**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**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, 2005**                                                                                                                                                        |
| ** **                                                                                                                                                                                                        | ** ** | ** **                                                                                        |
| **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**

(Exactname of registrant as specified in its charter)

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

 

**25A Technology DriveIrvine, CA 92618**

(Addressof principal executive offices)

 

**(949) 442-4400**

(Registrant’stelephone number)

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.Yes ý  No o

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No ý

 

As of December 31,2005, there were 20,599,003 shares of registrant’s Common Stock, $.10 parvalue, outstanding.

 

Transitional Small BusinessDisclosure 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, 2005 AND MARCH 31,  2005                        |   |   |
|          |   | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — THREE AND NINE MONTHS ENDED  DECEMBER 31, 2005 AND 2004 |   |   |
|          |   | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — NINE MONTHS ENDED  DECEMBER 31, 2005 AND 2004           |   |   |
|          |   | NOTES TO THE  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                            |   |   |
| ITEM 2.       |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                                |   |   |
| ITEM 3.       |   | CONTROLS AND PROCEDURES                                                                                                        |   |   |
| PART II. |   | OTHER INFORMATION                                                                                                              |   |   |
| ITEM 1.       |   | LEGAL PROCEEDINGS                                                                                                              |   |   |
| ITEM 4.       |   | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                           |   |   |
| ITEM 6.       |   | EXHIBITS                                                                                                                       |   |   |

 

2

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**PART I.  FINANCIALINFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                      | ** ** | **December 31,****2005** | ** ** | **March 31,****2005** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**            | ** ** |
| ASSETS                                          | ** ** | ** **                    | ** ** | ** **                 | ** ** |
|                                            |       |                          |       |                       |       |
| Current assets                                  |       |                          |       |                       |       |
| Cash                                            |       | $                             | 9,734      |                       | $          | 10,625 |   |
| Trade accounts receivable-net                   |       | 2,206                         |       | 2,009                      |       |
| Other current assets                            |       | 475                           |       | 403                        |       |
| Total current assets                            |       | 12,415                        |       | 13,037                     |       |
|                                            |       |                          |       |                       |       |
| Property, furniture and equipment-net           |       | 1,056                         |       | 871                        |       |
|                                            |       |                          |       |                       |       |
| Goodwill                                        |       | 27,684                        |       | 27,684                     |       |
| Other assets                                    |       | 129                           |       | 218                        |       |
| Total assets                                    |       | $                             | 41,284     |                       | $          | 41,810 |   |
|                                            |       |                          |       |                       |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY      |       |                          |       |                       |       |
|                                            |       |                          |       |                       |       |
| Current liabilities                             |       |                          |       |                       |       |
| Accounts payable                                |       | $                             | 214        |                       | $          | 542 |   |
| Accrued liabilities                             |       | 2,520                         |       | 2,548                      |       |
| Deferred revenue                                |       | 4,731                         |       | 5,258                      |       |
| Total current liabilities                       |       | 7,465                         |       | 8,348                      |       |
|                                            |       |                          |       |                       |       |
| Long term debt-net of discount                  |       | 22,591                        |       | 21,692                     |       |
| Total liabilities                               |       | 30,056                        |       | 30,040                     |       |
|                                            |       |                          |       |                       |       |
| Commitments and contingencies                   |       |                          |       |                       |       |
|                                            |       |                          |       |                       |       |
| Stockholders’ equity                       |       |                          |       |                       |       |
| Preferred stock                                 |       | —                        |       | 300                        |       |
| Common stock                                    |       | 2,060                         |       | 1,975                      |       |
| Additional paid-in capital                      |       | 99,263                        |       | 98,267                     |       |
| Deferred stock-based compensation               |       | —                        |       | (10                        | )          |
| Accumulated other comprehensive income          |       | 1,298                         |       | 1,394                      |       |
| Accumulated deficit                             |       | (91,393                       | )          | (90,156                    | )          |
| Total stockholders’ equity                 |       | 11,228                        |       | 11,770                     |       |
|                                            |       |                          |       |                       |       |
| Total liabilities and stockholders’ equity |       | $                             | 41,284     |                       | $          | 41,810 |   |

 

Seeaccompanying notes to the unaudited condensed consolidated financialstatements.

 

3

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                     | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Net revenues                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Licenses                                                       |       | $                                         | 2,334      |                                     | $          | 2,667 |   | $ | 6,271 |   | $ | 6,907 |   |
| Services                                                       |       | 2,965                                     |       | 3,053                                    |       | 8,930 |   | 9,082 |   |
| Total net revenues                                             |       | 5,299                                     |       | 5,720                                    |       | 15,201 |   | 15,989 |   |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Costs of revenues                                              |       |                                      |       |                                     |       |   |   |   |   |
| Cost of license revenues                                       |       | 27                                        |       | 66                                       |       | 124 |   | 166 |   |
| Cost of service revenues                                       |       | 542                                       |       | 593                                      |       | 1,745 |   | 1,712 |   |
| Total cost of revenues                                         |       | 569                                       |       | 659                                      |       | 1,869 |   | 1,878 |   |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Gross profit                                                   |       | 4,730                                     |       | 5,061                                    |       | 13,332 |   | 14,111 |   |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Cost of operations                                             |       |                                      |       |                                     |       |   |   |   |   |
| Selling and marketing                                          |       | 1,337                                     |       | 1,552                                    |       | 3,923 |   | 4,288 |   |
| Research and development                                       |       | 2,429                                     |       | 2,029                                    |       | 7,052 |   | 5,503 |   |
| General and administrative                                     |       | 986                                       |       | 1,079                                    |       | 2,777 |   | 2,925 |   |
| Stock-based compensation                                       |       | —                                    |       | 8                                        |       | 10 |   | 58 |   |
| Amortization of intangible assets                              |       | —                                    |       | 433                                      |       | — |   | 1,733 |   |
| Total operating expenses                                       |       | 4,752                                     |       | 5,101                                    |       | 13,762 |   | 14,507 |   |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Operating loss                                                 |       | (22                                       | )          | (40                                      | )          | (430 | ) | (396 | ) |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Other expense                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense-net                                           |       | (239                                      | )          | (292                                     | )          | (728 | ) | (900 | ) |
| Other income (expense)-net                                     |       | (7                                        | )          | 67                                       |       | (79 | ) | 61 |   |
|                                                           |       | (246                                      | )          | (225                                     | )          | (807 | ) | (839 | ) |
| Net loss                                                       |       | $                                         | (268       | )                                        | $          | (265 | ) | $ | (1,237 | ) | $ | (1,235 | ) |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted net loss per share                           |       | $                                         | (0.01      | )                                        | $          | (0.01 | ) | $ | (0.06 | ) | $ | (0.07 | ) |
|                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Shares used in computing basic and diluted  net loss per share |       | 20,485                                    |       | 18,687                                   |       | 20,065 |   | 18,518 |   |

 

Seeaccompanying notes to the unaudited condensed consolidated financialstatements.

