**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-QSB**

 
| **(Mark One)**                                                                                                                                                                                         |   |                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                             |   | **Quarterly  Report under Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                   |   |                                                                                   |
| **For the quarterly period ended December 31,  2003**                                                                                                                                                  |
|                                                                                                                                                                                                   |   |                                                                                   |
| **o**                                                                                                                                                                                                  |   | **Transition  Report Pursuant to Section 13 or 15(d) of the Exchange Act**             |
|                                                                                                                                                                                                   |   |                                                                                   |
| **For the transition period from                 to               ** |

 

**Commission File number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of registrant as specified in itscharter)

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

 

**17500 Cartwright Road**

**Irvine, CA 92614**

(Address of principal executive offices)

 

**(949) 442-4400**

(Registrant’s telephone number)

 

Check whether the issuer: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

As of December31, 2003, there were 18,199,348 shares of registrant’s Common Stock, $.10 parvalue, outstanding.

 

TransitionalSmall Business Disclosure Format (Check one): Yes o  No ý

 

 

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**RAINING DATA CORPORATION**

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                                                     |   |
|------------|---------------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.    | FINANCIAL STATEMENTS                                                                                                      |   |
|       | UNAUDITED CONDENSED CONSOLIDATED BALANCE  SHEETS — DECEMBER 31, 2003  AND MARCH 31, 2003                             |   |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF OPERATIONS — THREE AND  NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002 |   |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF CASH FLOWS — NINE MONTHS  ENDED DECEMBER 31, 2003 AND 2002           |   |
|       | CONDENSED NOTES TO THE UNAUDITED CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS                                             |   |
| ITEM 2.    | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND  RESULTS OF OPERATIONS                              |   |
| ITEM 3.    | CONTROLS AND PROCEDURES                                                                                                   |   |
| PART II.   | OTHER INFORMATION                                                                                                         |   |
| ITEM 1.    | LEGAL PROCEEDINGS                                                                                                         |   |
| ITEM 6.    | EXHIBITS AND REPORTS ON FORM 8-K                                                                                          |   |
| SIGNATURES |                                                                                                                      |

 

2

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**PART I. FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATACORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**
|                                               |   | **December  31,2003** |   | **March 31,2003** |   |
|----------------------------------------------------|--------|-----------------------|--------|-------------------|--------|
|                                               |   | **(In thousands)**    |   |
|                                               |   |                  |   |              |   |
| ASSETS                                             |   |                  |   |              |   |
|                                               |   |                  |   |              |   |
| Current assets                                     |   |                  |   |              |   |
| Cash and equivalents                               |   | $                     | 5,723  |              | $      | 5,279 |   |
| Trade accounts receivable-net                      |   | 2,371                 |   | 2,142             |   |
| Other current assets                               |   | 560                   |   | 318               |   |
| Total current assets                               |   | 8,654                 |   | 7,739             |   |
|                                               |   |                  |   |              |   |
| Property, furniture and equipment-net              |   | 776                   |   | 880               |   |
|                                               |   |                  |   |              |   |
| Intangible assets-net                              |   | 2,383                 |   | 4,333             |   |
| Goodwill                                           |   | 27,684                |   | 27,684            |   |
| Other assets                                       |   | 198                   |   | 258               |   |
| Total assets                                       |   | $                     | 39,695 |              | $      | 40,894 |   |
|                                               |   |                  |   |              |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY         |   |                  |   |              |   |
|                                               |   |                  |   |              |   |
| Current liabilities                                |   |                  |   |              |   |
| Accounts payable                                   |   | $                     | 139    |              | $      | 600 |   |
| Accrued liabilities                                |   | 2,631                 |   | 2,992             |   |
| Deferred revenue                                   |   | 4,899                 |   | 5,242             |   |
| Current portion of long term debt-net of  discount |   | 54                    |   | 321               |   |
| Total current liabilities                          |   | 7,723                 |   | 9,155             |   |
|                                               |   |                  |   |              |   |
| Long term debt-net of discount                     |   | 22,808                |   | 21,932            |   |
| Total liabilities                                  |   | 30,531                |   | 31,087            |   |
|                                               |   |                  |   |              |   |
| Commitments and contingencies                      |   | —                |   | —            |   |
|                                               |   |                  |   |              |   |
| Stockholders’ equity                          |   |                  |   |              |   |
| Preferred stock                                    |   | 300                   |   | 300               |   |
| Common stock                                       |   | 1,820                 |   | 1,795             |   |
| Paid-in capital                                    |   | 95,184                |   | 94,919            |   |
| Deferred compensation                              |   | (48                   | )      | (145              | )      |
| Accumulated other comprehensive income             |   | 1,258                 |   | 1,050             |   |
| Accumulated deficit                                |   | (89,350               | )      | (88,112           | )      |
| Total stockholders’ equity                    |   | 9,164                 |   | 9,807             |   |
| Total liabilities and stockholders’ equity    |   | $                     | 39,695 |              | $      | 40,894 |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****THREE AND NINE MONTHS ENDED DECEMBER 31,**
|                                                          |   | **Three  Months Ended  December 31,**     |   | **Nine  Months Ended  December 31,** |   |
|---------------------------------------------------------------|--------|-------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2003**                                  |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                          |   | **(In thousands, except per share data)** |   |
| Net revenue                                                   |   |                                      |   |                                 |   |   |   |   |   |
| Licenses                                                      |   | $                                         | 2,731  |                                 | $      | 2,494 |   | $ | 7,264 |   | $ | 6,866 |   |
| Services                                                      |   | 3,059                                     |   | 2,796                                |   | 9,297 |   | 8,085 |   |
| Total net revenue                                             |   | 5,790                                     |   | 5,290                                |   | 16,561 |   | 14,951 |   |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Costs of revenue                                              |   |                                      |   |                                 |   |   |   |   |   |
| Cost of license revenue                                       |   | 100                                       |   | 62                                   |   | 322 |   | 177 |   |
| Cost of service revenue                                       |   | 518                                       |   | 438                                  |   | 1,590 |   | 1,356 |   |
| Total cost of revenue                                         |   | 618                                       |   | 500                                  |   | 1,912 |   | 1,533 |   |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Gross profit                                                  |   | 5,172                                     |   | 4,790                                |   | 14,649 |   | 13,418 |   |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Cost of operations                                            |   |                                      |   |                                 |   |   |   |   |   |
| Selling and marketing                                         |   | 1,570                                     |   | 1,011                                |   | 4,336 |   | 3,088 |   |
| Research and development                                      |   | 1,789                                     |   | 1,551                                |   | 5,606 |   | 4,253 |   |
| General and administrative                                    |   | 1,021                                     |   | 1,276                                |   | 2,937 |   | 4,187 |   |
| Stock-based compensation                                      |   | 48                                        |   | 89                                   |   | 171 |   | 354 |   |
| Amortization of intangible assets                             |   | 650                                       |   | 650                                  |   | 1,950 |   | 1,950 |   |
| Total operating expenses                                      |   | 5,078                                     |   | 4,577                                |   | 15,000 |   | 13,832 |   |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Operating income (loss)                                       |   | 94                                        |   | 213                                  |   | (351 | ) | (414 | ) |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Other expense                                                 |   |                                      |   |                                 |   |   |   |   |   |
| Interest expense-net                                          |   | (307                                      | )      | (853                                 | )      | (908 | ) | (2,920 | ) |
| Other income-net                                              |   | 10                                        |   | 5                                    |   | 21 |   | 44 |   |
|                                                          |   | (297                                      | )      | (848                                 | )      | (887 | ) | (2,876 | ) |
| Net loss                                                      |   | $                                         | (203   | )                                    | $      | (635 | ) | $ | (1,238 | ) | $ | (3,290 | ) |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share                          |   | $                                         | (0.01  | )                                    | $      | (0.04 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share |   | 18,159                                    |   | 17,881                               |   | 18,073 |   | 17,767 |   |
|                                                          |   |                                      |   |                                 |   |   |   |   |   |
| Departmental allocation of stock-based  compensation          |   |                                      |   |                                 |   |   |   |   |   |
| Cost of service revenues                                      |   | $                                         | 16     |                                 | $      | 16 |   | $ | 49 |   | $ | 49 |   |
| Selling and marketing                                         |   | 3                                         |   | 3                                    |   | 8 |   | 8 |   |
| Research and development                                      |   | 26                                        |   | 57                                   |   | 106 |   | 272 |   |
| General and administrative                                    |   | 3                                         |   | 13                                   |   | 8 |   | 25 |   |
| Total stock-based compensation                                |   | $                                         | 48     |                                 | $      | 89 |   | $ | 171 |   | $ | 354 |   |

 

See accompanying condensed notes to the unauditedcondensed consolidated financial statements.

