotal of  6.5 million shares of commonstock have been authorized for issuance under the  stock option plan.  

*Adoption of SFAS No. 123(R)*

Prior to April 1, 2006,the Company’s stock-based compensation plans were accounted for in accordancewith Accounting Principles Board Opinion No. 25 (“APB 25”) “*Accounting for Stock Issued to Employees*” by applying theintrinsic value method to account for employee fixed stock-based awards.  Under this method, deferred stock-basedcompensation is recorded on the date of grant only if the current market priceof the underlying stock exceeds the exercise price.  Deferred stock-based compensation is thenamortized using the straight-line method over the vesting term of theunderlying option.  Additionally, theESPP qualified as a non-compensatory plan under APB 25; therefore, nocompensation cost was recorded in relation to the discount offered to employeesfor purchases made under the ESPP. The Company disclosed pro formanet income and earnings per share as if compensation for its stock options weredetermined based on the estimated fair value at the grant date in accordancewith Statements of Financial Accounting Standards (“SFAS”) No. 123, *“Accounting for Stock-Based Compensation”*and SFAS No. 148, “*Accounting forStock-Based Compensation—Transition and Disclosure*” as amended.  

Effective April 1, 2006,the Company adopted the fair value recognition provisions of SFAS No. 123(R),“*Share-Based Payment*,” which is arevision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25,and amends SFAS No. 95, “*Statement ofCash Flows*.”

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SFAS No. 123(R) generally requiresshare-based payments to employees, including grants of employee stock optionsand other equity awards, to be recognized in the statement of operations basedon their fair values.Inaddition, SFAS No. 123(R) requires the benefits of tax deductions inexcess of recognized compensation expense to be reported as a financing cashflow, rather than as an operating cash flow as prescribed under previousaccounting rules. In its adoption, the Company elected to use the modifiedprospective method, which recognized compensation expense for all share-basedpayments granted after March 31, 2006 and for all awards granted to employeesprior to April 1, 2006 that remain unvested on the date of adoption, asadjusted for estimated forfeitures. Accordingly, prior period amounts have notbeen restated. 

Additionally, under SFASNo. 123(R), the Company’s ESPP is considered a compensatory plan andrequires recognition of compensation expense for purchases of common stock madeunder the ESPP.  The Company recognizescompensation expense for stock option and ESPP awards ratably over the vestingperiod and purchase period, respectively.

*Determining Fair Value*

Valuation Method - TheCompany estimates the fair value of stock options granted and ESPP purchaserights using the Black-Scholes option-pricing model and a single option awardapproach.

Expected Term - The expectedterm represents the period the Company’s stock-based awards are expected to beoutstanding and was determined based on historical experience with similarawards, giving consideration to the contractual terms of the stock-basedawards, vesting schedules and expectations of future employee behavior asinfluenced by changes to the terms of its stock-based awards.

Expected Volatility*-*The computation of expected volatilityis based on historical volatility.

Risk-Free Interest Rate - Therisk-free interest rate used in the Black-Scholes valuation method is based onthe implied yield currently available on U.S. Treasury securities with anequivalent remaining term.

Expected Dividend - Nodividends are expected to be paid.

Estimated Forfeitures - Whenestimating forfeitures, the Company considers voluntary termination behavior aswell as analysis of actual option forfeitures.

The Company estimated thefair value of its stock options and ESPP purchase rights using theBlack-Scholes option-pricing model, by using the following assumptions for thethree months ended June 30, 2006: 

|                          | ** ** | ** **     | ** ** | ** **   | ** ** |
|--------------------------|------------|----------------|------------|--------------|------------|
|                          | ** ** | ** **     | ** ** | ** **   | ** ** |
| ** **               | ** ** | ** **     | ** ** | **ESPP**     | ** ** |
| ** **               | ** ** | **Stock**      | ** ** | **purchase** | ** ** |
| ** **               | ** ** | **options**    | ** ** | **rights**   | ** ** |
| Dividend yield           |       | 0              | %          | 0            | %          |
| Expected  volatility     |       | 61             | %          | 89           | %          |
| Risk-free  interest rate |       | 5.0            | %          | 4.6          | %          |
| Estimated life           |       | 6.1 Years |       | 0.5 Years    |       |
| Forfeiture rate          |       | 11             | %          | 0            | %          |

Total stock-basedcompensation expense included in the unaudited condensed consolidatedstatements of operations for the three months ended June 30, 2006 (inthousands) was as follows:

|                                         | ** ** | **Stock-based  awards** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| Operating expense:                      |       |                    |       |
| Selling and marketing                   |       | $                       | 90         |   |
| Research and development                |       | 66                      |       |
| General and administrative              |       | 55                      |       |
| Total  stock-based compensation expense |       | 211                     |       |
| Income tax benefit                      |       | —                  |       |
| Net stock-based  compensation expense   |       | $                       | 211        |   |

 

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*Stock options*

Stock options are generallygranted with an exercise price equal to the stock’s fair market value at thedate of grant.  All options under the1999 Plan have ten-year terms and generally vest ratably over a period of fouryears.  As of June 30, 2006, there were1,212,868 shares available for future option grants under the 1999 Plan.

A summary of changes incommon stock options is as follows:

|                                           | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**     | ** ** | ** **    | ** ** |
|-------------------------------------------|------------|--------------------|------------|--------------|------------|------------------|------------|---------------|------------|
| ** **                                | ** ** | ** **         | ** ** | ** **   | ** ** | **Average**      | ** ** | ** **    | ** ** |
| ** **                                | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Remaining**    | ** ** | ** **    | ** ** |
| ** **                                | ** ** | ** **         | ** ** | **Average**  | ** ** | **Contractual**  | ** ** | **Aggregate** | ** ** |
| ** **                                | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Term in** | ** ** | **Intrinsic** | ** ** |
| ** **                                | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Years**        | ** ** | **Value**     | ** ** |
|                                      |       |               |       |         |       |             |       |          |       |
| Options  outstanding as of March 31, 2006 |       | 4,190,691          |       | $            | 2.75       |             |       |          |       |   |
| Granted                                   |       | 705,000            |       | $            | 3.39       |             |       |          |       |   |
| Exercised                                 |       | (43,150            | )          | $            | 1.98       |             |       |          |       |   |
| Forfeited                                 |       | (126,919           | )          | $            | 2.78       |             |       |          |       |   |
| Expired                                   |       | (10,787            | )          | $            | 6.53       |             |       |          |       |   |
| Options  outstanding as of June 30, 2006  |       | 4,714,835          |       | $            | 2.84       |             | 6.6        |          | $          | 6,211,785 |   |
| Exercisable at June 30,  2006             |       | 3,112,194          |       | $            | 2.77       |             | 5.3        |          | $          | 4,559,927 |   |

The aggregate intrinsic valuein the table above represents the difference between the exercise price of theunderlying awards and the quoted price of our common stock for the options thatwere in-the-money at June 30, 2006. During the three months ended June 30, 2006 and 2005, the aggregateintrinsic value of options exercised under the Company’s stock option plan was$65,089 and $31,841, respectively, determined as of the date of optionexercise.   Weighted-average grant-datefair values of the options granted during the three months ended June 30, 2006and 2005 were $2.08 and $2.04, respectively.