 

4

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**NINE****MONTHS ENDEDDECEMBER 31,**

 
| ** **                                                                                 | ** ** | **2005**            | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(In  thousands)** | ** ** |
| Cash flows from operating activities:                                                      |       |                |       |     |       |
| Net loss                                                                                   |       | $                   | (1,237     | )        | $          | (1,235 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                |       |     |       |
| Depreciation and amortization of long-lived  assets                                        |       | 206                 |       | 1,948    |       |
| Note payable discount amortization                                                         |       | 62                  |       | 62       |       |
| Amortization of deferred stock-based  compensation                                         |       | 10                  |       | 58       |       |
| Change in assets and liabilities:                                                          |       |                |       |     |       |
| Trade accounts receivable                                                                  |       | (359                | )          | (336     | )          |
| Other current and non-current assets                                                       |       | (23                 | )          | (194     | )          |
| Accounts payable                                                                           |       | (317                | )          | 82       |       |
| Accrued liabilities                                                                        |       | 869                 |       | 813      |       |
| Deferred revenue                                                                           |       | (396                | )          | (100     | )          |
| Net cash provided by (used in) operating  activities                                       |       | (1,185              | )          | 1,098    |       |
|                                                                                       |       |                |       |     |       |
| Cash flows from investing activities:                                                      |       |                |       |     |       |
| Purchase of property, furniture and  equipment                                             |       | (421                | )          | (22      | )          |
| Net cash used in investing activities                                                      |       | (421                | )          | (22      | )          |
|                                                                                       |       |                |       |     |       |
| Cash flows from financing activities:                                                      |       |                |       |     |       |
| Proceeds from exercise of stock options and  warrants                                      |       | 716                 |       | 42       |       |
| Proceeds from issuance of common stock                                                     |       | 65                  |       | 99       |       |
| Repayment of debt                                                                          |       | —              |       | (38      | )          |
| Net cash provided by financing activities                                                  |       | 781                 |       | 103      |       |
|                                                                                       |       |                |       |     |       |
| Effect of exchange rate changes on cash                                                    |       | (66                 | )          | 80       |       |
|                                                                                       |       |                |       |     |       |
| Net increase (decrease) in cash and  equivalents                                           |       | (891                | )          | 1,259    |       |
|                                                                                       |       |                |       |     |       |
| Cash and equivalents at beginning of period                                                |       | 10,625              |       | 7,783    |       |
| Cash and equivalents at end of period                                                      |       | $                   | 9,734      |     | $          | 9,042 |   |
|                                                                                       |       |                |       |     |       |
| Non-cash financing activities:                                                             |       |                |       |     |       |
| Issuance of payment-in-kind notes for  accrued interest                                    |       | $                   | 821        |     | $          | 881 |   |
| Conversion of preferred stock to common  stock                                             |       | 300                 |       | —   |       |
| Reduction of long-term debt through  exercise of warrants                                  |       | —              |       | 2,671    |       |

 

Seeaccompanying notes to the unaudited condensed consolidated financialstatements.

 

5

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**CONDENSED NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**December 31, 2005**

 

**1.  INTERIM FINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidatedfinancial information furnished herein reflects all adjustments, consistingonly of normal recurring items, which in the opinion of management arenecessary to fairly state Raining Data Corporation and subsidiaries’ (the “Company”)consolidated financial position, the results of their operations and their cashflows for the dates and periods presented and to make such informationpresented not misleading. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omittedpursuant to SEC rules and regulations; nevertheless, management of theCompany believes that the disclosures herein are adequate to make theinformation presented not misleading. These unaudited condensed consolidatedfinancial statements should be read in conjunction with the Company’s auditedfinancial statements for the year ended March 31, 2005, contained in theCompany’s Annual Report on Form 10-KSB. The results of operations for theperiod ended December 31, 2005, are not necessarily indicative of resultsto be expected for any other interim period or the fiscal year endingMarch 31, 2006.

 

**Reclassifications**

 

Certain reclassifications have been made toprior period amounts to conform to the current period presentation.

 

**StockOptions**

 

Pro forma information,which assumes the Company had accounted for stock options granted under thefair value method prescribed by Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-based Compensation,” as amended, ispresented below. The per share weighted average fair values of stock optionsgranted for the three and nine-month periods ended December 31, 2005, asestimated using the Black-Scholes option-pricing model, were $3.23 and $2.04,respectively.  The per share weightedaverage fair values of stock options granted for the three and nine-monthperiods ended December 31, 2004, as estimated using the Black-Scholesoption-pricing model, were $2.46 and $2.52, respectively.  The following weighted average assumptionswere used for the three-month period ended December 31, 2005: dividendyield of 0%; expected volatility of 110%; risk-free interest rate of 4.42%; andexpected life of 6 years.  The followingweighted average assumptions were used for the nine-month period ended December 31,2005: dividend yield of 0%; expected volatility of 110%; risk-free interestrate of 4.17%; and expected life of 6 years. The following weighted average assumptions were used for the three-monthperiod ended December 31, 2004: dividend yield of 0%; expected volatilityof 120%; risk-free interest rate of 3.85%; and expected life of 6 years.  The following weighted average assumptionswere used for the nine-month period ended December 31, 2004: dividendyield of 0%; expected volatility of 120%; risk-free interest rate of 3.99%; andexpected life of 6 years.

 

For purposes of proforma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting periods. The Company’s historical and proforma net loss per share for the three and nine-month periods endedDecember 31, 2005 and 2004, are as follows (in thousands, except per sharedata):

 
| ** **                                                                                             | ** ** | **Three Months ended  December 31,** | ** ** | **Nine Months ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Net loss:                                                                                              |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                            |       | $                                         | (268       | )                                        | $          | (265 | ) | $ | (1,237 | ) | $ | (1,235 | ) |
|                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Add:                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Stock-based employee compensation expense  included in net loss                                        |       | —                                    |       | 8                                        |       | 10 |   | 23 |   |
|                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Less:                                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under the fair value method for all awards |       | (303                                      | )          | (298                                     | )          | (981 | ) | (871 | ) |
|                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Pro forma net loss:                                                                                    |       | $                                         | (571       | )                                        | $          | (555 | ) | $ | (2,208 | ) | $ | (2,083 | ) |
|                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted loss per share                                                                       |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                            |       | $                                         | (0.01      | )                                        | $          | (0.01 | ) | $ | (0.06 | ) | $ | (0.07 | ) |
| Pro forma                                                                                              |       | $                                         | (0.03      | )                                        | $          | (0.03 | ) | $ | (0.11 | ) | $ | (0.11 | ) |

 

6

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** **

**2.  RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment,” which establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for employee services. A keyprovision of this statement is the requirement of a public entity to measurethe cost of employee services received in exchange for an award of equityinstruments (including stock options) based on the grant-date fair value of theaward. That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award (i.e., the requisiteservice period). With respect to the Company, which is a small business issuer,this statement becomes effective on April 1, 2006.  The adoption of this statement is expected toreduce earnings in future periods.

 

**3.  LONG-TERM DEBT**

 

The Convertible Subordinated Notes payable toAstoria Capital Partners, L.P. (“Astoria”), the Company’s controllingstockholder, and others, as of December 31, 2005 and March 31, 2005,are summarized as follows (in thousands):

 
| ** **                                                    | ** ** | **December 31,****2005** | ** ** | **March 31,****2005** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| Convertible Subordinated Notes payable to  Astoria and others |       | $                             | 22,501     |                       | $          | 21,681 |   |
| Plus accrued interest                                         |       | 284                           |       | 267                        |       |
| Less unamortized discount                                     |       | (194                          | )          | (256                       | )          |
| Total debt                                                    |       | 22,591                        |       | 21,692                     |       |
|                                                          |       |                          |       |                       |       |
| Less current portion of long-term debt                        |       | —                        |       | —                     |       |
| Total long-term debt                                          |       | $                             | 22,591     |                       | $          | 21,692 |   |

 

**4.  STOCKHOLDERS’ EQUITY**

 

Basic loss per share is computed using thenet loss and the weighted average number of common shares outstanding duringthe period. Diluted loss per share is computed using the net loss and theweighted average number of common shares and dilutive potential common sharesoutstanding during the period when the potential common shares are notanti-dilutive. Potential dilutive common shares include outstanding stockoptions and warrants, convertible debt, and convertible preferred stock. Therewere outstanding options to purchase 4,121,067 shares of the Company’s commonstock with exercise prices ranging from $0.75 to $33.13 per share as ofDecember 31, 2005.  There wereoutstanding options to purchase 4,272,433 shares of the Company’s common stockwith exercise prices ranging from $0.75 to $52.50 per share as ofDecember 31, 2004.  There were no outstanding warrants as of December31, 2005, and outstanding warrants to purchase 1,033,092 shares of the Company’scommon stock with exercise prices ranging from $2.35 to $6.29 per share as ofDecember 31, 2004.  There were300,000 shares of preferred stock, which were convertible into 500,100 sharesof common stock, outstanding at December 31, 2004.  There wasconvertible debt outstanding at December 31, 2005 and 2004, which wasconvertible into 4,500,283 and 4,326,021 shares of common stock,respectively.  The effects of these items were not included in thecomputation of diluted earnings per share because their effect would have beenanti-dilutive.