 

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**RAINING DATACORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****NINE MONTHS ENDED DECEMBER 31,**
|                                                                                        |   | **2003**           |   | **2002** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                                                                        |   | **(In thousands)** |   |
| Cash flows from operating activities:                                                       |   |               |   |     |   |
| Net loss                                                                                    |   | $                  | (1,238 | )        | $      | (3,290 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used for) operating activities: |   |               |   |     |   |
| Depreciation and amortization of long-lived  assets                                         |   | 2,213              |   | 2,230    |   |
| Note discount amortization                                                                  |   | 62                 |   | 1,485    |   |
| Amortization of deferred stock-based  compensation                                          |   | 171                |   | 354      |   |
| Change in assets and liabilities:                                                           |   |               |   |     |   |
| Trade accounts receivable                                                                   |   | (11                | )      | (115     | )      |
| Other current and non-current assets                                                        |   | (234               | )      | (485     | )      |
| Accounts payable and accrued liabilities                                                    |   | (85                | )      | (1,746   | )      |
| Deferred revenue                                                                            |   | (432               | )      | (58      | )      |
| Net cash provided by (used for) operating  activities                                       |   | 446                |   | (1,625   | )      |
|                                                                                        |   |               |   |     |   |
| Cash flows from investing activities:                                                       |   |               |   |     |   |
| Purchase of property, furniture and  equipment - net                                        |   | (24                | )      | (179     | )      |
| Net cash used for investing activities                                                      |   | (24                | )      | (179     | )      |
|                                                                                        |   |               |   |     |   |
| Cash flows from financing activities:                                                       |   |               |   |     |   |
| Proceeds from exercise of stock options and  warrants                                       |   | 133                |   | 2        |   |
| Proceeds from issuance of common stock                                                      |   | 83                 |   | 43       |   |
| Repayment of debt                                                                           |   | (304               | )      | (36      | )      |
| Net cash provided by (used for) financing  activities                                       |   | (88                | )      | 9        |   |
|                                                                                        |   |               |   |     |   |
| Effect of exchange rate changes on cash                                                     |   | 110                |   | 56       |   |
|                                                                                        |   |               |   |     |   |
| Net increase (decrease) in cash and  equivalents                                            |   | 444                |   | (1,739   | )      |
|                                                                                        |   |               |   |     |   |
| Cash and equivalents at beginning of period                                                 |   | 5,279              |   | 4,500    |   |
| Cash and equivalents at end of period                                                       |   | $                  | 5,723  |     | $      | 2,761 |   |
|                                                                                        |   |               |   |     |   |
| Other non-cash activities:                                                                  |   |               |   |     |   |
| Issuance of payment-in-kind notes for  accrued interest                                     |   | $                  | 851    |     | $      | — |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**CONDENSED NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2003 (Unaudited)**

 

**1. INTERIM FINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidated financial informationfurnished herein reflects all adjustments, consisting only of normal recurringitems, which in the opinion of management are necessary to fairly state RainingData Corporation’s (the “Company”) financial position, the results of itsoperations and its cash flows for the dates and periods presented and to makesuch information presented not misleading. Certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America,have been omitted pursuant to SEC rules and regulations; nevertheless,management of the Company believes that the disclosures herein are adequate tomake the information presented not misleading. These consolidated financialstatements should be read in conjunction with the Company’s audited financialstatements for the year ended March 31, 2003 contained in the Company’sAnnual Report on Form 10-KSB. The results of operations for the periodended December 31, 2003 are not necessarily indicative of results to beexpected for any other interim period or the fiscal year ending March 31,2004.

 

**Stock Options**

 

Pro formainformation, which assumes the Company had accounted for stock options grantedunder the fair value method prescribed by SFAS No. 123, “Accounting forStock-based Compensation,” is presented below. There were no stock optionsgranted during the three-month period ended December 31, 2003.  The per share weighted-average fair value ofstock options granted was $2.38 for the nine-month period ended December 31,2003, and $1.39 and $1.75 for the three and nine-month periods ended December31, 2002, respectively, as estimated using the Black-Scholes option-pricingmodel.  The following assumptions wereused for the nine-month period ended December 31, 2003: dividend yield of 0%;expected volatility of 133%; risk-free interest rate of and 4.05% and expectedlife of 4 years.  The followingassumptions were used for each of the three and nine-month periods endedDecember 31, 2002: dividend yield of 0%; expected volatility of 152%; risk-freeinterest rate of 4.01% and 4.46%, respectively; and expected life of 4 years.

 

For purposesof pro forma disclosures, the estimated fair value of the options is amortizedto expense over the options’ vesting periods. The Company’s historical and proforma net loss per share for the three and nine-month periods ended December31, 2003 and 2002, are as follows (in thousands, except per share data):

 
|                                                                                                   |   | **Three  Months ended  December 31,** |   | **Nine  Months ended********December  31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                   |   | **2003**                              |   | **2002**                                    |   | **2003** |   | **2002** |   |
| Net loss:                                                                                              |   |                                  |   |                                        |   |   |   |   |   |
| As reported                                                                                            |   | $                                     | (203   | )                                           | $      | (635 | ) | $ | (1,238 | ) | $ | (3,290 | ) |
|                                                                                                   |   |                                  |   |                                        |   |   |   |   |   |
| Add:                                                                                                   |   |                                  |   |                                        |   |   |   |   |   |
| Stock-based employee compensation expense included in net loss                                         |   | 48                                    |   | 89                                          |   | 171 |   | 354 |   |
|                                                                                                   |   |                                  |   |                                        |   |   |   |   |   |
| Less:                                                                                                  |   |                                  |   |                                        |   |   |   |   |   |
| Total stock-based employee compensation expense determined under the  fair value method for all awards |   | (484                                  | )      | (573                                        | )      | (1,462 | ) | (1,793 | ) |
|                                                                                                   |   |                                  |   |                                        |   |   |   |   |   |
| Pro forma net loss:                                                                                    |   | $                                     | (639   | )                                           | $      | (1,119 | ) | $ | (2,529 | ) | $ | (4,729 | ) |
|                                                                                                   |   |                                  |   |                                        |   |   |   |   |   |
| Basic and diluted loss per share                                                                       |   |                                  |   |                                        |   |   |   |   |   |
| As reported                                                                                            |   | $                                     | (0.01  | )                                           | $      | (0.04 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Pro forma                                                                                              |   | $                                     | (0.04  | )                                           | $      | (0.06 | ) | $ | (0.14 | ) | $ | (0.27 | ) |

 

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**Reclassifications**

 

Certain reclassifications have been made to prior period amounts toconform to the current period presentation.

 

**2. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In June 2001, the Financial****Accounting****Standards Board****(“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 143, “Accounting for Asset RetirementObligations” (“SFAS No. 143”). SFAS No. 143 requires the Company torecord the fair value of an asset retirement obligation as a liability in theperiod in which it incurs a legal obligation associated with the retirement oftangible long-lived assets that result from the acquisition, construction,development or normal use of the assets. The Company also records a correspondingasset, which is depreciated over the life of the asset. Subsequent to theinitial measurement of the asset retirement obligation, the obligation will beadjusted at the end of each period to reflect the passage of time and changesin the estimated future cash flows underlying the obligation. The Companyadopted SFAS No. 143 on April 1, 2003.  The adoption has not had and is not expected to have a materialeffect on the Company’s consolidated financial position or results ofoperations.

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of the FASB Statements No. 4, 44 and64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFASNo. 145”). SFAS No. 145 eliminates the requirement to classify gains andlosses from the extinguishment of indebtedness as extraordinary, requirescertain lease modifications to be treated the same as a sale-leasebacktransaction, and makes other non-substantive technical corrections to existingpronouncements. SFAS No. 145 is effective for fiscal years beginning afterMay 15, 2002. SFAS No. 145 was adopted on April 1, 2003.  The adoption has not had and is not expectedto have a material effect on the Company’s consolidated financial position orresults of operations.

 

The Emerging Issues Task Force (“EITF”) reached a consensus on EITF00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF00-21 provides accounting guidance for allocation of revenue where delivery orperformance of products or services or performance may occur at differentpoints in time or over different periods of time. Companies are required toadopt this consensus for fiscal periods beginning after June 15, 2003.  The Company adopted EITF 00-21 on July 1,2003.  The adoption of EITF 00-21 didnot have a material effect on the Company’s consolidated financial position orresults of operations.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  SFAS No. 150establishes standards for how a company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify certainfinancial instruments as a liability (or as an asset in somecircumstances).  SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is generally effective at the beginning of the firstinterim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’sfinancial statements.

 

In December 2003, the FASB issued FASB Interpretation No. 46 (revisedDecember 2003), “Consolidation of Variable Interest Entities”, (“FIN 46R”)which addresses how a business enterprise should evaluate whether it has acontrolling financial interest in an entity through means other than votingrights and accordingly should consolidate the entity. FIN 46R replaces FASBInterpretation No. 46, Consolidation of Variable Interest Entities, which wasissued in January 2003.  FIN 46R isgenerally applicable for small business issuers in December 2004.  Since the Company has no interest in anyvariable entity, the Company believes that the adoption of this interpretationwill not have a material impact on its consolidated financial position orresults of operations.