*Employee Stock Purchase Plans*

Under the ESPP, eligibleemployees may authorize payroll deductions of up to 10% of their regular basesalary to purchase shares at the lower of 85% of the closing price of theCompany’s common stock on the first or last day of the six-month purchaseperiod. In the three months ended June 30, 2006, no shares of common stockwere issued under the ESPP as the current purchase period ends August 14, 2006.As of June 30, 2006 employee withholdings under the ESPP aggregated $36,336.

*Pro-forma Disclosure under SFAS No.123 for Periods prior to Fiscal 2006*

The following tableillustrates the effect on net loss and net loss per share as if we had appliedthe fair value recognition provisions of SFAS No. 123 to stock-basedcompensation during the three-months ended June 30, 2005 (in thousands, exceptper share amounts):

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|                                                                                                                       | ** ** | **Three Months**        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                            | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                                            | ** ** | **2005**                     | ** ** |
| Net loss, as  reported                                                                                                |       | $                            | (163       | ) |
| Add:                                                                                                                  |       |                         |       |
| Stock-based compensation expense included in  reported net earnings                                                   |       | 6                            |       |
| Less:                                                                                                                 |       |                         |       |
| Total stock-based employee compensation expense  determined under fair value based methods for all awards, net of tax |       | (353                         | )          |
| Pro forma net  loss                                                                                                   |       | $                            | (510       | ) |
| Basic and  diluted loss per share                                                                                     |       |                         |       |
| As reported                                                                                                           |       | $                            | (0.01      | ) |
| Pro forma                                                                                                             |       | $                            | (0.03      | ) |

**3.  RECENTLY ISSUED ACCOUNTING STANDARDS**

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 48  (“FIN 48”), *“Accounting for Uncertainty  inIncome Taxes.”*  Thisinterpretation clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB Statement No.109, *“Accounting for Incone Taxes”. *This interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.FIN 48 willbecome effective for the Company in fiscal year 2008. Management of the Companydoes not expect the impact of this pronouncement to be material on theCompany’s consolidated results of operations and financial condition.

In June 2006, theFASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-3 (“EITFNo. 06-3”), *“How Taxes Collected from Customers and Remitted toGovernmental Authorities should be presented in the Income Statement (That is,Gross versus Net Presentation).” *Thescope of EITF No. 06-3 includes any tax assessed by a governmental authoritythat is directly imposed on a revenue-producing transaction between a sellerand a customer may include, but are not limited to, sales, use, value added,and some excise taxes.  EITF No. 06-3allows for the presentation of such taxes on either a gross (included inrevenues and costs) or a net (excluded from revenues) basis and requires theaccounting policy to be disclosed pursuant to APB Opinion No. 22.  EITF No. 06-3 applies to financial reportsfor interim and annual reporting periods beginning after December 15, 2006.  Management of the Company does not expect theimpact of EITF No. 06-3 to be material on the Company’s consolidated results ofoperations and financial condition.

In February 2006, the FASB issued FASB Staff Position(“FSP”) No. SFAS 123(R)-4 “*Classification ofOptions and Similar Instruments Issued as Employee Compensation That Allow forCash Settlement upon the Occurrence of a Contingent Event*.” FSP SFAS123(R)-4 addresses the classification of options and similar instruments issuedas employee compensation that allow for cash settlement upon the occurrence ofa contingent event and amends paragraphs 32 and A229 of SFAS No. 123(R). TheCompany was required to apply the guidance in FSP SFAS 123(R)-4 in thequarterly period ended June 30, 2006. Such adoption of FSP SFAS 123(R)-4 didnot impact the Company’s consolidated financial statements included in thisreport. 

In November 2005, the FASB issued FSP No. SFAS123(R)-3, “*Transition Election Related toAccounting for the Tax Effects of Share-Based Payment Awards*,”**which allows an entity up to one yearfrom the later of its initial adoption of SFAS No. 123(R) or the effectivedate of FSP SFAS 123(R)-3 to evaluate its available transition alternatives incalculating the pool of excess tax benefits available to absorb taxdeficiencies recognized subsequent to the adoption of SFAS No. 123 forrecognition purposes (the “APIC pool”) and to make its one-time election. Theavailable transition alternatives allow an entity to elect either thetransition guidance in paragraph 81 of SFAS No. 123(R) or the alternative transitionmethod described in FSP SFAS 123(R)-3, which comprises (a) a computationalcomponent that establishes a beginning balance of the APIC pool related to theemployee compensation and (b) a simplified method to determine the subsequentimpact on the APIC pool of employee awards that are fully vested andoutstanding upon the adoption of SFAS No. 123(R). Management of the Company isin the process of evaluating its available transition alternatives and theCompany will make its one-time election prior to March 31, 2007. 

 

**4. LONG-TERM DEBT**

Long-term debt of theCompany, including the Convertible Subordinated Note payable to Astoria CapitalPartners, L.P. (“Astoria”), the Company’s controlling stockholder, as ofJune 30, 2006 and March 31, 2006, is as follows (in thousands):

|                                                   | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                        | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| Subordinated  convertible note payable to Astoria |       | $                 | 23,066     |               | $          | 22,785 |   |
| Plus accrued  interest                            |       | 288               |       | 281                |       |
| Less unamortized  discount                        |       | (153              | )          | (173               | )          |
| Total long-term debt                              |       | $                 | 23,201     |               | $          | 22,893 |   |

**5.  STOCKHOLDERS’EQUITY**

Basic loss per share iscomputed using the net loss and the weighted average number of common sharesoutstanding during the period. Diluted loss per share is computed using the netloss and the weighted average number of common shares and dilutive potentialcommon shares outstanding during the period when the potential common sharesare not anti-dilutive. Potential dilutive common shares include outstandingstock options and warrants, convertible debt, and convertible preferred stock.There were outstanding options to purchase 4,714,835 shares of the Company’scommon stock with exercise prices ranging from $0.75 to $17.00 per share as ofJune 30, 2006.  There were outstandingoptions to purchase 4,058,646 shares of the Company’s common stock withexercise prices ranging from $0.75 to $33.13 per share as of June 30,2005.  There were no outstanding warrants or convertible preferred stock asof June 30, 2006.  There were outstandingwarrants to purchase 500,000 shares of the Company’s

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common stock with an exercise price of $6.29 pershare as of June 30, 2005.  There were300,000 shares of preferred stock, which were convertible into 500,100 sharesof common stock, outstanding at June 30, 2005.  There was convertibledebt outstanding at June 30, 2006 and 2005, which is convertible into 4,613,200and 4,389,556 shares of common stock, respectively.  The effects of theseitems were not included in the computation of diluted earnings per sharebecause their effect would have been anti-dilutive.

