** **

**UNITEDSTATESSECURITIES 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  June 30, 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**                            |
|---------------------------------------------------------|
| (Exact name of registrant as specified in its  charter) |
| ** **                                              | ** ** | ** ** |
| **Delaware**                                            | ** ** | **94-3046892** |
| (State of Incorporation)                                |   | (IRS Employer Identification No.) |
|                                                    |   |   |
| **17500 Cartwright Road  Irvine, CA 92614**             |
| (Address of principal executive offices)                |
|                                                    |   |   |
| **(949) 442-4400**                                      |
| (Registrant’s telephone number)                    |

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý  No o

 

As ofJune 30, 2005, there were 19,776,456 shares of registrant’s Common Stock,$.10 par value, outstanding.

 

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

 

 

**RAINING DATA CORPORATION**

**INDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                        | 3  |
|----------|--------------------------------------------------------------------------------------------------------------|----|
| ITEM 1.  | FINANCIAL STATEMENTS                                                                                         | 3  |
|     | UNAUDITED CONDENSED  CONSOLIDATED BALANCE SHEETS — JUNE 30, 2005 AND MARCH 31, 2005           | 3  |
|     | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2005 AND  2004 | 4  |
|     | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS — THREE MONTHS ENDED JUNE 30, 2005 AND  2004 | 5  |
|     | NOTES TO THE UNAUDITED  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          | 6  |
| ITEM 2.  | MANAGEMENT’S DISCUSSION AND  ANALYSIS OR PLAN OF OPERATION                                              | 8  |
| ITEM 3.  | CONTROLS AND PROCEDURES                                                                                      | 21 |
| PART II. | OTHER INFORMATION                                                                                            | 22 |
| ITEM 1.  | LEGAL PROCEEDINGS                                                                                            | 22 |
| ITEM 6.  | EXHIBITS                                                                                                     | 22 |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATA CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                       | ** ** | **June 30,****2005** | ** ** | **March 31,****2005** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **(In  thousands)**       | ** ** |
| ASSETS                                           |       |                      |       |                       |       |
|                                             |       |                      |       |                       |       |
| Current  assets                                  |       |                      |       |                       |       |
| Cash                                             |       | $                         | 10,341     |                       | $          | 10,625 |   |
| Trade  accounts receivable-net                   |       | 1,971                     |       | 2,009                      |       |
| Other  current assets                            |       | 368                       |       | 403                        |       |
| Total  current assets                            |       | 12,680                    |       | 13,037                     |       |
|                                             |       |                      |       |                       |       |
| Property,  furniture and equipment-net           |       | 875                       |       | 871                        |       |
|                                             |       |                      |       |                       |       |
| Goodwill                                         |       | 27,684                    |       | 27,684                     |       |
| Other  assets                                    |       | 194                       |       | 218                        |       |
| Total  assets                                    |       | $                         | 41,433     |                       | $          | 41,810 |   |
|                                             |       |                      |       |                       |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY       |       |                      |       |                       |       |
|                                             |       |                      |       |                       |       |
| Current  liabilities                             |       |                      |       |                       |       |
| Accounts  payable                                |       | $                         | 318        |                       | $          | 542 |   |
| Accrued  liabilities                             |       | 2,355                     |       | 2,548                      |       |
| Deferred  revenue                                |       | 5,198                     |       | 5,258                      |       |
| Total  current liabilities                       |       | 7,871                     |       | 8,348                      |       |
|                                             |       |                      |       |                       |       |
| Long  term debt-net of discount                  |       | 21,986                    |       | 21,692                     |       |
| Total  liabilities                               |       | 29,857                    |       | 30,040                     |       |
|                                             |       |                      |       |                       |       |
| Commitments  and contingencies                   |       |                      |       |                       |       |
|                                             |       |                      |       |                       |       |
| Stockholders’  equity                       |       |                      |       |                       |       |
| Preferred  stock                                 |       | 300                       |       | 300                        |       |
| Common  stock                                    |       | 1,978                     |       | 1,975                      |       |
| Additional  paid-in capital                      |       | 98,298                    |       | 98,267                     |       |
| Deferred  stock-based compensation               |       | (4                        | )          | (10                        | )          |
| Accumulated  other comprehensive income          |       | 1,323                     |       | 1,394                      |       |
| Accumulated  deficit                             |       | (90,319                   | )          | (90,156                    | )          |
| Total  stockholders’ equity                 |       | 11,576                    |       | 11,770                     |       |
|                                             |       |                      |       |                       |       |
| Total  liabilities and stockholders’ equity |       | $                         | 41,433     |                       | $          | 41,810 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