 

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**3. LONG-TERM DEBT**

 

Long-term debt of the Company, including the Convertible SubordinatedNote payable to Astoria Capital Partners, L.P. (“Astoria”), the Company’scontrolling stockholder, as of December 31, 2003 and March 31, 2003, is asfollows (in thousands):

 

**RAININGDATA CORPORATION AND SUBSIDIARIES****LONG-TERM DEBTSCHEDULE**
|                                               |   | **December  31,2003** |   | **March 31,2003** |   |
|----------------------------------------------------|--------|-----------------------|--------|-------------------|--------|
|                                               |   |                  |   |              |   |
| Note payable to Astoria                            |   | $                     | 22,885 |              | $      | 22,140 |   |
| Plus accrued interest                              |   | 288                   |   | 182               |   |
| Less unamortized discount                          |   | (365                  | )      | (427              | )      |
|                                               |   | 22,808                |   | 21,895            |   |
|                                               |   |                  |   |              |   |
| Note payable and accrued interest -  individual    |   | —                |   | 256               |   |
| Capital lease obligations                          |   | 54                    |   | 102               |   |
| Total debt                                         |   | 22,862                |   | 22,253            |   |
| Less current portion of long-term debt             |   | —                |   | (257              | )      |
| Less current portion of capital lease  obligations |   | (54                   | )      | (64               | )      |
| Total long-term debt                               |   | $                     | 22,808 |              | $      | 21,932 |   |

 

In January 2003, the Company entered into a Note Exchange Agreementwith Astoria replacing the Secured Promissory Note with a ConvertibleSubordinated Note that extended the maturity date of the debt to May 30, 2008.

 

**4. STOCKHOLDERS’ EQUITY**

 

The Company’s weighted average common shares for the diluted earnings(loss) per share calculation excludes 1,242,451 and 1,189,745 incrementalshares related to outstanding stock options and warrants for the three andnine-month periods ended December 31, 2003, respectively, and excludes 145,597and 160,618 incremental shares for the three and nine-month periods endedDecember 31, 2002, respectively.  Thecalculation also excludes 4,484,906 and 4,520,628 shares related to theCompany’s convertible subordinated debt for the three and nine-month periodsended December 31, 2003, respectively. The Company entered into the convertible subordinated debt in January2003, accordingly there is no impact on the three and nine-month periods endedDecember 31, 2002.  These shares havebeen excluded from the weighted average common shares for diluted earnings(loss) per share calculation because the effect of including them would havebeen antidilutive.

 

The change in accumulated other comprehensive income during the threeand nine-month periods ended December 31, 2003 and 2002 is the result of theeffect of foreign exchange rate changes. The following table reconciles netloss as reported with total comprehensive loss (in thousands):

 
|                               |   | **Three  Months ended  December 31,** |   | **Nine  Months ended  December 31,** |   |
|------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                               |   |                                  |   |                                 |   |   |   |   |   |
| Net loss reported                  |   | $                                     | (203   | )                                    | $      | (635 | ) | $ | (1,238 | ) | $ | (3,290 | ) |
| Translation adjustments – net |   | 55                                    |   | 6                                    |   | 208 |   | 133 |   |
| Total comprehensive loss           |   | $                                     | (148   | )                                    | $      | (629 | ) | $ | (1,030 | ) | $ | (3,157 | ) |

 

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**5. SUBSEQUENT EVENTS, COMMITMENTS AND CONTINGENCIES**

 

In February 2004, the Company entered into a credit facility whichprovides the Company with the ability to borrow up to $1.5 million at an annualinterest rate of Prime rate plus 1.0% provided that the annual interest rateshall never be less than 5%.  The creditfacility is collateralized by the Company’s assets and expires in February2006.  The credit facility containsfinancial and reporting covenants that require the Company to maintain certainfinancial ratios only when the Company has outstanding credit extensions.

 

Indemnification and warrantyprovisions contained within the Company’s customer license and serviceagreements are generally consistent with those prevalent in the Company’sindustry.  The duration of the Company’sservice warranties generally does not exceed 30 days following completion ofits services. The Company has not incurred significant obligations undercustomer indemnification or warranty provisions.  Accordingly, the Company does not maintain accruals for potentialcustomer indemnification or warranty-related obligations. The indemnificationagreements that the Company has executed with its executive officers anddirectors and the statutory indemnification provisions under the laws of theState of Delaware relating to the Company’s directors require the Company toindemnify such officers and directors in certain instances. The Company has notincurred obligations under these indemnification agreements.  Accordingly, the Company does not maintainaccruals for potential officer or director indemnification obligations. Themaximum potential amount of future payments that the Company could be requiredto make is generally limited under the indemnification provisions in itscustomer license and service agreements, and is unlimited under the indemnificationprovisions contained in the indemnification agreements entered into with theCompany’s officers and directors and the statutory indemnification provisionsunder the laws of the State of Delaware relating to the Company’s directors.

 

**6. BUSINESS SEGMENT**

 

The Company operates in one business segment and 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 (“MDMS”), XML Data Management Servers (“XDMS”) and the Pick DataProvider for the Microsoft .NET development environment (“PDP”); and (2) RapidApplication Development software tools (“RAD Tools”). The following tablerepresents the net revenue from the Company’s business segment by product lineand by office location:

 
|              |   | **Three  Months Ended  December 31,** |   | **Nine  Months Ended  December 31,** |   |
|-------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|              |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| **Databases:**    |   |                                  |   |                                 |   |   |   |   |   |
| United States     |   | $                                     | 3,745  |                                 | $      | 3,474 |   | $ | 10,771 |   | $ | 9,864 |   |
| United Kingdom    |   | 389                                   |   | 358                                  |   | 1,123 |   | 1,140 |   |
| France            |   | 422                                   |   | 431                                  |   | 1,106 |   | 1,206 |   |
|              |   | 4,556                                 |   | 4,263                                |   | 13,000 |   | 12,210 |   |
|              |   |                                  |   |                                 |   |   |   |   |   |
| **RAD Tools:**    |   |                                  |   |                                 |   |   |   |   |   |
| United States     |   | 301                                   |   | 304                                  |   | 1,268 |   | 799 |   |
| United Kingdom    |   | 213                                   |   | 253                                  |   | 599 |   | 676 |   |
| France            |   | 243                                   |   | 127                                  |   | 542 |   | 403 |   |
| Germany           |   | 477                                   |   | 343                                  |   | 1,152 |   | 863 |   |
|              |   | 1,234                                 |   | 1,027                                |   | 3,561 |   | 2,741 |   |
|              |   |                                  |   |                                 |   |   |   |   |   |
| Total Net Revenue |   | $                                     | 5,790  |                                 | $      | 5,290 |   | $ | 16,561 |   | $ | 14,951 |   |

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Form 10-QSB contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Suchstatements include our expectations, hopes and intentions regarding the future,including but not limited to statements regarding (i) our strategy, (ii) ourresearch and development plans, (iii) our expectation about selling andmarketing costs and general and administrative costs, (iv) the sufficiency ofour capital resources, (v) our capital expenditures, (vi) our financing plan,(vii) our revenue and cost of license and service revenue, (viii) our operationsand operating results, (ix) our competitive position, (x) our expectation aboutcertain markets, and (xi) our expectation about future expenses.Forward-looking statements involve certain risks and uncertainties, and actualresults may differ materially from those discussed in any such statement.Factors that could cause actual results to differ materially from suchforward-looking statements include the risks described in the “Risk Factors”section and elsewhere in this Form 10-QSB. All forward-looking statementsin this document are made as of the date hereof, based on information availableto us as of the date hereof, and we assume no obligation to update anyforward-looking statement.

 

This discussion and analysis of the financial statements and results ofoperations should be read in conjunction with our unaudited condensedconsolidated financial statements, including the related notes thereto,contained elsewhere in this Form 10-QSB.

 

**OVERVIEW**

 

We were incorporated in the State of Delaware in August 1987. Wewere originally incorporated as Blyth Holdings, Inc., and our name waschanged to Omnis Technology Corporation in September 1997. EffectiveDecember 1, 2000, we completed the acquisition of PickAx, Inc., aDelaware corporation (“PickAx”).  Concurrentwith the acquisition, we changed our name to Raining Data Corporation.

 

Our principal business is the design, development, sale and support ofsoftware infrastructure.  Our softwaremay be classified into two main categories: (1) Pick-based database technology,which includes Multi-dimensional Database Management Systems (“MDMS”), XML DataManagement Servers (“XDMS”) and the Pick Data Provider for the Microsoft .NETdevelopment environment (“PDP”); and (2) Rapid Application Development softwaretools (“RAD”).