The change in accumulatedother comprehensive income during the three-month periods ended June 30,2006 and 2005 is the result of the effect of foreign exchange rate changes. Thefollowing table reconciles net loss as reported with total comprehensive loss(in thousands):

|                                   | ** ** | **Three Months ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **June 30,**                | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net loss  reported                |       | $                                | (1,092     | ) | $ | (163 | ) |
| Translation  adjustments—net |       | 161                              |       | (71 | ) |
| Total comprehensive  loss         |       | $                                | (931       | ) | $ | (234 | ) |

**6.  BUSINESS SEGMENT**

The Company operates in one reportable segment. International operationsconsist primarily of foreign sales offices selling software developed in theUnited States of America combined with local maintenance revenue. The followingtable summarizes consolidated financial information of the Company’s operationsby geographic location (in thousands):
| ** **                                        | ** ** | **North**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **America** | ** ** | **Europe** | ** ** | **Total**  | ** ** |
| *As of and for Three Months  Ended June 30, 2006* |       |        |       |       |       |       |       |
| Net revenues                                      |       | $           | 3,251      |       | $          | 1,421      |       | $ | 4,672 |   |
| Long lived assets                                 |       | $           | 27,209     |       | $          | 871        |       | $ | 28,080 |   |
| *As of and for Three Months  Ended June 30, 2005* |       |        |       |       |       |       |       |
| Net revenues                                      |       | $           | 3,680      |       | $          | 1,613      |       | $ | 5,293 |   |
| Long lived assets                                 |       | $           | 27,781     |       | $          | 201        |       | $ | 27,982 |   |

The Company is engaged in thedesign, development, sale and support of software infrastructure. The Companydivides its products into two main categories: (1) Pick-based databasetechnology (“Databases”), which includes Multi-dimensional Database ManagementSystems, XML Data Management Servers and the Pick Data Provider for theMicrosoft .NET development environment; and (2) Rapid ApplicationDevelopment software tools (“RAD Tools”). The following table represents thenet revenue from the Company’s segment by product line (in thousands):
| ** **         | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **June 30,**                | ** ** |
| ** **         | ** ** | ** **                       | **2006**   | ** ** | **2005** | ** ** |
| Net revenues  |       |                             |       |   |   |
| Databases          |       | $                                | 3,325      |   | $ | 4,200 |   |
| RAD Tools          |       | 1,347                            |       | 1,093 |   |
| Total net revenues |       | $                                | 4,672      |   | $ | 5,293 |   |
|                    |            |                                  |            |  |  |  |  |  |

**7.  COMMITMENTS ANDCONTINGENCIES**

TheCompany is subject from time to time to litigation, claims and suits arising inthe ordinary course of business.  As ofJune 30, 2006, the Company was not a party to any known material litigation,claim or suit.

TheCompany’s standard customer license and software agreements containindemnification and warranty provisions which are generally consistent withpractice in the Company’s industry.  Theduration of the Company’s service warranties generally does not exceed 30 daysfollowing completion of its services. The Company has not incurred significant future obligations.  Accordingly, the Company does not maintainaccruals for potential customer indemnification or warranty-relatedobligations.  The maximum potentialamount of future payments that the Company could be required to make isgenerally limited under the indemnification provisions in its customer liceneseand service agreements.

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

This Form 10-QSBcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). These statements maygenerally be identified by the use of such words as “expect,” “anticipate,” “believe,”“intend,” “plan,” “will,” or “shall,” or the negative of those terms. We havebased these forward-looking statements on our current expectations andprojections about future events. Forward-looking statements involve certainrisks and uncertainties and actual results may differ materially from thosediscussed in any such statement. Factors that could cause actual results todiffer materially from such forward-looking statements include the risksdescribed under the heading “Risk Factors” in Item 2 of this Form 10-QSBand elsewhere in this Form 10-QSB. The forward-looking statementscontained in this Form 10-QSB include, but are not limited tostatements 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) ourresearch and development costs, (10) our general and administrative costs,(11) stock-based compensation expense and the impact of adopting SFAS No. 123(R),(12) the possibility that we may seek to take advantage of opportunities in theequity and capital markets  (13) ourbelief that our existing cash balances combined with our cash flow fromoperating activities will be sufficient to meet our operating and capitalexpenditure requirements for the remainder of the fiscal year endingMarch 31, 2007 and through the foreseeable future, (14) our belief thatour credit facility is not required for liquidity purposes or to meet our cashflow needs for the foreseeable future and (15) our focus on the continueddevelopment and enhancement of the TigerLogic XDMS product line, identificationof new and emerging application areas and discussions with channel partners forthe sale and distribution of the TigerLogic product line. All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and we assume no obligationto update any forward-looking statement.

**Overview**

We were incorporated in theState of Delaware in August 1987. We were originally incorporated as BlythHoldings, Inc. and our name was changed to Omnis Technology Corporation inSeptember 1997. Effective December 1, 2000, we completed theacquisition of PickAx, Inc., a Delaware corporation (“PickAx”). Concurrentwith the acquisition, we changed our name to Raining Data Corporation.

**Products**

Our principal business is thedesign, development, sale and support of software infrastructure. Our productsallow customers to create and enhance flexible software applications for theirown needs and our software may be categorized into three product lines: XMLdata management systems (“XDMS”), Multi-dimensional database managementsystems (“MDMS”), and Rapid Application Development (“RAD”) software tools.

Many of our products arebased on the Pick Universal Data Model (“Pick UDM”), which we created, and arecapable of handling data from many sources. The Pick UDM is a core componentacross the XDMS and MDMS product lines.

Beginning in 2001, we began anextensive effort to leverage our time-proven Pick UDM and core intellectualproperty to create an enterprise class XML database management system for theemerging XML market, the growing need for native XML data stores and theability to handle structured and unstructured data. This significant investmentof time and resources resulted in the TigerLogic XDMS product line. We arefocused on the continued development and enhancement of this product line,identification of new and emerging application areas and discussions withchannel partners for the sale and distribution of the TigerLogic product line.

***TigerLogic XDMS***

TigerLogicXML Data Management Server provides high-performance management andquery of XML data by leveraging the time-proven Pick UDM. TigerLogic alsoenables the ability to query external data sources as if they were one logicaldatabase and maintains referential integrity across data sources. TigerLogic’spatent-pending XML Indexing and Profiling technology enables it to access XMLdata via XQuery between 10x to 150x faster in internal tests than relationaldatabases, XML repositories or XML Index and Search engines. TigerLogicprovides XML, Java, WSDL and SOAP compatibility for simplified plug-in andintegration with development 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 2.1, which included manyfeature enhancements and the full implementation of our XQuery engine, wasreleased in May 2005, and Version 2.5, which included platformsupport for Linux in addition to Windows and Solaris, was released inOctober 2005. In September 2005, we announced our first commercialOEM agreement for TigerLogic XDMS.