 

The change in accumulated other comprehensiveincome during the three and nine-month periods ended December 31, 2005 and2004 is the result of the effect of foreign exchange rate changes. Thefollowing table reconciles net loss as reported with total comprehensive loss(in thousands):

 
| ** **                         | ** ** | **Three Months ended  December 31,** | ** ** | **Nine Months ended  December 31,** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                               |       |                                      |       |                                     |       |   |   |   |   |
| Net loss                           |       | $                                         | (268       | )                                        | $          | (265 | ) | $ | (1,237 | ) | $ | (1,235 | ) |
| Translation adjustments – net |       | 54                                        |       | 172                                      |       | (96 | ) | 47 |   |
| Total comprehensive loss           |       | $                                         | (214       | )                                        | $          | (93 | ) | $ | (1,333 | ) | $ | (1,188 | ) |

 

EffectiveSeptember 6, 2005, all of the outstanding shares of preferred stock wereconverted into 500,100 shares of common stock.

 

7

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At the 2005 AnnualMeeting, held on November 28, 2005, the stockholders voted to amend theCertificate of Incorporation to increase the authorized number of shares ofCommon Stock from 60,000,000 to 100,000,000 shares and to increase theauthorized number of shares of Prefered Stock from 300,000 to 5,000,000shares.  The stockholders also voted to approve amendments to the Company’s 1999Stock Option Plan (the “Plan”) to: (1) increase the number of shares authorizedfor issuance under the Plan by 1,500,000 shares to a total of 6,500,000 sharesavailable for issuance under the Plan; (2) provide for automatic annualincreases in the number of shares reserved for issuance under the Plan by anamount equal to the lesser of (i) three percent (3%) of the Company’s totaloutstanding shares on the last day of the Company’s fiscal year, (ii)2,000,000, or (iii) such lesser amount as determined in the sole and absolute discretionof the Company’s Board of Directors; and (3) add restricted stock purchaserights as a new award type and add net exercise as an acceptable form ofconsideration upon exercise of stock options.

 

**5.  BUSINESS SEGMENT**

 

The Company operates in onereportable segment. International operations consist primarily of foreign salesoffices selling software developed in the United States of America combinedwith local service revenue. The following table summarizes consolidatedfinancial information of the Company’s operations by geographic location (inthousands):

 
| ** **                                                    | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
| *Three Months Ended December 31, 2005*                   |       |               |       |       |       |      |       |
| Net revenues                                                  |       | $                  | 3,577      |       | $          | 1,722     |       | $ | 5,299 |   |
| *Three Months Ended December 31, 2004*                   |       |               |       |       |       |      |       |
| Net revenues                                                  |       | $                  | 3,914      |       | $          | 1,806     |       | $ | 5,720 |   |
| *As of and for the Nine Months Ended  December 31, 2005* |       |               |       |       |       |      |       |
| Net revenues                                                  |       | $                  | 10,576     |       | $          | 4,625     |       | $ | 15,201 |   |
| Long lived assets                                             |       | 28,047             |       | 822        |       | 28,869    |       |
| *As of and for the Nine Months Ended  December 31, 2004* |       |               |       |       |       |      |       |
| Net revenues                                                  |       | $                  | 11,263     |       | $          | 4,726     |       | $ | 15,989 |   |
| Long lived assets                                             |       | 27,956             |       | 671        |       | 28,627    |       |

 

The Company is engaged in thedesign, development, sale and support of software infrastructure. The Companydivides its products into two main categories: (1) Pick-based databasetechnology (“Pick UDM Products”), which includes Multi-dimensional DatabaseManagement Systems and related components, and XML Data Management Servers; and(2) Rapid Application Development software tools (“RAD Tools”). Thefollowing table represents the net revenue from the Company’s segment byproduct line (in thousands):

 
| ** **         | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|--------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Databases:**     |       |                                      |       |                                     |       |   |   |   |   |
| Pick UDM Products  |       | $                                         | 3,503      |                                     | $          | 4,387 |   | $ | 11,874 |   | $ | 12,322 |   |
| RAD Tools          |       | 1,796                                     |       | 1,333                                    |       | 3,327 |   | 3,667 |   |
| Total net revenues |       | $                                         | 5,299      |                                     | $          | 5,720 |   | $ | 15,201 |   | $ | 15,989 |   |

 

**6.  COMMITMENTS AND CONTINGENCIES**

 

The Company issubject from time to time to litigation, claims and suits arising in theordinary course of business.  As ofDecember 31, 2005, the Company was not a party to any known materiallitigation, claim or suit.

 

The Company’sstandard customer license and software agreements contain indemnification andwarranty provisions which are generally consistent with practice in the Company’sindustry.  The duration of the Company’sservice warranties generally does not exceed 30 days following completion ofits services.  Based on prior experience,the Company believes that it has not incurred significant future obligations.  Accordingly, the Company does not maintainaccruals for potential customer indemnification or warranty-relatedobligations.  The maximum potentialamount of future payments that the Company could be required to make isgenerally limited under the indemnification provisions in its customer licenseeand service agreements.

 

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** **

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

This Form 10-QSB containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended (the “Exchange Act”). These statements may generally beidentified by the use of such words as “expect,” “anticipate,” “believe,” “intend,”“plan,” “will,” or “shall,” or the negative of those terms or similar terms. Wehave based these forward-looking statements on our current expectations andprojections about future events. Forward-looking statements involve certainrisks and uncertainties and actual results may differ materially from thosediscussed in any such statement. Factors that could cause actual results todiffer materially from such forward-looking statements include the risksdescribed under the heading “Risk Factors” of this Form 10-QSB and elsewhere in this Form 10-QSB.The forward-looking statements contained in this Form 10-QSB include, butare not limited to statements about the following: (1) our future success,(2) our research and development efforts and expenses, (3) our futureoperating results and cash flow, (4) our competitive ability and position,(5) the markets in which we operate, (6) our revenue, (7) ourcost of license revenue and cost of service revenue, (8) our selling andmarketing costs, (9) our general and administrative costs, (10) ourstock-based compensation expense, (11) the possibility that we may seek to takeadvantage of opportunities in the equity and capital markets, (12) our beliefthat our existing cash balances combined with our cash flow from operating activitieswill be sufficient to meet our operating and capital expenditure requirementsfor the remainder of the fiscal year ending March 31, 2006 and through theforeseeable future, (13) the issuance of additional PIK notes, (14) the effectof the Company’s reduction in force, (15) the effect of SFAS 123R, and (16) ourbelief that the Silicon Valley Bank credit facility is not required forliquidity purposes or to meet our cash flow needs for the foreseeablefuture.  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.

 

**OVERVIEW**

 

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

 

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

 

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

 

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

 

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

 

TigerLogic provides anextensible and flexible development and deployment environment. Unlike otherXML data management alternatives, TigerLogic XDMS does not need to know theschema or structure of data before processing and storing it. We believe theability to make XML schemas optional is a vital innovation because thestructures of operational systems frequently change, and mapping schemas forthe purpose of linking to a new data source is both difficult andtime-consuming. The system also enables support for schema versioning, which iscritical when addressing evolving standards and XML schemas. The GeneralAvailability Release of TigerLogic XDMS version 2.1, which included manyfeature enhancements and the full implementation of our XQuery engine, wasreleased in May 2005, and Version 2.5, which included platform support forLinux in addition to Windows and Solaris, was released in October 2005.  In September 2005, we announced ourfirst commercial OEM agreement for TigerLogic XDMS.

 

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The MDMS product line consistsprincipally of the D3 Data Base Management System (“D3”), which runs on manyoperating systems such as IBM AIX, Linux and Windows NT. D3 allows applicationprogrammers to create new business solution software in less time than itnormally takes in many other environments. This can translate into lower costsfor the developer, lower software prices for the customer and reduced costs ofownership for both the developer and end user.