 

Many of our products are based on the Pick Universal Data Model (“PickUDM”), which we created, and are capable of handling data from manysources.  The Pick UDM is a corecomponent across the MDMS, XDMS and PDP product lines.

 

Our MDMS products include a comprehensive set of Pick UDM basedsoftware development tools that allow the user to write, compile and runapplication programs.  Our MDMS productsare based on the multi-dimensional data model and are designed to operate inenvironments such as Windows, Unix and Linux.

 

Our first XDMS product, TigerLogic XDMS (“TigerLogic”) version 1.1, wasreleased in May 2003.  TigerLogic XDMSis a high-performance information infrastructure software that provides bothscalability, XA-compliant transactional integrity and fine-grain searchcapabilities typically associated with enterprise databases, as well as thedynamic extensibility, n-tier hierarchies and ease of use and deploymentusually found in data repositories and file systems.

 

In September 2003, we released the production version of the Pick DataProvider (“PDP”) for .NET.  This was ourfirst release in the PDP product line which is designed to support theMicrosoft NET Framework.

 

Our RAD products support the full life cycle of software applicationdevelopment and are designed for rapid prototyping, development and deploymentof graphical user interface (“GUI”) client/server and web applications. The RADproducts are object-oriented and component-based, providing the ability todeploy applications on operating system platforms such as Windows, Unix andLinux, as well as database environments such as Oracle, DB2, Sybase, MicrosoftSQL Server and other Open Data Base Connectivity (“ODBC”) compatible databasemanagement systems.  In July 2003, we announcedthe release of our Omnis Studio for SAP product.  Omnis Studio for SAP provides a rapid application developmentenvironment allowing fast provision of applications accessing SAP data.

 

We have devoted significant resources to theresearch and development of products and technology.  We believe that our future success will depend largely on astrong development effort with respect to both our existing and newproducts.  These

 

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development efforts have resulted in updatesand upgrades to existing MDMS and RAD products and the launch of new productsincluding the XDMS and PDP product lines. New product releases in all of our product lines arecurrently in progress.  We expect to continue our research anddevelopment efforts in all product lines for the foreseeable future.  We intend for these efforts to improve ouroperating results and increase cash flow. However, such efforts may not resultin additional new products or revenue, and we can make no assurances that therecently announced products or future products will be successful.

 

In the United States, we sell our products through establisheddistribution channels consisting of system integrators, specialized verticalapplication software developers and consulting organizations. We also sell ourproducts directly through our sales personnel to large end user organizations.

 

Outside the United States, wemaintain direct sales offices in the United Kingdom, France and Germany. Inaddition, we have distributor relationships in over 25 countries. Approximately30% and 29% of our revenue came from sales through our offices located outsidethe United States for the three-month periods ended December 31, 2003 and 2002,respectively, and approximately 27% and 29% of our revenue came from salesthrough our offices located outside the United States for the nine-monthperiods ended December 31, 2003 and 2002, respectively.

 

We sell our products in U.S. Dollars in North America, British PoundsSterling in the United Kingdom and Euros in Germany and France. Because werecognize revenue and expense in these various currencies but report ourfinancial results in U.S. Dollars, changes in exchange rates may causevariances in our period-to-period revenue and results of operations in futureperiods. Foreign exchange gains and losses have not been material to ourperformance to date.

 

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

 

Our customers may be classified into two general categories:

 

•                                          IndependentSoftware Vendors and Software Developers. The majority of our revenue isderived from independent software vendors, which typically write their ownvertical application software that they sell as a complete package to end usercustomers. This category includes value added resellers (“VARs”) andsoftware-consulting companies that provide contract programming services totheir customers.

 

•                                          CorporateInformation Technology (“IT”) Departments. We also derive a significant portionof our revenue from sales to IT departments of large companies.

 

For the three and nine-month periods ended December 31, 2003 and 2002,no single customer accounted for more than 10% of our revenue.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of our condensed consolidated financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses, and the disclosure ofcontingent liabilities.  On an on-goingbasis, we evaluate our estimates, including those related to revenuerecognition and accounting for intangible assets and goodwill. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom 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 consolidatedfinancial statements:

 

REVENUE RECOGNITION. We recognize and defer revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2,“Software Revenue Recognition” (“SOP 97-2”), as amended.  Under the residual method, revenue isrecognized in a multiple element arrangement when company-specific objectiveevidence of fair value exists for all of the undelivered elements in thearrangement, but does not exist for one or more of the delivered elements inthe arrangement. At the outset of the arrangement with the customer, we deferrevenue for the fair value of our undelivered elements (e.g., maintenance) andrecognize revenue for the remainder of the arrangement fee attributable to theelements initially delivered in the arrangement (e.g., software license) whenthe basic criteria in SOP 97-2 have been met.

 

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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 deferrevenue recognition until the arrangement fee becomes due and payable.

 

Service revenues relate primarily to maintenance, consulting services,and training.  Maintenance revenue isrecognized ratably over the term of the maintenance contract, typically12 months. Consulting and training revenue is recognized as the servicesare performed and is usually calculated on a time and materials basis. Suchservices primarily consist of implementation services related to theinstallation of our products and do not include significant customization to ordevelopment of the underlying software code. We do not have price protectionprograms, conditional acceptance agreements or warranty programs, and sales ofour products are made without right of return.

 

When applicable, we record revenue on certain products, such as the PDPproduct, on a net amount retained basis in accordance with Emerging Issues TaskForce Issue No. 99-19, “Reporting Revenue Gross as a Principal verses Net as anAgent.”

 

INTANGIBLE ASSETS AND GOODWILL.  We assess the impairment of identifiable intangibles, long-lived assetsand goodwill whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors we consider to be importantwhich could trigger an impairment review include the following:

 

•                                          Significant underperformance relative to expectedhistorical or projected future operating results;

 

•                                          Timing of our revenue, significant changes in themanner of use of the acquired assets or the strategy for the overall business;

 

•                                          Significant negative industry or economic trends;

 

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

 

•                                          Our market capitalization relative to net bookvalue.

 

When we determine that the carrying value ofintangibles and other long-lived assets may not be recoverable based upon theexistence of one or more of the above indicators of impairment, and thecarrying value of the asset cannot be recovered from projected undiscounted cashflows, we measure any impairment based on a projected discounted cash flowmethod using a discount rate determined by our management to be commensuratewith the risk inherent in the current business model. Significant managementjudgment is required in determining whether an indicator of impairment existsand in projecting cash flows.

 

Prior to the adoption of SFASNo. 142, we assessed impairment of goodwill in the same manner as otherintangibles and long-lived assets as described above.  Following the adoption of SFAS No. 142, we updated our policy forassessing and determining impairment of goodwill.  The SFAS No. 142 goodwill impairment model is a two-step process.The first step requires identification of potential impairment by comparing thefair value of a reporting unit with its net book value (or carrying amount),including goodwill. If the fair value exceeds the carrying amount, goodwill ofthe reporting unit is considered not impaired and the second step of theimpairment test is unnecessary. If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test isperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test compares the implied fair value of the reportingunit’s goodwill with the carrying amount of that goodwill. If the carryingamount of the reporting unit’s goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recognized in an amount equal to that excess.The implied fair value of goodwill is determined in the same manner as theamount of goodwill recognized in a business combination. That is, the fairvalue of the reporting unit is allocated to all of the assets and liabilitiesof that unit (including any unrecognized intangible assets) as if the reportingunit had been acquired in a business combination and the fair value of thereporting unit was the purchase price paid to acquire the reporting unit.

 

Determining the fair value of areporting unit under the first step of the goodwill impairment test anddetermining the fair value of individual assets and liabilities of a reportingunit (including unrecognized intangible assets) under the second step of thegoodwill impairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions.

 

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These estimates and assumptionscould have a significant impact on whether or not an impairment charge isrecognized and the magnitude of any such charge. Estimates of fair value areprimarily determined using discounted cash flows and are based on our bestestimate of future revenue and operating costs and general market conditions.These estimates are subject to review and approval by management. This approachuses significant assumptions, including projected future cash flows (includingtiming), the discount rate reflecting the risk inherent in future cash flows,and a terminal growth rate.

 

**RESULTSOF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002**

 

**REVENUE**

 

NET REVENUE. Our revenue isderived principally from two sources: fees from software licensing and fees forservices, including maintenance, consulting, training and technical support.Total net revenue increased 9% to $5.8 million for the three months endedDecember 31, 2003 from $5.3 million for the same three-month period in theprior fiscal year and increased 11% for the nine months ended December 31, 2003to $16.6 million from $15.0 million for the same nine-month period in the priorfiscal year.  For the three months endedDecember 31, 2003, license revenue increased 10% to $2.7 million from$2.5 million for the same three-month period in the prior fiscal year,while services revenue increased 9% to $3.1 million from $2.8 millionfor the same three-month period in the prior fiscal year.  For the nine months ended December 31, 2003,license revenue increased ­6% to $7.3 million from $6.9 million forthe same nine-month period in the prior fiscal year, while services revenueincreased 15% to $9.3 million from $8.1 million for the samenine-month period in the prior fiscal year.