***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.

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MDMS components include thePick Data Provider for .Net (“PDP”) and our Pick Reporting Services Connector.The PDP component for the Microsoft .NET Framework is tightly integrated withMicrosoft Visual Studio .NET. It allows software developers using IBM’sUniverse and Unidata databases and our D3 database platform to buildclient/server applications, Web applications or Web services using any of thelanguages and technologies that run on the Microsoft .NET Framework, such asMicrosoft 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.Our MDMS products also include mvEnterprise, a scalable multi-dimensionaldatabase solution that allows the user to leverage the capabilities of the UNIXoperating system, and mvBase, a multi-dimensional database solution that runson all Windows platforms.

***Rapid ApplicationDevelopment (RAD) Tools***

Our RAD products support thefull life cycle of software application development and are designed for rapidprototyping, 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 by ourcustomers to build and deploy applications that may become a critical componentof their business operations. As a result, continuing to provide customertechnical support services is an important element of our business strategy.Customers who participate in our support programs receive periodic maintenancereleases on a when-and-if available basis and direct technical support whenrequired.

**Sales and Distribution**

In the United States, we sellour products through established distribution channels consisting of OEMs,system integrators, specialized vertical application software developers andconsulting organizations. We also sell our products directly through our salespersonnel to end user organizations. Outside the United States, we maintaindirect sales offices in the United Kingdom, France and Germany. Approximately 30%of our revenue came from sales through our offices located outside the UnitedStates for the three months ended June 30, 2006 and 2005.

We sell our products in U.S.Dollars in North America, British Pounds Sterling in the United Kingdom andEuros in France and Germany. Because we recognize revenue and expense in thesevarious currencies but report our financial results in U.S. Dollars, changes inexchange rates may cause variances in our period-to-period revenue and resultsof operations in future periods. Recorded foreign exchange gains and losses havenot been material to our performance to date.

We license our software on aper-CPU, per-server, per-port or per-user basis. Therefore, the addition of CPU’s,servers, ports or users to existing systems increases our revenue from ourinstalled base of licenses. In addition to software products, we providecontinuing 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 be classified into two general categories:

·       Independent Software Vendors and Software Developers. The majority ofour revenue is derived from independent software vendors, which typically writetheir own vertical application software that they sell as a complete package toend user customers. This category includes value added resellers (“VARs”) andsoftware-consulting companies that provide contract programming services totheir customers.

·       Corporate Information Technology (“IT”) Departments.

For each of the three-monthsended June 30, 2006 and 2005, no single customer accounted for more than 10% ofour revenue.

**Research and Development**

We have devoted significantresources to the research and development of our products and technology. Webelieve that our future success will depend largely on a strong developmenteffort with respect to both our existing and new products. These developmentefforts have resulted in updates and upgrades to existing MDMS and RAD productsand the launch of new products including the XDMS product line. New productreleases in all of our product lines are currently in progress. We expect tocontinue our research and development efforts in all product lines for theforeseeable future. We intend for these efforts to improve our future operatingresults and increase cash flow. However, such efforts may not result inadditional new products or revenue, and we can make no assurances that therecently announced products or future products will be successful. We spent$2.6 million and $2.2 million on research and development for the threemonths ended June 30, 2006, and 2005, respectively.

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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 our abilityto compete in the various MDMS, RAD, and XDMS markets depends on factors bothwithin and outside our control, including the timing of release, performanceand price of new products developed by both us and our competitors. Although webelieve that we currently compete favorably with respect to most of thesefactors, we may not be able to maintain our competitive position againstcurrent and potential competitors, especially those with greater resources.

**Intellectual Property andOther 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 June 30, 2006.

We license our products toend users on a “right to use” basis pursuant to a perpetual license agreementthat restricts use of products to a specified number of users. We generallyrely on “click-wrap” licenses that become effective when a customer downloadsand installs the software on its system. In order to retain exclusive ownershiprights to our software and technology, we generally provide our software inobject code only, with contractual restrictions on copying, disclosure, andtransferability. There can be no assurance that these protections will beadequate, or that our competitors will not independently develop technologiesthat are substantially equivalent or superior to our technology.

**Backlog**

We generally ship softwareproducts as orders are received and have historically operated with littlebacklog. As a result, our license revenue in any given quarter is dependentupon orders received and product shipped during the quarter. Historically,there has been a short cycle between receipt of an order and shipment.Consequently, we do not believe that our backlog as of any particular date ismeaningful.

**Employees**

At June 30, 2006, we had 133 employees worldwide of which 100 werein the United States and 33 were in our international offices. Of the 133employees, 128 are full-time and approximately 47% are in research anddevelopment, 15% in technical support, 23% in sales and marketing and 15% ingeneral and administrative functions.

**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, we evaluate our estimates, including those relatedto revenue recognition and accounting for intangible assets and goodwill. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions.

We have identified the accounting policies below as the policiescritical to our business operations and the understanding of our results ofoperations. We believe the following critical accounting policies and therelated judgments and estimates affect the preparation of our condensedconsolidated financial statements:

REVENUERECOGNITION.   Werecognize revenue using the residual method pursuant to the requirements ofStatement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”),as amended. Under the residual method, revenue is recognized in a multipleelement arrangement when company-specific objective evidence of fair valueexists for all of the undelivered elements in the arrangement, but does notexist for one or more of the delivered elements in the arrangement. At theoutset 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, revenue attributable to an element in a customerarrangement is recognized when persuasive evidence of an arrangement exists anddelivery has occurred, provided the fee is fixed or determinable,collectibility is probable and the arrangement does not require significantcustomization of the software. If, at the outset of the customer arrangement,we determine that the arrangement fee is not fixed or determinable, we deferthe revenue and recognize the revenue when the arrangement fee becomes due andpayable.

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Service revenue relates primarily to consulting services, maintenanceand training. Maintenance revenue is initially deferred and then recognizedratably over the term of the maintenance contract, typically 12 months.Consulting and training revenue is recognized as the services are performed andis usually calculated on a time and materials basis. Such services primarilyconsist of implementation services related to the installation of our productsand do not include significant customization to or development of theunderlying software code. We do not have price protection programs, conditionalacceptance agreements or warranty programs, and sales of our products are madewithout right of return.