 

MDMS components include thePick Data Provider for .Net (“PDP”) and our Pick Reporting ServicesConnector.  The PDP component for theMicrosoft .NET Framework is tightly integrated with Microsoft Visual Studio..NET. It allows software developers using IBM’s Universe and Unidata databasesand our D3 database platform to build client/server applications, Web applications or Web services usingany of the languages and technologies that run on the Microsoft .NET Framework,such as Microsoft ASP.NET, Visual Basic .NET, Visual C# .NET and Visual J#..NET. Our Pick Reporting Services Connector enables a data connection thatallows Pick database users to unlock the benefits of Microsoft ReportingServices to take advantage of a comprehensive, server-based reporting solutionthat can author, manage, and deliver both paper-oriented and interactive,Web-based reports. This solution also allows access to IBM UniVerse, IBMUniData and Pick D3 data. Our MDMS products also include mvEnterprise, ascalable multi-dimensional database solution that allows the user to leveragethe capabilities of the UNIX operating system, and mvBase, a multi-dimensionaldatabase solution that runs on all Windows platforms.

 

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

 

Our products are used by ourcustomers to build and deploy applications that may become a critical componentof their business operations. As a result, continuing to provide customertechnical support services is an important element of our business strategy.Customers who participate in our support programs receive periodic maintenancereleases and direct technical support when required.

 

In the United States, we sellour products through established distribution channels consisting of OEMs,system integrators, specialized vertical application software developers andconsulting organizations. We also sell our products directly through our salespersonnel to end user organizations. Outside the United States, we maintaindirect sales offices in the United Kingdom, France and Germany. Approximately32% of our revenue came from sales through our offices located outside theUnited States for the three-month periods ended December 31, 2005 and2004.  Approximately 30% of our revenuecame from sales through our offices located outside the United States for thenine-month periods ended December 31, 2005 and 2004.

 

We sell our products in U.S.Dollars in North America, British Pounds Sterling in the United Kingdom andEuros in Germany and France. Because we recognize revenue and expense in thesevarious currencies but report our financial results in U.S. Dollars, changes inexchange rates may cause variances in our period-to-period revenue and resultsof operations in future periods. Recorded foreign exchange gains and losseshave not been material to our performance to date.

 

We license our software on aper CPU, per-server, per-port or per-user basis. Therefore, the addition of CPU’s,servers, ports or users to existing systems increases our revenue from ourinstalled base of licenses. In addition to software products, we providecontinuing maintenance and other services to our customers, includingprofessional services, technical support and training to help plan, analyze,implement and maintain application software based on our products.

 

Our customers may be classifiedinto 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.

 

For the three and nine-monthperiods ended December 31, 2005 and 2004, no single customer accounted formore than 10% of our revenue.

 

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We have devotedsignificant resources to the research and development of our products andtechnology.  We believe that our futuresuccess will depend largely on a strong development effort with respect to bothour existing and new products.  These developmentefforts have resulted in updates and upgrades to existing MDMS and RAD productsand the launch of new products including the XDMS product line.  Newproduct releases in all of our product lines are currently in progress.  We expectto continue our research and development efforts in all product lines for theforeseeable future.  We intend for theseefforts to improve our future operating results and increase cash flow.However, such efforts may not result in additional new products or revenue, andwe can make no assurances that the recently announced products or futureproducts will be successful.

 

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

 

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

 

We rely primarily on acombination of trade secret, copyright and trademark laws and contractualprovisions to protect our intellectual property and proprietary rights. Ourtrademarks include Raining Data, Pick, TigerLogic, D3, Omnis, Omnis Studio,mvEnterprise, mvBase, and mvDesigner, among others. We also have one pendingU.S. patent application as of December 31, 2005.

 

We license our products to endusers on a “right to use” basis pursuant to a perpetual license agreement thatrestricts use of products to a specified number of users. We generally rely on “click-wrap”licenses that become effective when a customer downloads and installs thesoftware on its system. In order to retain exclusive ownership rights to oursoftware and technology, we generally provide our software in object code only,with contractual restrictions on copying, disclosure, and transferability.There can be no assurance that these protections will be adequate, or that ourcompetitors will not independently develop technologies that are substantiallyequivalent or superior to our technology.

 

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

 

At December 31, 2005, wehad 134 employees worldwide of which 99 were in the United States and 35 werein our international offices. Of the 134 employees, 131 are full-time andapproximately 50% are in research and development, 15% in technical support,20% in sales and marketing and 15% in general and administrative functions.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The discussion and analysis ofour financial condition and results of operations is based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses and disclosure of contingent liabilities.

 

On an on-going basis, weevaluate our estimates, including those related to revenue recognition andaccounting for intangible assets and goodwill. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

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

 

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REVENUE RECOGNITION.   We recognizerevenue using the residual method pursuant to the requirements of Statement ofPosition No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), asamended. Under the residual method, revenue is recognized in a multiple element arrangement whencompany-specific objective evidence of fair value exists for all of theundelivered elements in the arrangement, but does not exist for one or more ofthe delivered elements in the arrangement. At the outset of the arrangementwith the customer, we defer revenue for the fair value of our undeliveredelements (e.g., maintenance) based on company-specific objective evidence ofthe amount such items are sold individually to our customers and recognizerevenue for the remainder of the arrangement fee attributable to the elementsinitially delivered in the arrangement (e.g., software license) when the basiccriteria in SOP 97-2 have been met.

 

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

 

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

 

GOODWILL.   We assess theimpairment of long-lived assets and goodwill whenever events or changes incircumstances indicate that the carrying value may not be recoverable. We alsoassess the value of goodwill at least annually. Factors we consider to beimportant which could trigger an impairment review include the following:

 

•                                          Significantunderperformance relative to expected historical or projected future operatingresults;

•                                          Timingof our revenue, significant changes in the manner of use of the acquired assetsor the strategy for the overall business;

•                                          Significantnegative industry or economic trends;

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

•                                          Ourmarket capitalization relative to net book value.

 

When we determine that thecarrying value of long-lived assets may not be recoverable based upon theexistence of one or more of the above indicators of impairment and the carryingvalue of the asset cannot be recovered from projected undiscounted cash flows,we measure any impairment based on a projected discounted cash flow methodusing a discount rate determined by our management to be commensurate with therisk inherent in the current business model. Significant management judgment isrequired in determining whether an indicator of impairment exists and inprojecting cash flows.

 

Following the adoption ofStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”), we revised our policy for assessing anddetermining impairment of goodwill. The SFAS 142 goodwill impairment model is atwo-step process. The first step is used to identify potential impairment bycomparing the fair value of a reporting unit with its net book value (orcarrying amount), including goodwill. If the fair value exceeds the carryingamount, goodwill of the reporting unit is considered not impaired and thesecond step of the impairment test is unnecessary. If the carrying amount of areporting unit exceeds its fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, if any.The second step of the goodwill impairment test compares the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill. Ifthe carrying amount of the reporting unit’s goodwill exceeds the implied fairvalue of that goodwill, an impairment loss is recognized in an amount equal tothat excess. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. That is,the fair value of the reporting unit is allocated to all of the assets andliabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit.

 

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 reporting unit(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. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand the magnitude of any such charge. However, we currently use ourpublicly-traded stock price to determine the fair value of the Company understep one of the goodwill impairment test.