 

We view the MDMS and RADmarkets in which we operate to be relatively stable and consistent from periodto period and anticipate that our revenue on an annual basis from thoseproducts will remain stable for the foreseeable future. Fluctuations in revenuebetween quarters or year-to-year are primarily the result of changes in the mixof software licensing and service fees as well as the timing of orders andcustomer order patterns. We do not view the changes in year-to-year revenue forthe three and nine-month periods ended December 31, 2003 and 2002 to berepresentative of market trends.  In thelonger term, we expect that the MDMS and RAD markets will eventually contractas customers adopt newer technologies and, therefore, the revenue generatedfrom sales of our MDMS and RAD products is expected to decrease.

 

In addition, we can make noassurances as to customer acceptance of any new products or services, or theability of the current or any new products and services to generate revenue.While we are committed to research and development efforts that are designed toallow us to penetrate new markets and generate new sources of revenue, such effortsmay not result in additional products, services or revenue.

 

**COST OF REVENUE**

 

COST OF LICENSE REVENUE. Cost of license revenue is comprised of directcosts associated with software license sales including software packaging,documentation, physical media costs and royalties.  Total cost of license revenue for the three months ended December31, 2003 remained relatively consistent with the three months ended December31, 2002.  As a percentage of licenserevenue, cost of license revenue increased to approximately 4% for the threemonths ended December 31, 2003 from 2% of license revenue for the samethree-month period in the prior fiscal year. For the nine months ended December 31, 2003, cost of license revenueincreased 82% to $0.3 million from $0.2 million for the nine months endedDecember 31, 2002.  As a percentage oflicense revenue, cost of license revenue increased to approximately 4% for thenine months ended December 31, 2003 from 3% of license revenue for the samenine-month period in the prior fiscal year. This increase, although relatively small in absolute dollars, waslargely due to the composition of products sold during the three and nine-monthperiods ended December 31, 2003.  Weanticipate that the cost of license revenue, as a percentage of license revenueand in absolute dollars, will remain relatively stable in future periods.

 

COST OF SERVICE REVENUE. Cost of service revenue includes consulting,technical support and training, all of which consist primarily of personnelrelated costs.  Total cost of servicerevenue increased 18% to $0.5 million for the three months ended December 31,2003 from $0.4 million for the same three-month period in the prior fiscalyear.  As a percentage of servicerevenue, cost of service revenue increased to approximately 17% for the threemonths ended December 31, 2003 from 16% of license revenue for the samethree-month period in the prior fiscal year. For the nine months ended December 31, 2003, cost of service revenueincreased 17% to $1.6 million from $1.4 million for the nine months endedDecember 31, 2002.  As a percentage ofservice revenue, cost of service revenue for the nine months ended December 31,2003 remained relatively consistent with the prior nine months ended December31, 2002.  We anticipate that the costof service revenue as a percentage of service revenue and in absolute dollarswill remain relatively stable in future periods.

 

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**OPERATING EXPENSES**

 

SELLING AND MARKETING. Selling and marketing expense consists primarilyof salaries, benefits, advertising, tradeshows, travel and overhead costs forour sales and marketing personnel. Selling and marketing expense increased 55%to $1.6 million for the three months ended December 31, 2003 from$1.0 million for the three months ended December 31, 2002.  Sales and marketing expense increased to 27%of total revenue for the three months ended December 31, 2003 from 19% of totalrevenue for the same three-month period in the prior fiscal year.  Selling and marketing expense increased 40%to $4.3 million for the nine months ended December 31, 2003 from$3.1 million for the nine months ended December 31, 2002. Selling andmarketing expense increased to 26% of total revenue for the nine months endedDecember 31, 2003 from 21% of total revenue for the same nine-month period inthe prior fiscal year.  The increase inselling and marketing expense was primarily due to increased marketing effortsand an increase in staffing in connection with the release of the XDMS and PDPproducts. We anticipate that selling and marketing costs related to the XDMSand PDP products will continue to increase as we develop the sales channel forthese new products and if customer acceptance of these products increases.  In addition, if our continued research anddevelopment efforts are successful, including with respect to our XDMS and PDPproducts, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products in future periods.

 

RESEARCH AND DEVELOPMENT. Research and development expense consistsprimarily of salaries and other personnel-related expenses for engineeringpersonnel, expensible hardware and software costs, overhead costs and costs ofcontractors. Research and development expense increased 15% to$1.8 million for the three months ended December 31, 2003 from$1.6 million for the three months ended December 31, 2002. Research anddevelopment expense increased to 31% of total revenue for the three monthsended December 31, 2003 from 29% of total revenue for the same three-monthperiod in the prior fiscal year. Research and development expense increased 32% to $5.6 million forthe nine months ended December 31, 2003 from $4.3 million for the ninemonths ended December 31, 2002. Research and development expense increased to34% of total revenue for the nine months ended December 31, 2003 from 28% oftotal revenue for the same nine-month period in the prior fiscal year.  We have seen an increase in our spendingrelated to our development efforts as our new products reached productionrelease and as we refine and add certain features and functionality to theseproducts.  In addition, we continue toincur costs related to the ongoing development and enhancement of all of ourproduct lines.  We are committed to ourresearch and development efforts and expect research and development expense inabsolute dollars to remain stable at the current quarter levels in futureperiods or increase if liquidity improves and we believe that additionalspending is warranted. Such efforts may not result in additional new productsand any new products, including the announced XDMS and PDP products, may notgenerate sufficient revenue, if any, to offset the research and developmentexpense.

 

GENERAL AND ADMINISTRATIVE. General and administrative expense consistsprimarily of costs associated with our finance, human resources, legal andother administrative functions. These costs consist principally of salaries andother personnel-related expenses, professional fees, depreciation and overheadcosts. General and administrative expense decreased 20% to $1.0 millionfor the three months ended December 31, 2003 from $1.3 million for thesame three-month period in the prior fiscal year. General and administrativeexpense decreased to 18% of total revenue for the three months ended December31, 2003 from 24% of total revenue for the three months ended December 31,2002.  General and administrative expensedecreased 30% to $2.9 million for the nine months ended December 31, 2003from $4.2 million for the same nine-month period in the prior fiscal year.General and administrative expense decreased to 18% of total revenue for thenine months ended December 31, 2003 from 28% of total revenue for the ninemonths ended December 31, 2002.  Thisdecrease in general and administrative spending is a result of continued costcontrols. We are focused on the continued reduction in general overhead costsand intend to use any savings from such reduction for our ongoing research anddevelopment and sales and marketing efforts. During the latter portion of fiscal year 2002 and into fiscal year 2003,we underwent significant changes in our management, including the hiring of anew chief executive officer and chief financial officer. Since that time, wehave been focused on streamlining the operations, including implementingstandardized policies and procedures throughout the organization with increasedoversight from management and necessary head count reductions. Additionally, wesettled various outstanding legal matters. This resulted in increased general and administrative costs in theperiods incurred.  The Company doesanticipate increased expenditures in future periods for professional fees andother items related to the necessary review, testing and evaluation of theCompany’s internal control environment as required by the Sarbanes-Oxley Actsection 404.  The amount of incrementalcosts cannot be determined at this time. With the exception of these incremental costs, we anticipate thatgeneral and administrative costs, in absolute dollars, will remain relativelystable or slightly decrease in future periods now that cost reduction effortshave been implemented and all material litigation has been settled.

 

STOCK-BASED COMPENSATION. Stock-based compensation expense for thethree months ended December 31, 2003 remained relatively consistent with thethree months ended December 31, 2002. Stock-based compensation expense decreased to 1% of total revenue for thethree months ended December 31, 2003 from 2% of total revenue for the samethree-month period in the prior fiscal year. Stock-based compensation expense decreased 52% to $0.2 million in thenine months ended December 31, 2003 from $0.4 million for the nine months endedDecember 31, 2002. Stock-based compensation expense decreased to 1% of totalrevenue for the nine months ended December 31, 2003 from 2% of total revenuefor the same nine-month period in the prior fiscal year.  The decrease in stock-based compensation isattributable primarily to cancellations of options for terminated employees,options reaching the end of their vesting periods, no new options being

 

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granted with an exercise price below fair value at the date of grant,and fewer options granted to non-employees. We do not anticipate anysignificant changes in stock-based compensation expense in future periods.