GOODWILL.   We assess the impairment of long-lived assetsand goodwill whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. We also assess the value of goodwill atleast annually. Factors we consider to be important which could trigger animpairment review include the following:

·              Significant underperformance relative toexpected historical or projected future operating results;

·              Timing of our revenue, significant changes inthe manner of use of the acquired assets or the strategy for the overallbusiness;

·              Significant negative industry or economictrends;

·              Significant decline in our stock price for asustained period; and

·              Our market capitalization relative to net bookvalue.

When we determine that the carrying value of long-lived assets may notbe recoverable based upon the existence of one or more of the above indicatorsof impairment and the carrying value of the asset cannot be recovered fromprojected undiscounted cash flows, we measure any impairment based on a projecteddiscounted cash flow method using a discount rate determined by our managementto be commensurate with the risk inherent in the current business model.Significant management judgment is required in determining whether an indicatorof impairment exists and in projecting cash flows.

Following the adoption of Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), werevised our policy for assessing and determining impairment of goodwill. TheSFAS No. 142 goodwill impairment model is a two-step process. The firststep is used to identify potential impairment by comparing the fair value of areporting unit with its net book value (or carrying amount), includinggoodwill. If the fair value exceeds the carrying amount, goodwill of thereporting unit is considered not impaired and the second step of the impairmenttest is unnecessary. If the carrying amount of a reporting unit exceeds itsfair value, the second step of the goodwill impairment test is performed tomeasure the amount of impairment loss, if any. The second step of the goodwillimpairment test compares the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. If the carrying amount ofthe reporting unit’s goodwill exceeds the implied fair value of that goodwill,an impairment loss is recognized in an amount equal to that excess. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination. That is, the fair value of thereporting unit is allocated to all of the assets and liabilities of that unit(including any unrecognized intangible assets) as if the reporting unit hadbeen acquired in a business combination and the fair value of the reportingunit was the purchase price paid to acquire the reporting unit.

Determining the fair value of a reporting unit under the first step ofthe goodwill impairment test and determining the fair value of individualassets and liabilities of a reporting unit (including unrecognized intangibleassets) under the second step of the goodwill impairment test is judgmental innature and often involves the use of significant estimates and assumptions.These estimates and assumptions could have a significant impact on whether ornot an impairment charge is recognized and the magnitude of any such charge.Estimates of fair value are based on our stock price as reported by Nasdaq.

**Results of Operations**

The following table sets forth certain Condensed Consolidated Statementof Operations data in total dollars, as a percentage of total net revenues andas a percentage change from the same period in the prior year.  Cost of license revenues and cost of servicerevenues are expressed as a percentage of the related revenues. Thisinformation should be read in conjunction with the Condensed ConsolidatedFinancial Statements included elsewhere in this Form 10-QSB.

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| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005**      | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | **% of Net**           | ** ** | **Percent** | ** ** | ** ** | ** ** | **% of Net** | ** ** |
| ** **                                             | ** ** | **Results**                      | ** ** | **Revenues**                     | ** ** | **Change** | ** ** | **Results** | ** ** | **Revenues** | ** ** |
| Net revenues                                           |       |                             |       |                             |       |   |   |   |   |   |   |
| Licenses                                               |       | $                                | 1,654      |                             | 35.4       | % | (28.4 | )% | $ | 2,311 |   | 43.7 | % |
| Services                                               |       | 3,018                            |       | 64.6                             | %          | 1.2 | % | 2,982 |   | 56.3 | % |
| Total net  revenues                                    |       | 4,672                            |       | 100.0                            | %          | (11.7 | )% | 5,293 |   | 100.0 | % |
| Operating expense                                      |       |                             |       |                             |       |   |   |   |   |   |   |
| Cost of license  revenues (as a % of license revenues) |       | 21                               |       | 1.3                              | %          | (67.2 | )% | 64 |   | 2.8 | % |
| Cost of service  revenues (as a % of service revenues) |       | 653                              |       | 21.6                             | %          | 5.3 | % | 620 |   | 20.8 | % |
| Selling and marketing                                  |       | 1,456                            |       | 31.2                             | %          | 9.6 | % | 1,329 |   | 25.1 | % |
| Research and  development                              |       | 2,646                            |       | 56.6                             | %          | 17.9 | % | 2,244 |   | 42.4 | % |
| General and  administrative                            |       | 806                              |       | 17.3                             | %          | (10.5 | )% | 901 |   | 17.0 | % |
| Total operating  expenses                              |       | 5,582                            |       | 119.5                            | %          | 8.2 | % | 5,158 |   | 97.4 | % |
| Operating income (loss)                                |       | (910                             | )          | (19.5                            | )%         | (774.1 | )% | 135 |   | 2.6 | % |
| Other expense-net                                      |       | (201                             | )          | (4.3                             | )%         | (32.6 | )% | (298 | ) | (5.6 | )% |
| Loss before income  taxes                              |       | (1,111                           | )          | (23.8                            | )%         | 581.6 | % | (163 | ) | (3.1 | )% |
| Provision for income  taxes                            |       | (19                              | )          | (0.4                             | )%         | (100.0 | )% | — |   | — |   |
| Net loss                                               |       | $                                | (1,092     | )                                | (23.4      | )% | 569.9 | % | $ | (163 | ) | (3.1 | )% |

**REVENUE**

NETREVENUE. Our revenue is derived principally from two sources: fees fromsoftware licensing and fees for services, including maintenance, consulting,training and technical support. We license our software on a per-CPU,per-server, per-port or per-user basis. Therefore, the addition of CPU’s,servers, ports or users to existing systems increases our revenue from ourinstalled base of licenses. We view the MDMS and RAD markets in which weoperate to be relatively stable and consistent from period to period andanticipate that our revenue on an annual basis from those products will remainstable for the foreseeable future. Fluctuations in revenue between quarters oryear-to-year are primarily the result of the timing of orders and customerordering patterns. We do not view the decrease in year-to-year revenues for thethree-month periods ended June 30, 2006 and 2005 to be representative ofimmediate market trends. In the longer term, we expect that the MDMS and RADmarkets will eventually contract as customers adopt newer technologies, and,therefore, the revenue generated from sales of our MDMS and RAD products isexpected 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. In September 2005, we announced our first commercial OEMagreement for TigerLogic XDMS.

**OPERATINGEXPENSES**

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costsassociated with software license sales including software packaging,documentation, physical media costs and royalties. Cost of license revenueremained relatively consistent in the three-month period ended June 30, 2006 ascompared to the same period in the prior year. We anticipate that the cost oflicense revenue, as a percentage of license revenue and in absolute dollars,will be relatively stable in future periods.

COSTOF SERVICE REVENUE. Cost of service revenue includes primarily personnel costsrelating to providing consulting, technical support and training services.  Cost of service revenue remained relativelyconsistent for the three-month period ended June 30, 2006 as compared to thesame period in the prior year.  Weanticipate that the cost of service revenue, as a percentage of service revenueand in absolute dollars, will be relatively stable in future periods.