 

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**Results ofOperations**

 

The following table sets forth certainCondensed Consolidated Statement of Operations data in total dollars, as apercentage of total net revenues and as a percentage change from the same periodin the prior year.  Cost of licenserevenues, cost of service revenues, gross margin on license revenues and grossprofit and margin on service revenues are expressed as a percentage of therelated revenues. This information should be read in conjunction with theCondensed Consolidated Financial Statements included elsewhere in thisForm 10-QSB.

 
| ** **                                                     | ** ** | **Three  Months Ended  December 31, 2005** | ** ** | **Three  Months Ended  December 31, 2004** | ** ** | **Nine  Months Ended  December 31, 2005** | ** ** | **Nine  Months Ended   December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                     | ** ** | **Results**                                     | ** ** | **% of Net  Revenues**                          | ** ** | **Percent  Change**                            | ** ** | **Results**                                     | ** ** | **% of Net  Revenues** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| Net revenues                                                   |       |                                            |       |                                            |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                                       |       | $                                               | 2,334      |                                            | 44         | %                                              | (12        | )%                                              | $          | 2,667 |   | 47 | % | $ | 6,271 |   | 41 | % | (9 | )% | $ | 6,907 |   | 43 | % |
| Services                                                       |       | 2,965                                           |       | 56                                              | %          | (3                                             | )%         | 3,053                                           |       | 53 | % | 8,930 |   | 59 | % | (2 | )% | 9,082 |   | 57 | % |
| Total net  revenues                                            |       | 5,299                                           |       | 100                                             | %          | (7                                             | )%         | 5,720                                           |       | 100 | % | 15,201 |   | 100 | % | (5 | )% | 15,989 |   | 100 | % |
| Cost of revenues                                               |       |                                            |       |                                            |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license  revenues (as a % of license revenues)         |       | 27                                              |       | 1                                               | %          | (59                                            | )%         | 66                                              |       | 2 | % | 124 |   | 2 | % | (25 | )% | 166 |   | 2 | % |
| Cost of service  revenues (as a % of service revenues)         |       | 542                                             |       | 18                                              | %          | (9                                             | )%         | 593                                             |       | 19 | % | 1,745 |   | 20 | % | 2 | % | 1,712 |   | 19 | % |
| Gross margin on  license revenues (as a % of license revenues) |       | 2,307                                           |       | 99                                              | %          | (11                                            | )%         | 2,601                                           |       | 98 | % | 6,147 |   | 98 | % | (9 | )% | 6,741 |   | 98 | % |
| Gross margin on  service revenues (as a % of service revenues) |       | 2,423                                           |       | 82                                              | %          | (2                                             | )%         | 2,460                                           |       | 81 | % | 7,185 |   | 80 | % | (3 | )% | 7,370 |   | 81 | % |
| Operating  expenses                                            |       |                                            |       |                                            |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and  marketing                                         |       | 1,337                                           |       | 25                                              | %          | (14                                            | )%         | 1,552                                           |       | 27 | % | 3,923 |   | 26 | % | (9 | )% | 4,288 |   | 27 | % |
| Research and  development                                      |       | 2,429                                           |       | 46                                              | %          | 20                                             | %          | 2,029                                           |       | 35 | % | 7,052 |   | 46 | % | 28 | % | 5,503 |   | 34 | % |
| General and  administrative                                    |       | 986                                             |       | 19                                              | %          | (9                                             | )%         | 1,079                                           |       | 19 | % | 2,777 |   | 18 | % | (5 | )% | 2,925 |   | 18 | % |
| Stock-based  compensation                                      |       | —                                          |       | 0                                               | %          | (100                                           | )%         | 8                                               |       | 0 | % | 10 |   | 0 | % | (83 | )% | 58 |   | 0 | % |
| Amortization of  intangible assets                             |       | —                                          |       | 0                                               | %          | (100                                           | )%         | 433                                             |       | 8 | % | — |   | 0 | % | (100 | )% | 1,733 |   | 11 | % |
| Total operating  costs                                         |       | 4,752                                           |       | 90                                              | %          | (7                                             | )%         | 5,101                                           |       | 89 | % | 13,762 |   | 91 | % | (5 | )% | 14,507 |   | 91 | % |
| Operating loss                                                 |       | (22                                             | )          | 0                                               | %          | (45                                            | )%         | (40                                             | )          | (1 | )% | (430 | ) | (3 | )% | 9 | % | (396 | ) | (2 | )% |
| Other expense,  net                                            |       | (246                                            | )          | (5                                              | )%         | 9                                              | %          | (225                                            | )          | (4 | )% | (807 | ) | (5 | )% | (4 | )% | (839 | ) | (5 | )% |
| Net loss                                                       |       | $                                               | (268       | )                                               | (5         | )%                                             | 1          | %                                               | $          | (265 | ) | (5 | )% | $ | (1,237 | ) | (8 | )% | 0 | % | $ | (1,235 | ) | (8 | )% |

 

**REVENUE**

 

NET REVENUE. Our revenue is derivedprincipally from two sources: fees from software licensing and fees forservices, including maintenance, consulting, training and technical support. Welicense our software on a per-CPU, per-server, per-port or per-user basis.Therefore, the addition of CPU’s, servers, ports or users to existing systemsincreases our revenue from our installed base of licenses. We view the MDMS andRAD markets in which we operate to be relatively stable from period toperiod.  We anticipate that our revenueon an annual basis from those products will remain stable or see slightdeclines for the foreseeable future. Fluctuations in revenue between quartersor year-to-year are primarily the result of the timing of orders and customerordering patterns. We do not view the changes in year-to-year revenues for thethree and nine-month periods ended December 31, 2005 and 2004 to berepresentative of immediate market trends. However, we expect that the MDMS and RAD markets will eventually declineas customers adopt newer technologies, and, therefore, the revenue generatedfrom sales of our MDMS and RAD products is expected to decrease.

 

We have been activelydeveloping and marketing our XDMS product line. Should our development effortsand the adoption of this product line be successful, we anticipate additionalrevenues in future periods related to the sale of these products. However, wecan give no assurances as to customer acceptance of any new products orservices, or the ability of the current or any new products and services togenerate revenue. While we are committed to research and development effortsthat are intended to allow us to penetrate new markets and generate new sourcesof revenue, such efforts may not result in additional products, services orrevenue.  In September 2005, weannounced the Company’s first commercial OEM agreement for TigerLogic XDMS, whichwe expect will generate revenue in future periods.

 

**COST OFREVENUE**

 

COST OF LICENSE REVENUE. Cost oflicense revenue is comprised of direct costs associated with software licensesales including software packaging, documentation, physical media costs androyalties.  We anticipate that the costof license revenue, as a percentage of license revenue and in absolute dollars,will be relatively stable in future periods.

 

COST OF SERVICE REVENUE. Cost ofservice revenue includes primarily personnel costs relating to providingconsulting, technical support and training services.  We anticipate that the cost of servicerevenue, as a percentage of service revenue and in absolute dollars, will berelatively stable in future periods.

 

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**OPERATINGEXPENSES**

 

SELLING AND MARKETING. Selling andmarketing expense consists primarily of salaries, benefits, advertising,tradeshows, travel and overhead costs for our sales and marketing personnel. Inthe three and nine-month periods ended December 31, 2005 selling and marketingexpense decreased as compared to the same periods in the prior year due to reducedsalary and personnel related costs and timing of trade shows. We anticipatethat selling and marketing costs related to XDMS products may increase as wefurther develop the sales channel for these products and if customer acceptanceof these products increases. In addition, if our continued research anddevelopment efforts are successful, including with respect to our XDMSproducts, 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 anddevelopment expense consists primarily of salaries and other personnel-relatedexpenses and overhead costs for engineering personnel, including employees inthe US and the UK and contractors in the US and India. In the three andnine-month periods ended December 31, 2005, spending related to ourdevelopment efforts increased as certain of our new products reached general orproduction release and we continued to refine and add certain features andfunctionality to these products. The majority of these costs have beenpersonnel-related, including salary and recruiting costs, as we have hiredemployees and contractors in association with the ongoing development andenhancement of our product lines. We are committed to our research anddevelopment efforts and expect research and development expense will remain atthe current level in future periods or increase if we believe that additionalspending is warranted. Such efforts may not result in additional new productsand any new products, including the XDMS products, may not generate sufficientrevenue, if any, to offset the research and development expense.

 

GENERAL AND ADMINISTRATIVE.General and administrative expense consists primarily of costs associated withour finance, human resources, legal and other administrative functions. Thesecosts consist principally of salaries and other personnel-related expenses,professional fees, depreciation and overhead costs. General and administrativespending decreased slightly in the three and nine-month periods endedDecember 31, 2005 as compared to the same periods in the prior year as aresult of salary-related savings.  Weanticipate that general and administrative costs as a percentage of revenue andin absolute dollars will remain relatively stable during fiscal 2006.  In October 2005, the Company implementeda reduction in force relating to under utilized and non-strategic personnel.  The purpose of this initiative was to reducethe Company’s operating expenses. Although the full impact has yet to be determined, it is anticipatedthat the Company will achieve a savings of approximately $0.5 million per annumacross various operating expense categories including General andAdministrative, Cost of Service and Research and Development.  However, such savings may be offset by costincreases relating to new product initiatives.