 

GOODWILL AND AMORTIZATION OF INTANGIBLE ASSETS. Amortization ofidentifiable intangible assets of $0.7 million was recorded for each of thethree-month periods ended December 31, 2003 and 2002.  Amortization of identifiable intangible assets of $2.0 millionwas recorded for each of the nine-month periods ended December 31, 2003 and2002.  Under SFAS 142, goodwill isnot amortized, but is tested at least annually for impairment. We continue toamortize identifiable intangible assets in accordance with their determineduseful life, estimated at four years.

 

OTHER INCOME (EXPENSE). Other expense consists primarily of netinterest expense and, to a much lesser extent, gains and losses on foreigncurrency transactions. Other expense decreased to $0.3 million in thethree months ended December 31, 2003 from $0.9 million in the same three-monthperiod in the prior fiscal year.  Otherexpense decreased to $0.9 million in the nine months ended December 31, 2003from $2.9 million in the same nine-month period in the prior fiscal year.  This decrease was primarily the result ofthe reduction of the interest rate as a result of the restructuring of our debtin January 2003.  We expect other income(expense) to remain stable in future periods.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

In connection with the acquisition of PickAx, we assumed a Secured PromissoryNote issued to Astoria Capital Partners, L.P. (“Astoria”) dated November 30,2000 in the amount of $18.5 million.  InJanuary 2003, we entered into a Note Exchange Agreement (the “Exchange Agreement”) with Astoria toreplace the existing Secured Promissory Note, as amended, with a ConvertibleSubordinated Note.  Under the terms ofthe Exchange Agreement, the Secured Promissory Note was exchanged and replacedwith a Convertible Subordinated Note having a principal amount of $22.1million, which principal amount was equal to the outstanding principal andaccrued interest payable on the Secured Promissory Note as of the date of theExchange Agreement.  The ConvertibleSubordinated Note is convertible into common stock at any time, at the optionof Astoria, at a price of $5.00 per share. The Convertible Subordinated Notematures May 30, 2008, extending the May 30, 2003 maturity date of the SecuredPromissory Note. The Company may not redeem the Convertible Subordinated Noteuntil January 2005.   The interest rateof the Convertible Subordinated Note is 5% per annum as compared to an interestrate of 10% per annum under the Secured Promissory Note.  The interest is payable quarterly at ouroption in cash or through increases to the outstanding principal of theConvertible Subordinated Note. For the periods ended March 31, 2003,June 30, 2003, September 30, 2003 and December 31, 2003, we issued payment inkind (“PIK”) notes to Astoria for the accrued interest due in the aggregateamount of $1,033,465.  For theforeseeable future, we expect to issue additional PIK notes to Astoria, in lieuof cash payments for the interest due under the Convertible SubordinatedNote.  If the Convertible SubordinatedNote or the PIK notes are converted into common stock, our stockholders mayexperience substantial dilution.  Unlikethe Secured Promissory Note, the Convertible Subordinated Note is not securedby our assets.

 

If our future financial performance improves, we may seek to takeadvantage of opportunities in the equity and capital markets to raiseadditional funds for operating needs or to pay down our debt to Astoria.

 

In addition to holding the Convertible Subordinated Note, Astoria is amajor stockholder of ours, holding all of our preferred stock and a majority ofour outstanding common stock. Richard W. Koe, a member of our Board ofDirectors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria.  Carlton H. Baab, our President and Chief Executive Officer,served as a Managing Principal of Astoria Capital Management until taking aformal leave of absence to join us in August 2001.  Gerald F. Chew, a member of our Board ofDirectors, is the cousin of Mr. Koe.

 

At December 31, 2003, we had $5.7 million in cash and cashequivalents.  We believe that our cash,cash equivalents and cash flow from operating activities will be sufficient tomeet our operating and capital expenditure requirements through the foreseeablefuture. We are committed to research and development efforts that are intendedto allow us to penetrate new markets and generate new sources of revenue andimprove operating results.  However, ourresearch and development efforts have required, and will continue to require,cash outlays without the immediate or short-term receipt of related revenue.Our ability to service our long-term debt and meet our expenditure requirementsis dependent upon our future financial performance, which will be affected by,among other things, prevailing economic conditions, our ability to penetratenew markets and attract new customers, market acceptance of our new andexisting products and services, the success of research and development effortsand other factors beyond our control.

 

In February 2004, the Company entered into a credit facility whichprovides the Company with the ability to borrow up to $1.5 million at an annualinterest rate of Prime rate plus 1.0% provided that the annual interest rateshall never be less than 5%.  The creditfacility is collateralized by the Company’s assets and expires in February2006.  The credit facility contains

 

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financial and reporting covenants that require the Company to maintaincertain financial ratios only when the Company has outstanding creditextensions.

 

We had no material commitments for capital expenditures at December 31,2003.

 

Net cash provided by operating activities was $0.4 million for the ninemonths ended December 31, 2003 and net cash used for operating activities was$1.6 million for the nine months ended December 31, 2002.

 

Our earnings before interest, taxes, depreciation and amortization(EBITDA) was $0.9 million, or 15% of total net revenue, and $1.0 million,or 19% of total net revenue, for the three-month periods ended December 31,2003 and 2002, respectively.  For thenine months ended December 31, 2003, EBITDA was $2.0 million, or 12% of netrevenue, as compared to $2.2 million, or 15% of net revenue, for the same nine-monthperiod in the prior fiscal year.  Thereduction in EBITDA for the three months ended December 31, 2003 was a resultof increased development and marketing costs related to our new productinitiatives.  EBITDA is defined as netloss with an add-back for depreciation, goodwill and non-goodwill amortization,non-cash stock-based compensation expense, interest expense and otherincome.  The following table reconcilesEBITDA to the reported net loss:

 

**RAINING DATA CORPORATION AND SUBSIDIARIESRECONCILIATION OF EBITDA TO NET LOSS**

**(Unaudited)**

 
|                                       |   | **For the  three months  ended December 31,** |   | **For the  nine months********ended  December 31,** |   |
|--------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------------|--------|
| **In $000’s**                         |   | **2003**                                      |   | **2002**                                            |   | **2003** |   | **2002** |   |
|                                       |   |                                          |   |                                                |   |   |   |   |   |
| Reported net loss                          |   | $                                             | (203   | )                                                   | $      | (635 | ) | $ | (1,238 | ) | $ | (3,290 | ) |
| Depreciation and non-goodwill amortization |   | 84                                            |   | 75                                                  |   | 263 |   | 280 |   |
| Stock-based compensation                   |   | 48                                            |   | 89                                                  |   | 171 |   | 354 |   |
| Intangible amortization                    |   | 650                                           |   | 650                                                 |   | 1,950 |   | 1,950 |   |
| Interest expense-net                       |   | 307                                           |   | 853                                                 |   | 908 |   | 2,920 |   |
| Other income-net                           |   | (10                                           | )      | (5                                                  | )      | (21 | ) | (44 | ) |
|                                       |   |                                          |   |                                                |   |   |   |   |   |
| EBITDA                                     |   | $                                             | 876    |                                                | $      | 1,027 |   | $ | 2,033 |   | $ | 2,170 |   |

 

EBITDA does not represent funds available for management’sdiscretionary use and is not intended to represent cash flow from operations.EBITDA should not be construed as a substitute for net loss or as a bettermeasure of liquidity than cash flow from operating activities, which aredetermined in accordance with generally accepted accounting principles(“GAAP”). EBITDA excludes components that are significant in understanding andassessing our results of operations and cash flows. In addition, EBITDA is nota term defined by GAAP and as a result our measure of EBITDA might not becomparable to similarly titled measures used by other companies.

 

However, we believe that EBITDA is relevant and useful information,which is often reported and widely used by analysts, investors and otherinterested parties in our industry. Accordingly, we are disclosing thisinformation to permit a more comprehensive analysis of our operatingperformance, to provide an additional measure of performance and liquidity andto provide additional information with respect to our ability to meet futuredebt service, capital expenditure and working capital requirements. See theUnaudited Condensed Consolidated Financial Statements and notes theretocontained elsewhere in this report for more information.