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**OPERATING EXPENSES**

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 thethree-month period ended June 30, 2006 as compared to the same period in theprior year was mainly due to the adoption of SFAS No. 123(R) pursuant towhich stock option compensation is required to be recorded as an expense. Weanticipate that selling and marketing costs related to XDMS products mayincrease as we further develop the sales channel for these products and ifcustomer acceptance of these products increases. In addition, if our continuedresearch and development efforts are successful, including with respect to ourXDMS products, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products in 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. In the three-month period ended June 30, 2006, spendingrelated to our development efforts increased as certain of our new productsreached general or production release and we continued to refine and addcertain features and functionality to these products. The majority of thesecosts have been personnel-related as we have hired employees and contractors inassociation with the ongoing development and enhancement of our product lines. Researchand development expense also increased in the three-month period ended June 30,2006 due to the adoption of SFAS No. 123(R) pursuant to which stock optioncompensation is required to be recorded as an expense. We are committed to ourresearch and development efforts and expect research and development expensewill remain at the current level in future periods or increase if we believethat additional spending is warranted. Such efforts may not result inadditional new products and any new products, including the XDMS products, maynot generate sufficient revenue, if any, to offset the research and developmentexpense.

GENERALAND ADMINISTRATIVE. General and administrative expense consists primarily ofcosts associated with our finance, human resources, legal and otheradministrative functions. These costs consist principally of salaries and otherpersonnel-related expenses, professional fees, depreciation and overhead costs.General and administrative spending remained relatively consistent in thethree-month period ended June 30, 2006 as compared to the same period in theprior year. The increase to general and administrative expense in thethree-month period ended June 30, 2006 due to the adoption of SFASNo. 123(R) pursuant to which stock option compensation is required to berecorded as an expense, was offset by decreases to other general andadministrative expenses. We anticipate that general and administrative costs asa percentage of revenue and in absolute dollars will remain relatively stableduring fiscal 2007.

OTHEREXPENSE. Other expense consists primarily of net interest expense and, to amuch lesser extent, gains and losses on foreign currency transactions. Otherexpense remained relatively consistent during the three-month period ended June30, 2006 as compared to the three-month period ended June 30, 2005.  Due to the uncertainty in exchange rates, wemay experience transaction gains or losses in future periods, the effect ofwhich cannot be determined at this time.

PROVISION FOR INCOME TAXES.   Oureffective tax rate was 1.7% for the three months ended June 30, 2006. Theprovision for income taxes reflects the tax on earnings from foreignsubsidiaries. The Company is able to reduce the current tax liability atforeign subsidiaries with net operating loss carryforwards. However, certaincarryforwards were acquired in our 2000 acquisition. Therefore, the benefitrealized from utilizing those net operating loss carryforwards reduced goodwillinstead of income tax expense. Due to uncertainties surrounding the timing ofrealizing the benefits of the net operating loss carryforwards in the future,the Company has established a full valuation allowance against its net deferredtax assets.

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**LIQUIDITYAND CAPITAL RESOURCES**

In connection with the acquisitionof PickAx, we assumed a Secured Promissory Note issued to Astoria CapitalPartners, L.P. (“Astoria”) dated November 30, 2000, in the amount of $18.5million. In January 2003, we entered into a Note Exchange Agreement (the “ExchangeAgreement”) with Astoria to replace the existing Secured Promissory Note, asamended, with a Convertible Subordinated Note. Under the terms of the ExchangeAgreement, the Secured Promissory Note was exchanged and replaced with aConvertible Subordinated Note having a principal amount of $22.1 million, whichprincipal amount was equal to the outstanding principal and accrued interestpayable on the Secured Promissory Note as of the date of the ExchangeAgreement. In October 2005, Astoria assigned a portion of its common stockholdings totaling 870,536 shares and a portion of the Subordinated ConvertibleNote, totaling $1,751,832, to two of its limited partners. As such, we issuedan Amended and Restated Note to Astoria for $20,749,581 and corresponding notesdirectly to the limited partners for $862,979 and $888,853, respectively. TheConvertible Subordinated Notes are convertible into common stock at any time,at the option of the holder, at a price of $5.00 per share. The ConvertibleSubordinated Notes mature on May 30, 2008, extending the May 30, 2003maturity date of the Secured Promissory Note. The interest rate of theConvertible Subordinated Notes is 5% per annum as compared to an interest rateof 10% per annum under the Secured Promissory Note. The interest is payablequarterly at our option in cash or through increases to the outstandingprincipal of the Convertible Subordinated Notes.

On December 14, 2004, weentered into an Agreement Regarding Amended and Restated Common Stock PurchaseWarrant and 5% Convertible Subordinated Note Due 2008 with Astoria whereby wecould redeem, in part, the Convertible Subordinated Note in advance ofJanuary 30, 2005. On December 14, 2004, Astoria exercised its warrantin the amount of $2,670,904. In lieu of a cash payment, we used the proceeds ofthe exercise to pay down a portion of the indebtedness to Astoria. The pay downconsisted of $247,129 for accrued and unpaid interest, and $2,423,775 as areduction of principal of the Convertible Subordinated Note. For theforeseeable future, we expect to increase the principal of the ConvertibleSubordinated Notes in lieu of cash payments for the interest. If theConvertible Subordinated Notes are converted into common stock, ourstockholders may experience substantial dilution. Unlike the Secured PromissoryNote, the Convertible Subordinated Notes are not secured by our assets.

If our future financialperformance improves, we may seek to take advantage of opportunities in theequity and capital markets to raise additional funds for operating needs or topay down our debt to Astoria and others. There can be no assurances that suchopportunities will arise. In addition to holding the majority of theConvertible Subordinated Notes, Astoria is a major stockholder of ours, holdinga majority of our outstanding common stock. Richard W. Koe, Chairman of theBoard of Directors, serves as the Managing General Partner for Astoria. CarltonH. Baab, our President, Chief Executive Officer, and Director, served as aManaging Principal of Astoria Capital Management, which is a general partner ofAstoria, until taking a formal leave of absence to join us in August 2001.Gerald F. Chew, a member of our Board of Directors, is the cousin ofMr. Koe.

At June 30, 2006, we had$10.0 million in cash. We believe that our existing cash balances combinedwith our cash flow from operating activities will be sufficient to meet ouroperating and capital expenditure requirements for the remainder of the fiscalyear ending March 31, 2007 and through the foreseeable future. We arecommitted to research and development efforts that are intended to allow us topenetrate new markets and generate new sources of revenue and improve operatingresults. However, our research and development efforts have required, and willcontinue to require, cash outlays without the immediate or short-term receiptof related revenue. Our ability to service our long-term debt and 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, weentered into a two year credit facility with Silicon Valley Bank which providedus with the ability to borrow up to $1.5 million at an annual interest rate ofPrime plus 1.0%, provided that the annual interest rate shall never be lessthan 5%. We renewed this credit facility on February 11, 2006. The creditfacility is collateralized by our assets and expires in February 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 at June 30, 2006. Uponexpiration of the term of this facility we will assess our credit and liquidityneeds in relation to market factors. However, we believe that the facility isnot required for liquidity purposes or to meet our cash flow needs for theforeseeable future.