 

STOCK-BASED COMPENSATION.  The decreases in stock-basedcompensation in the three and nine-month periods ended December 31, 2005as compared to the same periods in the prior year is attributable primarily tocancellations of previously issued options with an exercise price below fairvalue on date of grant for terminated employees, options reaching the end oftheir vesting periods, no new options being granted with an exercise pricebelow fair value at the date of grant, and fewer options granted tonon-employees. We do not anticipate significant changes in stock-basedcompensation expense in future periods prior to the adoption of SFAS 123R.  The adoption of this statement is expected toreduce earnings in future periods.

 

AMORTIZATION OF INTANGIBLEASSETS.   Weamortize our identifiable intangible assets in accordance with their determineduseful life. The life of our existing intangible assets was estimated to befour years. As of December 31, 2005, our existing intangible assets werefully amortized.

 

OTHER INCOME (EXPENSE). Otherexpense consists primarily of net interest expense and, to a much lesserextent, gains and losses on foreign currency transactions. Other expenseremained relatively consistent during the three and nine-month periods endedDecember 31, 2005 as compared to the three and nine-month periods endedDecember 31, 2004.  Due to theuncertainty in exchange rates, we may experience transaction gains or losses infuture periods, the effect of which cannot be determined at this time.

 

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** **

**LIQUIDITYAND CAPITAL RESOURCES**

 

In connection with theacquisition of PickAx, we assumed a Secured Promissory Note issued to AstoriaCapital Partners, L.P. (“Astoria”) dated November 30, 2000, in the amountof $18.5 million. In January 2003, we entered into a Note ExchangeAgreement (the “Exchange Agreement”) with Astoria to replace the existingSecured Promissory Note, as amended, with a Convertible Subordinated Note.Under the terms of the Exchange Agreement, the Secured Promissory Note wasexchanged and replaced with a Convertible Subordinated Note having a principalamount of $22.1 million, which principal amount was equal to the outstandingprincipal and accrued interest payable on the Secured Promissory Note as of thedate of the Exchange Agreement.  InOctober 2005, Astoria assigned a portion of its Common Stock holdingstotaling 870,306 shares and a portion of the Subordinated Convertible Note,totaling $1,751,832, to two of its limited partners.  As such, the Company issued an Amended andRestated Note to Astoria for $20,749,581 and corresponding notes directly tothe limited partners for $862,979 and $888,853, respectively.  The Convertible Subordinated Notes are convertibleinto common stock at any time, at the option of the holder, at a price of $5.00per share. The Convertible Subordinated Notes mature on May 30, 2008,extending the May 30, 2003 maturity date of the Secured Promissory Note.The interest rate of the Convertible Subordinated Notes is 5% per annum ascompared to an interest rate of 10% per annum under the Secured PromissoryNote. The interest is payable quarterly at our option in cash or throughincreases to the outstanding principal of the Convertible Subordinated Notes.

 

On December 14, 2004, weentered into an Agreement Regarding Amended and Restated Common Stock PurchaseWarrant and 5% Convertible Subordinated Note Due 2008 with Astoria whereby wecould redeem, in part, the Convertible Subordinated Note and the payment inkind (“PIK”) notes in advance of January 30, 2005. On December 14,2004, Astoria exercised its warrant in the amount of $2,670,904. In lieu of acash payment, we used the proceeds of the exercise to pay down a portion of theindebtedness to Astoria. The pay down consisted of $247,129 for accrued andunpaid interest, $1,914,165 for the PIK Notes issued to date and $509,610 as areduction of principal of the Convertible Subordinated Note. As ofDecember 31, 2005 there were outstanding PIK notes to Astoria and othersfor the accrued interest due in the aggregate amount of $283,580. For theforeseeable future, we expect to issue additional PIK notes in lieu of cashpayments for the interest due under the Convertible Subordinated Notes. If theConvertible Subordinated Notes or the PIK notes are converted into commonstock, our stockholders may experience substantial dilution. Unlike the SecuredPromissory Note, the Convertible Subordinated Notes are not secured by ourassets.

 

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

 

At December 31, 2005, wehad $9.7 million in cash. We believe that our existing cash balancescombined with our cash flow from operating activities will be sufficient tomeet our operating and capital expenditure requirements for the remainder ofthe fiscal year ending March 31, 2006 and through the foreseeable future.We are committed to research and development efforts that are intended to allowus to penetrate new markets and generate new sources of revenue and improveoperating results. However, our research and development efforts have required,and will continue to require, cash outlays without the immediate or short-termreceipt of related revenue. Our ability to service our long-term debt and meetour expenditure requirements is dependent upon our future financialperformance, which will be affected by, among other things, prevailing economicconditions, our ability to penetrate new markets and attract new customers,market acceptance of our new and existing products and services, the success ofresearch and development efforts and other factors beyond our control.

 

On February 11, 2004, weentered into a credit facility with Silicon Valley Bank which provides us withthe ability to borrow up to $1.5 million at an annual interest rate of Primeplus 1.0%, provided that the annual interest rate shall never be less than 5%. The credit facility iscollateralized by our assets and expires in February 2006. The creditfacility contains financial and reporting covenants that require us to maintaincertain financial ratios only when we have outstanding borrowings on the line.There were no outstanding borrowings at December 31, 2005. Upon expirationof the term of this facility we will assess our credit and liquidity needs inrelation to market factors. However, we believe that the facility is notrequired for liquidity purposes or to meet our cash flow needs for theforeseeable future.

 

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

 

We had no material commitmentsfor capital expenditures at December 31, 2005.

 

Net cash used in operatingactivities was $1.2 million and net cash provided by operating activities was$1.1 million for the nine-month periods ended December 31, 2005 and 2004,respectively.  The decrease in cashprovided by operating activities is the result of a reduction in revenuescoupled with increased investment in research and development activitiesrelating to our new product initiatives.

 

Our earnings before interest,taxes, depreciation and amortization (EBITDA) were $37,000, or 1% of total netrevenue, and negative $0.2 million, or negative 1% of total net revenue, forthe three and nine-month periods ended December 31, 2005, respectively,and $0.5 million, or 8% of total net revenue, and $1.6 million, or 10% of totalnet revenue, for the three and nine-month periods ended December 31, 2004,respectively. The reduction in EBITDA was a result of the reduced revenues inthe period and increased spending for research and development. EBITDA isdefined as net loss with an add-back for depreciation and amortization,non-cash stock-based compensation expense, interest expense, other income andexpense items and income taxes. The following table reconciles EBITDA to thereported net loss:

 

**RECONCILIATION OF EBITDA TO NET LOSS**

 
| ** **                    | ** ** | **Three months   ended December 31,** | ** ** | **Nine months   ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                       |       |                                      |       |   |   |   |   |
| Reported net loss             |       | $                                          | (268       | )                                         | $          | (265 | ) | $ | (1,237 | ) | $ | (1,235 | ) |
| Depreciation and amortization |       | 59                                         |       | 498                                       |       | 206 |   | 1,948 |   |
| Stock-based compensation      |       | —                                     |       | 8                                         |       | 10 |   | 58 |   |
| Interest expense-net          |       | 239                                        |       | 292                                       |       | 728 |   | 900 |   |
| Other (income) expense-net    |       | 7                                          |       | (67                                       | )          | 79 |   | (61 | ) |
|                          |       |                                       |       |                                      |       |   |   |   |   |
| EBITDA                        |       | $                                          | 37         |                                      | $          | 466 |   | $ | (214 | ) | $ | 1,610 |   |

 

EBITDA does not represent fundsavailable for management’s discretionary use and is not intended to representcash flow from operations. EBITDA should not be construed as a substitute fornet loss or as a better measure of liquidity than cash flow from operatingactivities, which are determined in accordance with United States generallyaccepted accounting principles (“GAAP”). EBITDA excludes components that aresignificant in understanding and assessing our results of operations and cashflows. In addition, EBITDA is not a term defined by GAAP and as a result ourmeasure of EBITDA might not be comparable to similarly titled measures used byother companies.