 

Our EBITDA financial information is also comparable to net cashprovided by (used for) operating activities. The table below reconciles EBITDA to the GAAP disclosure of net cashprovided by (used for) operating activities:

 

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**RAINING DATACORPORATION AND SUBSIDIARIESRECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USED FOR) OPERATINGACTIVITIES(Unaudited)**
|                                                 |   | **For the  nine months********ended  December 31,** |   |
|------------------------------------------------------|--------|-----------------------------------------------------|--------|
| **In $000’s**                                   |   | **2003**                                            |   | **2002** | ** ** |
|                                                 |   |                                                |   |   |   |
| Net cash provided by (used for) operating activities |   | $                                                   | 446    |   | $ | (1,625 | ) |
|                                                 |   |                                                |   |   |   |
| Interest expense, net                                |   | 908                                                 |   | 2,920 |   |
| Other income, net                                    |   | (21                                                 | )      | (44 | ) |
| Change in accounts receivable                        |   | 11                                                  |   | 115 |   |
| Change in other assets                               |   | 234                                                 |   | 485 |   |
| Change in accounts payable and accrued liabilities   |   | 85                                                  |   | 1,746 |   |
| Change in deferred revenue                           |   | 432                                                 |   | 58 |   |
| Note discount amortization                           |   | (62                                                 | )      | (1,485 | ) |
|                                                 |   |                                                |   |   |   |
| EBITDA                                               |   | $                                                   | 2,033  |   | $ | 2,170 |   |

 

**RISK FACTORS**

 

We operate in a rapidly changing environment that involves numerousrisks and uncertainties. The following section lists some, but not all, ofthese risks and uncertainties that may have a material adverse effect on ourbusiness, financial condition and results of operation.

 

**IF WE DO NOT DEVELOP NEW PRODUCTS AND ENHANCEEXISTING PRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND INDUSTRYSTANDARDS, OUR REVENUE MAY DECLINE.**

 

We have devoted significant resources to the research and developmentof products and technology. We believe that our future success will depend in largepart on a strong research and development effort with respect to both ourexisting and new products. Since the start of fiscal year 2002, we have changedthe mix of our research and development efforts to include technologies,markets and products outside of our historical market, specifically XML-basedinfrastructure products.  In May 2003,we announced the initial production release of our first XDMS product whichresulted from these development efforts. In September 2003, we released the production version of the Pick DataProvider (“PDP”) for .NET.  This was ourfirst release in the PDP product line which is designed to support theMicrosoft NET Framework.  While we intendfor these efforts to improve our operating results and increase cash flow, suchefforts may not result in new products or revenue, and any new products that doresult may not be successful. The development of new or enhanced softwareproducts is a complex and uncertain process requiring high levels ofinnovation, as well as accurate anticipation of customer and technical trends.In developing new products and services, we may fail to develop and marketproducts that respond to technological changes or evolving industry standardsin a timely or cost-effective manner, or experience difficulties that coulddelay or prevent the successful development, introduction and marketing ofthese new products. The development and introduction of new or enhancedproducts also requires us to manage the transition from older products in orderto minimize disruptions in customer ordering patterns and to ensure thatadequate supplies of new products can be delivered to meet customer demand.Failure to develop and introduce new products, or enhancements to existingproducts, in a timely manner in response to changing market conditions orcustomer requirements, or lack of customer acceptance of our products, willmaterially and adversely affect our business, results of operations andfinancial condition.

 

**THE CONCENTRATION OF OUR STOCK OWNERSHIP ANDTHE DEBT OWED TO ASTORIA GIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OURBUSINESS.**

 

As of December 31, 2003, Astoria and Rockport Group, LP (“Rockport”)together beneficially owned approximately 72% of our outstanding common stock.As of such date, Astoria also owned all of our outstanding preferred stock. Inaddition, as of December 31, 2003, the Convertible Subordinated Note issued toAstoria had a balance of approximately $23.2 million in

 

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principal and accrued interest maturing May 30, 2008.  Richard W. Koe, a member of our Board ofDirectors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria.  Carlton H. Baab, our President and Chief Executive Officer,served as a Managing Principal of Astoria Capital Management until taking aformal leave of absence to join us in August 2001.  Mr. Wagner, a member of our Board ofDirectors, is the Managing Director of Rockport.  This concentration of stock ownership, together with theoutstanding debt, would allow Astoria, acting alone, or Rockport and Astoria,acting together, to block any actions that require approval of ourstockholders, including the election of members to the Board of Directors andthe approval of significant corporate transactions. Also, Astoria, actingalone, or Rockport and Astoria, acting together, could approve certaincorporate actions without the consent of the other stockholders. Moreover, thisconcentration of ownership may delay or prevent a change in control.

 

**BECAUSE THE MARKET FOR OUR MDMS AND RADPRODUCTS IS RELATIVELY STABLE, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAINOUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

 

We believe that the markets for our MDMS and RAD products arerelatively stable and consistent from period to period. As a result, to growour revenue in these markets, we will need to maintain our sales to existingcustomers and to generate sales to new customers, including corporate developmentteams, commercial application developers, system integrators, independentsoftware vendors and independent consultants. If we fail to attract newcustomers, if we lose our customers to competitors, or if the MDMS or RADmarkets decline, our revenue may be adversely affected. In the longer term, itis expected that the MDMS and RAD markets will eventually contract as customersadopt newer technologies.

 

**IF WE FAIL TO INCREASE REVENUE OR IMPROVE OUROPERATING RESULTS, WE MAY NOT BE ABLE TO REPAY OUR DEBT TO ASTORIA.**

 

We believe that our cash, cash equivalents and cash flow from operatingactivities will be sufficient to meet our operating and capital expenditurerequirements at least through the foreseeable future. Our ability to meetour expenditures and service our debt obligations is dependent uponour future financial performance, which will be affected by, among otherthings, prevailing economic conditions, our ability to penetrate new marketsand attract new customers, market acceptance of our new and existing productsand services, the success of research and development efforts and other factorsbeyond our control.  As described above, in January 2003, we entered intothe ExchangeAgreement with Astoria to replace the existing Secured Promissory Note, whichwas due May 2003, with a Convertible Subordinated Note, which is due andpayable in May 2008.  The ConvertibleSubordinated Note bears interest at 5% per annum and is convertible into commonstock by Astoria at any time at a price of $5.00 per share. If we are unable topenetrate new markets, generate new sources of revenue or otherwise improve ouroperating results, we may be unable to repay our debt to Astoria or toaccess opportunities in the equity and capital markets to raise additional fundsfor operating needs.

 

**IF THE REGISTRATION RIGHTS HELD BY ASTORIAAND OTHER SECURITIES HOLDERS ARE EXERCISED, OR THESE SECURITIES HOLDERS SELL ASUBSTANTIAL AMOUNT OF RESTRICTED SECURITIES IN THE OPEN MARKET, OUR STOCK PRICEMAY DECLINE.**

 

As of December 31, 2003, we had 18,199,348 outstanding shares of commonstock, of which approximately 9,700,000 shares were restricted securities heldby Astoria and other holders. Restricted securities may be sold in the publicmarket only if they are registered or if they qualify for an exemption fromregistration promulgated under the Securities Act of 1933, as amended. Atpresent, all of our outstanding restricted securities are either entitled toregistration rights or eligible for public sale under Rule 144, subject tovolume limitations and other requirements of Rule 144.   If Astoria or other holders decide toexercise their demand registration rights, we would incur costs and expensesassociated with the registration of securities.

 

Furthermore, sales of a substantial number of shares by Astoria orother securities holders in the public market, or the perception that thosesales may occur, could cause the market price of our common stock to decline.In addition, if we register shares of our common stock in connection with apublic offering of securities, we may be required to include shares ofrestricted securities in the registration, which may have an adverse effect onour ability to raise capital.

 

**OUR FAILURE TO COMPETE EFFECTIVELY MAY HAVEAN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

 

The market for our products is highly competitive, diverse and subjectto rapid change. Our products and services compete on the basis of thefollowing key characteristics: performance; inter-operability; scalability;functionality; reliability; pricing; post sale customer support; quality;compliance with industry standards; and overall total cost of ownership.

 

We currently face competition from a number of sources, includingseveral large vendors that develop and market databases, development tools, anddecision support products and consulting services. Our MDMS products competewith products developed by companies such as Oracle, Microsoft, IBM and Sybase.Our Omnis line of RAD developer products currently encounters competition fromseveral direct competitors and competing development environments includingMicrosoft

 

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(Visual Studio and Visual Studio .NET) and JAVA.  Competition is developing in the XML marketfor which our XDMS products are intended. Companies who do or are expected to compete in this market includeOracle, IBM, Microsoft, Sybase and BEA, as well as a number of smallercompanies. Our new PDP products, which are intended to support the Microsoft..NET Framework, are subject to significant competition, primarily from IBM,Microsoft and Oracle. 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 have significantly more financial, technical,marketing and other resources than we do. As a result, these competitors may beable to respond more quickly to new or emerging technologies, evolving markets,changes in customer requirements, and may devote greater resources to thedevelopment, promotion and sale of their products.  While we currently believe that our products and services competefavorably in the marketplace, our products and services could fall behindmarketplace demands at any time. If we fail to address the competitivechallenges, our business would suffer materially.