On November 9, 2004, weentered 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, which represents a lowerper square foot cost than our prior property lease. 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 material commitments for capital expenditures at June 30,2006.

Net cash used in operating activities was $0.8 million and $0.2 millionfor the three-month periods ended June 30, 2006 and 2005, respectively.

Our earnings before interest, taxes, depreciation and amortization(EBITDA) was ($0.6 million), or 13% of total net revenue, for the three-monthperiod ended June 30, 2006, and $0.2 million, or 4% of total net revenue,for the three-month period ended June 30, 2005. The reduction in EBITDAwas a result of the increased spending for research and development. EBITDA isdefined as net loss with

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anadd-back for depreciation and amortization, non-cash stock-based compensationexpense, interest expense, other income and income taxes. The following tablereconciles EBITDA to the reported net loss:

**RECONCILIATIONOF EBITDA TO NET LOSS**

|                                | ** ** | **Three months**        | ** ** |
|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **ended June 30,** | ** ** |
| ** **                     | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| **In $000’s**        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** |
| Reported net  loss             |       | $                            | (1,092     | ) | $ | (163 | ) |
| Depreciation and  amortization |       | 75                           |       | 82 |   |
| Stock-based  compensation      |       | 211                          |       | 6 |   |
| Interest  expense-net          |       | 223                          |       | 247 |   |
| Other (income) expense-net     |       | (22                          | )          | 51 |   |
| Benefit from  income tax       |       | (19                          | )          | — |   |
| EBITDA                         |       | $                            | (624       | ) | $ | 223 |   |
|                                |            |                              |            |  |  |  |  |  |

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 used by management to evaluate, assess and benchmark our operationalresults and we believe that EBITDA is relevant and useful information, which isoften reported and widely used by analysts, investors and other interestedparties in our industry. Accordingly, we are disclosing this information topermit a more comprehensive analysis of our operating performance, to providean additional measure of performance and liquidity and to provide additionalinformation with respect to our ability to meet future debt service, capitalexpenditure and working capital requirements.

OurEBITDA financial information is also comparable to net cash used in operatingactivities. The table below reconciles EBITDA to the GAAP disclosure of netcash used in operating activities:

**RECONCILIATION OF EBITDA TONET CASH USED IN OPERATING ACTIVITIES**

|                                        | ** ** | **Three months**             | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **ended June 30,** | ** ** |
| ** **                             | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| **In $000’s**                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** |
| Net cash used in  operating activities |       | $                            | (800       | ) | $ | (176 | ) |
| Interest  expense-net                  |       | 223                          |       | 247 |   |
| Other (income) expense-net             |       | (22                          | )          | 51 |   |
| Change in  accounts receivable         |       | (217                         | )          | 129 |   |
| Change in other  assets                |       | 112                          |       | (24 | ) |
| Change in accounts  payable            |       | 111                          |       | 217 |   |
| Change in  accrued liabilities         |       | 341                          |       | (125 | ) |
| Change in  deferred revenue            |       | (351                         | )          | (75 | ) |
| Note payable  discount amortization    |       | (21                          | )          | (21 | ) |
| EBITDA                                 |       | $                            | (624       | ) | $ | 223 |   |
|                                        |            |                              |            |  |  |  |  |  |

**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 NEWPRODUCTS AND ENHANCE EXISTING PRODUCTS TO KEEP PACE WITH RAPIDLY CHANGINGTECHNOLOGY AND INDUSTRY STANDARDS, OUR REVENUE MAY DECLINE.**

We have devoted significantresources to the research and development of products and technologies. Webelieve that our future success will depend in large part on a strong researchand development effort with respect to both our existing and new products.Beginning in 2001, we began an extensive effort to leverage our time-provenPick UDM and core intellectual property to create an

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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 TO COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ONOUR OPERATING RESULTS.**

The market for our productsis highly competitive, diverse and subject to rapid change. Our products andservices compete on the basis of the following key characteristics:performance; inter-operability; scalability; functionality; reliability;pricing; post sale customer support; quality; compliance with industrystandards; and overall total cost of ownership.

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. Additionally, as we expand our business, we expect tocompete with a different group of companies, including smaller, highly focusedcompanies offering single products.

Most of our competitors havesignificantly more financial, technical, marketing and other resources than wedo. As a result, these competitors may be able to respond more quickly to newor emerging technologies, evolving markets and changes in customer requirementsand may devote greater resources to the development, promotion and sale oftheir products. While we currently believe that our products and servicescompete favorably in the marketplace, our products and services could fallbehind marketplace demands at any time. If we fail to address the competitivechallenges, our business would suffer materially.

**BECAUSE THE MARKET FOR OUR MDMS AND RAD PRODUCTS IS RELATIVELY STABLE ORMAY BE DECLINING, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAIN OURSALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

We believe that the marketsfor our MDMS and RAD products are relatively stable and consistent from periodto period. 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 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 HAVE A LONG SALES CYCLE WHICH COULD RESULT IN DELAYS IN THERECEIPT OF REVENUE.**

The sales cycle for our MDMSand RAD products typically ranges from three to nine months or longer and thesales 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.

**IF WE FAIL TO INCREASE REVENUE OR IMPROVE OUR OPERATING RESULTS, WEMAY NOT BE ABLE TO REPAY OUR DEBT TO ASTORIA AND OTHERS.**

We believe that our cash andcash flow from operating activities will be sufficient to meet our operatingand capital expenditure requirements at least through the foreseeable future.Our ability to meet our expenditures and service our debtobligations is dependent upon our future financial performance, which will beaffected by, among other things, prevailing economic conditions, our ability topenetrate new markets and attract new customers, market acceptance of our newand existing products and services, the success of research and developmentefforts and other factors beyond our control. As previously noted, inJanuary 2003, we entered into the Exchange Agreement with Astoria toreplace the existing Secured Promissory Note, which was due May 2003, witha Convertible Subordinated Note, which is due and payable in May 2008. TheConvertible Subordinated Notes bear interest at 5% per annum and areconvertible into common stock at any time at a price of $5.00 per share. If weare unable to penetrate new markets, generate new sources of revenue or

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otherwiseimprove our operating results, we may be unable to repay our debt to Astoriaand others or to access opportunities in the equity and capital markets toraise additional funds for operating needs.