 

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

 

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

 

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** **

**RECONCILIATIONOF EBITDA TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES**

 
| ** **                                           | ** ** | **Nine months   ended December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                         | (1,185     | ) | $ | 1,098 |   |
|                                                 |       |                                      |       |   |   |
| Interest expense-net                                 |       | 728                                       |       | 900 |   |
| Other (income) expense-net                           |       | 79                                        |       | (61 | ) |
| Change in accounts receivable                        |       | 359                                       |       | 336 |   |
| Change in other assets                               |       | 23                                        |       | 194 |   |
| Change in accounts payable                           |       | 317                                       |       | (82 | ) |
| Change in accrued liabilities                        |       | (869                                      | )          | (813 | ) |
| Change in deferred revenue                           |       | 396                                       |       | 100 |   |
| Note payable discount amortization                   |       | (62                                       | )          | (62 | ) |
|                                                 |       |                                      |       |   |   |
| EBITDA                                               |       | $                                         | (214       | ) | $ | 1,610 |   |

 

**RISKFACTORS**

 

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

 

**IF WE DONOT DEVELOP NEW PRODUCTS AND ENHANCE EXISTING PRODUCTS TO KEEP PACE WITHRAPIDLY CHANGING TECHNOLOGY AND INDUSTRY STANDARDS, OUR REVENUEMAY DECLINE.**

 

We have devoted significantresources to the research and development of products and technology. Webelieve that our future success will depend in large part on a strong researchand development effort with respect to both our existing and new products. Beginningin 2001, we began an extensive effort to leverage our time-proven Pick UDM andcore intellectual property to create an enterprise class XML databasemanagement server for the emerging XML market. This significant investment oftime and resources resulted in the TigerLogic XDMS product line. While weintend for these efforts to improve our future operating results and increasecash flow, such efforts may not result in new products or revenue, and any newproducts that do result may not be successful. The development of new orenhanced software products is a complex and uncertain process requiring highlevels of innovation, as well as accurate anticipation of customer andtechnical trends. In developing new products and services, we may fail todevelop and market products that respond to technological changes or evolvingindustry standards in a timely or cost-effective manner, or experiencedifficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customerordering patterns and to ensure that adequate supplies of new products can bedelivered to meet customer demand. Failure to develop and introduce newproducts, or enhancements to existing products, in a timely manner in responseto changing market conditions or customer requirements, or lack of customeracceptance of our products, will materially and adversely affect our business,results of operations and financial condition.

 

**OURFAILURE TO COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATINGRESULTS.**

 

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

 

The application developmenttools software market is rapidly changing and intensely competitive. Our MDMSproducts compete with products developed by companies such as Oracle, Microsoftand IBM. Our RAD products currently encounter competition from several directcompetitors, including Microsoft, and competing development environments,including JAVA. Competition is developing and evolving in the XML market forwhich our XDMS products are intended. Companies that do or are expected tocompete in this market include Oracle, IBM, Microsoft and Sybase, as well as anumber of smaller companies with products that directly and indirectly competewith our XDMS products. Additionally, as we expand our business, we expect tocompete with a different group of companies, including smaller, highly focusedcompanies offering single products.

 

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

** **

**BECAUSETHE MARKET FOR OUR MDMS AND RAD PRODUCTS IS RELATIVELY STABLE OR MAY BEDECLINING, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAIN OUR SALES TOEXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

 

We believe that the markets forour MDMS and RAD products are relatively stable and consistent from period toperiod. As a result, to maintain or grow our revenue in these markets, we willneed to maintain our sales to existing customers and to generate sales to newcustomers, including corporate development teams, commercial applicationdevelopers, system integrators, independent software vendors and independentconsultants. If we fail to attract new customers, if we lose our customers tocompetitors, or if the MDMS or RAD markets decline, our revenue may beadversely affected. In the longer term, it is expected that the MDMS and RADmarkets will eventually decline as customers adopt newer technologies.

 

**OURPRODUCTS HAVE A LONG SALES CYCLE WHICH COULD RESULT IN DELAYS IN THE RECEIPT OFREVENUE.**

 

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

 

**IF WE FAILTO INCREASE REVENUE OR IMPROVE OUR OPERATING RESULTS, WE MAY NOT BE ABLETO REPAY OUR DEBT TO ASTORIA AND OTHERS.**

 

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

 

**THECONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TO ASTORIA GIVE CERTAINSTOCKHOLDERS SIGNIFICANT CONTROL OVER OUR BUSINESS.**

 

As of December 31, 2005,Astoria beneficially owned approximately 58% of our outstanding common stock.  In addition, as of December 31, 2005,the Convertible Subordinated Note issued to Astoria had a balance ofapproximately $20.7 million in principal and accrued interest maturing onMay 30, 2008. Richard W. Koe, Chairman of the Board of Directors, servesas the Managing General Partner for Astoria Capital Management, which is ageneral partner of Astoria. Carlton H. Baab, our President and ChiefExecutive Officer, served as a Managing Principal of Astoria Capital Managementuntil taking a formal leave of absence to join us in August 2001. Thisconcentration of stock ownership, together with the outstanding debt, wouldallow Astoria, acting alone, 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. Moreover, thisconcentration of ownership may delay or prevent a change in control.

 

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**RECENTRULEMAKING BY THE FINANCIAL ACCOUNTING STANDARDS BOARD WILL REQUIRE THE COMPANYTO EXPENSE EQUITY COMPENSATION GIVEN TO EMPLOYEES AND MAY HARM OPERATINGRESULTS AND MAY REDUCE THE COMPANY’S ABILITY TO EFFECTIVELY UTILIZE EQUITYCOMPENSATION TO ATTRACT AND RETAIN EMPLOYEES.**

 

The Company historically hasused stock options as a significant component of its employee compensationprogram in order to align employees’ interests with the interests of theCompany’s stockholders, encourage employee retention, and provide competitivecompensation packages. The Financial Accounting Standards Board (“FASB”) hasadopted changes that will require companies to record a charge to earnings foremployee stock option grants and other equity incentives, which may impact theCompany’s results of operations in future periods. The Company is required toimplement the standard no later than its fiscal year 2007. By causing theCompany to incur increased compensation costs, such accounting changes areexpected to reduce the Company’s reported earnings and may require the Companyto reduce the availability and amount of equity incentives provided toemployees, which may make it more difficult for the Company to attract, retainand motivate key personnel. Each of these results could materially andadversely affect the Company’s business. The future impact of the adoption of SFAS 123R on the Company’sconsolidated financial position and results of operations has not beendetermined at this time, however, the adoption of this statement is expected toreduce earnings in future periods.

 

**WEMAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICHMAY RESULT IN VOLATILITY OF OUR STOCK PRICE.**

 

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

 

•                                          thesize and timing of customer orders;

•                                          changesin pricing policies by us or our competitors;

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

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

•                                          thedemand for our products;

•                                          non-renewalof customer support agreements;

•                                          softwaredefects and other product quality problems; and

•                                          personnelchanges.

 

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

 

**THESUCCESS OF OUR BUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT ANDRETAIN KEY PERSONNEL AND MANAGEMENT.**

 

The majority of our executiveofficers joined us subsequent to the acquisition of PickAx, including ourPresident and Chief Executive Officer, Carlton Baab, who joined us inAugust 2001. Additional changes in management have occurred followingMr. Baab’s appointment, including the hiring of Brian Bezdek, ChiefFinancial Officer and others. The loss of one or more of these or otherexecutives could adversely affect our business. In addition, we believe thatour future success will depend to a significant extent on our ability torecruit, hire and retain highly skilled management and employees withexperience in engineering, product management, business development, sales,marketing and customer service. Competition for such personnel in the softwareindustry can be intense, and there can be no assurance that we will besuccessful in attracting and retaining such personnel. If we are unable to doso, we may experience inadequate levels of staffing to develop and license ourproducts and perform services for our customers, which could adversely affectour business.