 

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

 

In the past, we have experienced significant quarterly fluctuations inour operating results. We expect to continue to spend substantial amounts ofmoney in the area of research and development, sales and marketing andoperations in order to promote new product development and introduction. Becausethe expenses associated with these activities are relatively fixed in theshort-term, we may be unable to timely adjust spending to offset any unexpectedshortfall in revenue growth or any decrease in revenue levels. Operatingresults may also fluctuate due to factors such as:

 

•                                          thesize and timing of customer orders;

 

•                                          changesin pricing policies by us or our competitors;

 

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

 

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

 

•                                          thedemand for our products;

 

•                                          non-renewalof customer support agreements;

 

•                                          softwaredefects and other product quality problems; and

 

•                                          personnelchanges.

 

We operate without a significant backlog of orders. As a result, thequarterly sales and operating results in any given quarter are dependent, inlarge part, upon the volume and timing of orders booked and products shippedduring that quarter. Accordingly, we may be unable to adjust spending in atimely manner to compensate for any unanticipated decrease in orders, sales orshipments. Therefore, any decline in demand for our products and services, inrelation to the forecast for any given quarter, could materially and negativelyimpact the results of our operations. As a result, we expect our quarterlyoperating results to continue to fluctuate, which may cause our stock price tobe volatile. In addition, we believe that period-to-period comparisons of ouroperating results should not be relied upon as indications of futureperformance.

 

**THE SUCCESS OF OUR BUSINESS DEPENDS IN PARTUPON OUR ABILITY TO RECRUIT, INTEGRATE AND RETAIN KEY PERSONNEL AND MANAGEMENT.**

 

Many of the our executive officers joined us subsequent to the acquisitionof PickAx, including our President and Chief Executive Officer, Carlton Baab,who joined us in August 2001. Additional changes in management haveoccurred following Mr. Baab’s appointment, including the hiring of BrianBezdek, Chief Financial Officer, Boris Geller, Vice President, MarketDevelopment and Soheil Raissi, Vice President, Product Development andProfessional Services. The executive officers must be able to work efficientlytogether to manage our operations. Furthermore, the loss of one or more ofthese or other executives could adversely affect our business. In addition, webelieve that our future success will depend to a significant extent on ourability to recruit, hire and retain highly skilled management and employeeswith experience in engineering, product management, sales, marketing andcustomer service. Competition for such personnel in the software industry canbe

 

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intense, and there can be no assurance that we will be successful inattracting and retaining such personnel. If we are unable to do so, we mayexperience inadequate levels of staffing to develop and license our productsand perform services for our customers, which could adversely affect ourbusiness.

 

**OUR PRODUCTS HAVE A LONG SALES CYCLE, WHICHCOULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

 

The sales cycle for our MDMS and RAD products typically ranges fromthree to nine months or longer and the sales cycle for our XDMS and PDPproducts is anticipated to be significantly longer since these new products arejust beginning to be adopted by the marketplace.  Our products are typically used by application developers, systemintegrators and value added resellers to develop applications that are criticalto their corporate end user’s business. Because the purchases of our productsare often part of an end user’s larger business process, re-engineeringinitiative, or implementation of client/server or web-based computing, the endusers frequently view the purchase of our products as part of a long-termstrategic decision regarding the management of their workforce-relatedoperations and expenditures. Thus, this sometimes results in end users taking asignificant period of time to assess alternative solutions by competitors or todefer a purchase decision as a result of an unrelated strategic issue beyondour control.   As a result, asignificant period of time may elapse between our research and developmentefforts and recognition of revenue, if any.

 

**OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS,WHICH COULD HARM OUR BUSINESS.**

 

Our enterprise applications software may contain undetected errors orfailures. This includes our XDMS and PDP products, which are at higher riskgiven these products are in the earliest stages of the product life cycle. Thismay result in loss of, or delay in, customer acceptance of our products andcould harm our reputation and our business. Undetected errors or failures incomputer software programs are not uncommon. While we make every effort to thoroughlytest our software, in the event that we experience significant software errors,we could experience delays in release, customer dissatisfaction and lostrevenue. Any of these errors or defects could harm our business.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONALRISKS AND CHALLENGES ASSOCIATED 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.Approximately 30% and 27% of our revenue for the three and nine-month periodsended December 31, 2003, respectively was generated from our internationaloffices. We face several risks inherent in conducting business internationally,including but not limited to the following:

 

•                                          fluctuationsin interest rates or currency exchange rates;

 

•                                          languageand cultural differences;

 

•                                          localand governmental requirements;

 

•                                          difficultiesand costs of staffing and managing international operations;

 

•                                          differencesin intellectual property protections;

 

•                                          difficultiesin collecting accounts receivable and longer collection periods;

 

•                                          seasonalbusiness activities in certain parts of the world;

 

•                                          tradepolicies; and

 

•                                          theimpact of SARS in Asia and in other areas of the world.

 

Any of these factors could harm our international operations and,consequently, affect the international growth or maintenance of our business.These factors or any combination of these factors may adversely affect ourinternational revenue or our overall financial performance.

 

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**THE FAILURE OF OUR PRODUCTS TO CONTINUE TOCONFORM TO INDUSTRY STANDARDS MAY HARM OUR OPERATING RESULTS.**

 

A key factor in our future success will continue to be the ability ofour products to operate and perform well with existing and future leading,industry-standard enterprise software applications intended to be used inconnection with our MDMS, RAD, XDMS and PDP products. Inter-operability mayrequire third party licenses, which may not be available to us on favorableterms or at all. Failure to meet existing or future inter-operability andperformance requirements of industry standard applications in a timely mannercould adversely affect our business. Uncertainties relating to the timing andnature of new product announcements or introductions or modifications of thirdparty software applications could delay our product development, increase ourproduct development expense or cause customers to delay evaluation, purchase,and deployment of our products.

 

**THE INABILITY TO PROTECT OUR INTELLECTUALPROPERTY COULD HARM OUR ABILITY TO COMPETE.**

 

Our ability to compete successfully will depend, in part, on ourability to protect our proprietary technology and operations without infringingupon the rights of others. We may fail to do so. In addition, the laws ofcertain countries in which our products are, or may be, licensed may notprotect our proprietary rights to the same extent as the laws of the UnitedStates. We rely primarily on a combination of trade secret, copyright andtrademark laws and contractual provisions to protect our intellectual propertyand proprietary rights. Our registered trademarks include Raining Data, Pick,D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesigner, and our trademarksor service marks includes TigerLogic among others.  We also have a pending U.S. patent application as ofDecember 31, 2003.  In addition totrademark and copyright protections, we license our products to end users on a“right to use” basis pursuant to a perpetual license agreement that restrictsuse of products to a specified number of users. We generally rely on“shrink-wrap” or “click-wrap” licenses that become effective when a customeropens the package or downloads and installs software on its system. In order toretain exclusive ownership rights to our software and technology, we generallyprovide our software in object code only, with contractual restrictions oncopying, disclosure and transferability. There can be no assurance that theseprotections will be adequate, or that our competitors will not independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.

 

**THIRD PARTIES COULD ASSERT THAT OUR SOFTWAREPRODUCTS AND SERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICHCOULD RESULT IN COSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS, PROHIBITPRODUCT LICENSING OR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS.**

 

There has been a substantial amount of litigation in the softwareindustry regarding intellectual property rights. Third parties may claim thatour current or potential future products and services infringe upon theirintellectual property. We expect that software product developers and providersof software applications will increasingly be subject to infringement claims asthe number of products and competitors in our industry segment grow and thefunctionality of products in different industry segments overlap. Any claims,with or without merit, could be time consuming, result in costly litigation,cause product shipment delays, prohibit product licensing or require us toenter into royalty or licensing agreements. Royalty or licensing agreements, ifrequired, may not be available on terms acceptable to us or at all, which couldseriously harm our business.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

**EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES**

 

The evaluation of our disclosure controls and procedures and internalcontrol over financial reporting included a review of their objectives andprocesses, implementation and effect on the information generated for use inthis report. In the course of this evaluation, we sought to identify anysignificant deficiencies or material weaknesses in our controls and any acts offraud involving personnel who have a significant role in our internal controlover financial reporting, and to confirm that any necessary corrective action,including process improvements, were being undertaken. The overall goals ofthese evaluation activities are to monitor our disclosure controls andprocedures and internal control over financial reporting and to makemodifications as necessary.

 

Our principal executive officer and principal financial officer haveconcluded that our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) are effective, as of the end of the periodcovered by this report, to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

However, a control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Management necessarily applied its judgment inassessing the benefits of controls relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues, if any, within Raining DataCorporation have been detected.

 

**CHANGES IN INTERNAL CONTROLS**

 

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.

 

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**PART II. OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from time to time to claims and suits arising in theordinary course of business.  As ofDecember 31, 2003, we were not a party to any material litigation, claim orsuit.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 
| (a)    | 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 Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Date:  February 11, 2004 | **RAINING DATA CORPORATION**                           |
|------------------------------------|--------------------------------------------------------|
|                               |                                                   |
|                               | */s/ Brian C. Bezdek*                                  |   |
|                               | Brian C. Bezdek                                        |
|                               | *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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