**THE CONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TO ASTORIAGIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OUR BUSINESS.**

As of June 30, 2006,Astoria beneficially owned approximately 58% of our outstanding common stock.In addition, as of June 30, 2006, the Convertible Subordinated Note issued toAstoria had a balance of approximately $23.2 million in principal andaccrued interest maturing on May 30, 2008. Richard W. Koe, Chairman of theBoard of Directors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria. Carlton H. Baab, our President,Chief Executive Officer, and Director, served as a Managing Principal ofAstoria Capital Management until taking a formal leave of absence to join us inAugust 2001. This concentration of stock ownership, together with theoutstanding debt, would allow Astoria, acting alone, to block any actions thatrequire approval of our stockholders, including the election of members to theBoard of Directors and the approval of significant corporate transactions.Moreover, this concentration of ownership may delay or prevent a change incontrol.

**WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OPERATING RESULTS,WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.**

We expect to continue to spend substantial amounts of money in the areaof research and development, sales and marketing and operations in order topromote new product development and introduction. Because the expensesassociated with these activities are relatively fixed in the short-term, we maybe unable to timely adjust spending to offset any unexpected shortfall inrevenue growth or any decrease in revenue levels. Operating results may alsofluctuate due to factors such as:

·       the size and timing of customer orders;

·       changes in 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;

·       software defects and other product quality problems; and

·       personnel changes.

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 OUR BUSINESS DEPENDS IN PART UPON OUR ABILITY TORECRUIT AND RETAIN KEY PERSONNEL AND MANAGEMENT.**

The majority of our executiveofficers joined us subsequent to the acquisition of PickAx, including ourPresident, Chief Executive Officer, and Director, Carlton H. Baab, who joinedus in August 2001. The loss of one or more of these or other executivescould adversely affect our business. In addition, we believe that our futuresuccess will depend to a significant extent on our ability to recruit, hire andretain highly skilled management and employees with experience in engineering,product management, business development, sales, marketing and customerservice. Competition for such personnel in the software industry can beintense, and there can be no assurance that we will be successful in attractingand retaining such personnel. If we are unable to do so, we may experienceinadequate levels of staffing to develop and license our products and performservices for our customers, which could adversely affect our business.

**THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OURABILITY 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 June 30, 2006. In addition to trademark and copyrightprotections, we license our products to end users on a “right to use” basispursuant to a perpetual license agreement that restricts use of products to aspecified number of users.

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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.

**OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS WHICH COULD HARM OURBUSINESS.**

Our enterprise applicationssoftware may contain undetected errors or failures. This includes our XDMSproducts, which are at higher risk given these products are in the earlieststages of the product life cycle. This may result in loss of, or delay in,customer acceptance of our products and could harm our reputation and ourbusiness. Undetected errors or failures in computer software programs are notuncommon. While we make every effort to thoroughly test our software, in the eventthat we experience significant software errors, we could experience delays inrelease, customer dissatisfaction and lost revenue. Any of these errors ordefects 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.**

As of June 30, 2006, we had20,687,726 outstanding shares of common stock, of which approximately 9,700,000shares were restricted securities held by Astoria and other holders. Restrictedsecurities may be sold in the public market only if they are registered or ifthey qualify for an exemption from registration promulgated under theSecurities Act of 1933, as amended. At present, all of our outstandingrestricted securities are either entitled to registration rights or eligiblefor public sale under Rule 144, subject to volume limitations and otherrequirements of Rule 144. If Astoria or other holders decide to exercisetheir demand registration rights, we would incur costs and expenses associatedwith the registration of securities.

Furthermore, sales of asubstantial number of shares by Astoria or other securities holders in thepublic market, or the perception that those sales may occur, could cause themarket price of our common stock to decline. In addition, if we register sharesof our common stock in connection with a public offering of securities, we maybe required to include shares of restricted securities in the registration,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.**

We operate on a global basis with offices or distributors in Europe,Africa, Asia, Latin America, South America, Australia and North America anddevelopment efforts in North America, India and Europe. Approximately 30% ofour revenue for the three months ended June 30, 2006 was generated from ourinternational offices. We face several risks inherent in conducting businessinternationally, including but not limited to the following:

·       fluctuations in interest rates or currency exchange rates;

·       language and cultural differences;

·       local and governmental requirements;

·       difficulties and costs of staffing and managing internationaloperations;

·       differences in intellectual property protections;

·       difficulties in collecting accounts receivable and longer collectionperiods;

·       seasonal business activities in certain parts of the world; and

·       trade policies.

Any of these factors couldharm our international operations and, consequently, affect the internationalgrowth or maintenance of our business. These factors or any combination ofthese factors may adversely affect our revenue or our overall financialperformance.

**THE FAILURE OF OUR PRODUCTS TO CONTINUE TO CONFORM TO INDUSTRYSTANDARDS MAY HARM OUR OPERATING RESULTS.**

A key factor in our futuresuccess will continue to be the ability of our products to operate and performwell with existing and future leading, industry-standard enterprise softwareapplications intended to be used in connection with our MDMS, RAD, and XDMSproducts. Inter-operability may require third party licenses, which may not be availableto us on favorable terms or at all. Failure to meet existing or futureinter-operability and performance requirements of industry standardapplications in a timely manner could adversely affect our business.Uncertainties relating to the timing and nature of new product announcements orintroductions or modifications of third party software applications could delayour product development, increase our product development expense or causecustomers to delay evaluation, purchase, and deployment of our products.

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**THIRDPARTIES COULD 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 a substantialamount of litigation in the software industry regarding intellectual propertyrights. Third parties may claim that our current or potential future productsand services infringe upon their intellectual property. We expect that softwareproduct developers and providers of software applications will increasingly besubject to infringement claims as the number of products and competitors in ourindustry segment grow and the functionality of products in different industrysegments overlap. Any claims, with or without merit, could be time consuming,result in costly litigation, cause product shipment delays, prohibit productlicensing or require us to enter into royalty or licensing agreements. Royalty orlicensing agreements, if required, may not be available on terms acceptable tous or at all, which could seriously harm our business.

**ITEM 3.  CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controlsand Procedures**

Our principal executive officer and principal financial officerevaluated the effectiveness of the Company’s disclosure controls and proceduresas of the end of the period covered by this report. Based on such evaluation,our principal executive officer and principal financial officer have concludedthat our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) are ineffective,as of the end of the period covered by this report, to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules andaccumulated and communicated to the Company’s management, including its principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure.

A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Management necessarily applied its judgment in assessing thebenefits of controls relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues, if any, within Raining DataCorporation have been detected.

**Changes in Internal Controls overFinancial Reporting**

There was no change in ourinternal control over financial reporting that occurred during our last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART II. OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

We are subject from time totime to claims and suits arising in the ordinary course of business.  As of June 30, 2006, we were not a partyto any material litigation, claim or suit.

**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. |

**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| Date:  August 14, 2006 | **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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