 

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**THEINABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TOCOMPETE.**

 

Our ability to competesuccessfully will depend, in part, on our ability to protect our proprietary technologyand operations without infringing upon the rights of others. We may fail to doso. In addition, the laws of certain countries in which our products are, ormay be, licensed may not protect our proprietary rights to the same extent asthe laws of the United States. We rely primarily on a combination of tradesecret, copyright and trademark laws and contractual provisions to protect ourintellectual property and proprietary rights. Our trademarks include RainingData, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesigner andTigerLogic, among others. We also have one pending U.S. patent application asof December 31, 2005. In addition to trademark and copyright protections,we license our products to end users on a “right to use” basis pursuant to aperpetual license agreement that restricts use of products to a specifiednumber of users.

 

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

 

**OURPRODUCTS MAY CONTAIN SOFTWARE DEFECTS WHICH COULD HARM OUR BUSINESS.**

 

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

 

**IF THEREGISTRATION RIGHTS HELD BY ASTORIA AND OTHER SECURITIES HOLDERS ARE EXERCISED,OR THESE SECURITIES HOLDERS SELL A SUBSTANTIAL AMOUNT OF RESTRICTED SECURITIESIN THE OPEN MARKET, OUR STOCK PRICE MAY DECLINE.**

 

As of December 31, 2005,we had 20,599,003 outstanding shares of common stock, of which approximately9,700,000 shares were restricted securities held by Astoria and other holders.Restricted securities may be sold in the public market only if they areregistered or if they qualify for an exemption from registration promulgatedunder the Securities Act of 1933, as amended. At present, all of ouroutstanding restricted securities are either entitled to registration rights oreligible for public sale under Rule 144, subject to volume limitations andother requirements of Rule 144. If Astoria or other holders decide toexercise their demand registration rights, we would incur costs and expensesassociated with the registration of securities.

 

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

 

**OUR GLOBALOPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITHCONDUCTING BUSINESS INTERNATIONALLY.**

 

We operate on a global basiswith offices or distributors in Europe, Africa, Asia, Latin America, SouthAmerica, Australia and North America and development efforts in North America,India and Europe. Approximately 32% and 30% of our revenue for the three andnine-month periods ended December 31, 2005, respectively, was generatedfrom our international offices. We face several risks inherent in conductingbusiness 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; and

•                                          tradepolicies.

 

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

 

**THEFAILURE OF OUR PRODUCTS TO CONTINUE TO CONFORM TO INDUSTRY STANDARDSMAY HARM OUR OPERATING RESULTS.**

 

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

 

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

 

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

 

**ITEM3.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our principal executive officerand principal financial officer evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on such evaluation, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) are effective, as of the end of the period covered by this report, toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and accumulated and communicated to the Company’smanagement, including its principal executive officer and principal financialofficer, to allow timely decisions regarding required disclosure.

 

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

 

**Changes inInternal Control over Financial Reporting**

 

There was no change in our internal controlover financial reporting that occurred during our last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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** **

**PART II. OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from time to time to claimsand suits arising in the ordinary course of business.  As of December 31, 2005, we were not aparty to any material litigation, claim or suit.

 

ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

At the 2005 Annual Meeting of the Company’sStockholders held on November 28, 2005 (the “Meeting”), six proposals weresubmitted. No other proposals were put before the meeting. The proposals andvoting results were as follows:

 

1.             To elect Douglas G. Marshall and Richard W.Smith as the two Class I directors to serve until the 2008 Annual Meetingof the Stockholders or until their successors are duly elected and qualified:

 
| Douglas G. Marshall |   | FOR: 20,206,749 |   | WITHHELD: 11,005 |
|---------------------|--------|----------------------|--------|-----------------------|
| Richard W. Smith    |   | FOR: 20,206,749 |   | WITHHELD: 11,005 |

 

2.             To ratify the appointment of KPMG LLP as theindependent auditors of the Company for the fiscal year ending March 31,2006:

 

FOR: 20,185,072    AGAINST:  29,337   ABSTAIN: 3,345

 

3.             To amend the Company’s Restated Certificateof Incorporation to increase the authorized number of shares of Common Stockfrom 60,000,000 to 100,000,000 shares and to increase the authorized number ofshares of Preferred Stock from 300,000 to 5,000,000 shares:

 

FOR: 14,005,517   AGAINST:  157,368  ABSTAIN: 39,685  BROKER NONVOTES: 6,015,184

 

4.             To amend the Company’s Restated Certificateof Incorporation to remove the provision requiring the affirmative vote of theholders of two-thirds (2/3) of the outstanding voting shares to amend, alter,modify or repeal provisions of the Company’s Restated Certification ofIncorporation which (i) set the authorized number of directors,(ii) provide for a classified Board of Directors and (iii) provide fordirectors to be removed with or without cause.

 

FOR: 14,052,798   AGAINST:  107,117  ABSTAIN: 42,665  BROKER NONVOTES: 6,015,184

 

5.             To approve amendments to Section 3.1 andArticle XI of the Company’s Amended and Restated Bylaws to remove therequirements of the affirmative vote of two-thirds (2/3) of the then-outstandingshares of stock entitled to vote to amend, change or repeal provisions which(i) set the authorized number of directors and (ii) provide for aclassified Board of Directors.

 

FOR: 14,056,379   AGAINST:  103,211  ABSTAIN: 42,980  BROKER NONVOTES: 6,015,184

 

6.             To approve amendments to the Company’s 1999Stock Option Plan (the “Plan”) to: (1) increase the number of shares authorizedfor issuance under the Plan by 1,500,000 shares to a total of 6,500,000 sharesavailable for issuance under the Plan; (2) provide for automatic annualincreases in the number of shares reserved for issuance under the Plan by anamount equal to the lesser of (i) three percent (3%) of the Company’s totaloutstanding shares on the last day of the Company’s fiscal year, (ii) 2,000,000,or (iii) such lesser amount as determined in the sole and absolute discretionof the Company’s Board of Directors; and (3) add restricted stock purchaserights as a new award type and add net exercise as an acceptable form ofconsideration upon exercise of stock options.

 

FOR: 13,163,615    AGAINST:  592,052    ABSTAIN: 442,003  BROKER NON VOTES: 6,020,084

 

All proposals were approved by the requisitenumber of votes.

 

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ITEM 6.  EXHIBITS

 
| ** ** | ** ** | **Exhibits:**                                                                                                                                                                                               |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                  |
| 3.1        |       | Amended and Restated Certificate of Incorporation of the Registrant  filed with the Secretary of State of Delaware on November 29, 2005,  incorporated by reference to Form 8-K filed on November 30, 2005. |
| 3.2        |       | Amended and Restated Bylaws of the Registrant, dated November 28,  2005, incorporated by reference to Form 8-K filed on November 30, 2005.                                                                  |
| 10.1       |       | 1999 Stock Plan, as amended on November 28, 2005, Form of Notice of  Stock Option Grant and Form of Stock Option Agreement, incorporated by  reference to Form 8-K filed on November 30, 2005.              |
| 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 theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Date: February 9, 2006 | **RAINING DATA CORPORATION**                          |
|------------------------|-------------------------------------------------------|
| ** **             | ** **                                            |
| * *               | */s/  Brian C. Bezdek*                                | * * |
|                   | Brian C. Bezdek                                       |
| * *               | *Chief Financial Officer and Duly Authorized Officer* |

 

**EXHIBIT INDEX**

 
| 3.1  |   | Amended and Restated Certificate of Incorporation of the Registrant  filed with the Secretary of State of Delaware on November 29, 2005,  incorporated by reference to Form 8-K filed on November 30, 2005. |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Amended and Restated Bylaws of the Registrant, dated November 28,  2005, incorporated by reference to Form 8-K filed on November 30, 2005.                                                                  |
| 10.1 |   | 1999 Stock Plan, as amended on November 28, 2005, Form of Notice of  Stock Option Grant and Form of Stock Option Agreement, incorporated by  reference to Form 8-K filed on November 30, 2005.              |
| 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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