3

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**RAINING DATA CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net  revenues                                                  |       |                                  |       |   |   |
| Licenses                                                       |       | $                                     | 2,311      |   | $ | 2,222 |   |
| Services                                                       |       | 2,982                                 |       | 2,975 |   |
| Total  net revenues                                            |       | 5,293                                 |       | 5,197 |   |
|                                                           |       |                                  |       |   |   |
| Costs  of revenues                                             |       |                                  |       |   |   |
| Cost  of license revenues                                      |       | 87                                    |       | 72 |   |
| Cost  of service revenues                                      |       | 620                                   |       | 468 |   |
| Total  cost of revenues                                        |       | 707                                   |       | 540 |   |
|                                                           |       |                                  |       |   |   |
| Gross  profit                                                  |       | 4,586                                 |       | 4,657 |   |
|                                                           |       |                                  |       |   |   |
| Cost  of operations                                            |       |                                  |       |   |   |
| Selling  and marketing                                         |       | 1,329                                 |       | 1,414 |   |
| Research  and development                                      |       | 2,238                                 |       | 1,738 |   |
| General  and administrative                                    |       | 878                                   |       | 889 |   |
| Stock-based  compensation                                      |       | 6                                     |       | 32 |   |
| Amortization  of intangible assets                             |       | —                                |       | 650 |   |
| Total  operating expenses                                      |       | 4,451                                 |       | 4,723 |   |
|                                                           |       |                                  |       |   |   |
| Operating  income (loss)                                       |       | 135                                   |       | (66 | )  |
|                                                           |       |                                  |       |   |   |
| Other  expense                                                 |       |                                  |       |   |   |
| Interest  expense-net                                          |       | (247                                  | )          | (303 | ) |
| Other  expense-net                                             |       | (51                                   | )     | (10 | )  |
| Total  other expense                                           |       | (298                                  | )          | (313 | ) |
| Net  loss                                                      |       | $                                     | (163       | ) | $ | (379 | ) |
|                                                           |       |                                  |       |   |   |
| Basic  and diluted net loss per share                          |       | $                                     | (0.01      | ) | $ | (0.02 | ) |
|                                                           |       |                                  |       |   |   |
| Shares  used in computing basic and diluted net loss per share |       | 19,764                                |       | 18,415 |   |
|                                                           |       |                                  |       |   |   |
| Departmental  allocation of stock-based compensation           |       |                                  |       |   |   |
| Research  and development                                      |       | $                                     | 6          |   | $ | 30 |   |
| General  and administrative                                    |       | —                                |       | 2 |   |
| Total  stock-based compensation                                |       | $                                     | 6          |   | $ | 32 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

4

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**RAINING DATA CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**THREE****MONTHS ENDEDJUNE 30,**

 
| ** **                                                                                 | ** ** | **2005**            | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(In  thousands)** | ** ** |
| Cash flows from operating  activities:                                                     |       |                |       |     |       |
| Net  loss                                                                                  |       | $                   | (163       | )        | $          | (379 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                |       |     |       |
| Depreciation  and amortization of long-lived assets                                        |       | 82                  |       | 725      |       |
| Note  payable discount amortization                                                        |       | 21                  |       | 21       |       |
| Amortization  of deferred stock-based compensation                                         |       | 6                   |       | 32       |       |
| Change  in assets and liabilities:                                                         |       |                |       |     |       |
| Trade  accounts receivable                                                                 |       | (129                | )          | 398      |       |
| Other  current and non-current assets                                                      |       | 24                  |       | 86       |       |
| Accounts  payable                                                                          |       | (217                | )     | 29       |       |
| Accrued  liabilities                                                                       |       | 125                 |       | (631     | )          |
| Deferred  revenue                                                                          |       | 75                  |       | 284      |       |
| Net  cash provided by (used in) operating activities                                       |       | (176                | )     | 565      |       |
|                                                                                       |       |                |       |     |       |
| Cash  flows from investing activities:                                                     |       |                |       |     |       |
| Purchase  of property, furniture and equipment                                             |       | (91                 | )          | (7       | )          |
| Net  cash used in investing activities                                                     |       | (91                 | )          | (7       | )          |
|                                                                                       |       |                |       |     |       |
| Cash  flows from financing activities:                                                     |       |                |       |     |       |
| Proceeds  from exercise of stock options and warrants                                      |       | 34                  |       | 32       |       |
| Repayment  of debt                                                                         |       | —              |       | (16      | )          |
| Net  cash provided by financing activities                                                 |       | 34                  |       | 16       |       |
|                                                                                       |       |                |       |     |       |
| Effect  of exchange rate changes on cash                                                   |       | (51                 | )     | (13      | )     |
|                                                                                       |       |                |       |     |       |
| Net  increase (decrease) in cash and equivalents                                           |       | (284                | )     | 561      |       |
|                                                                                       |       |                |       |     |       |
| Cash  and equivalents at beginning of period                                               |       | 10,625              |       | 7,783    |       |
| Cash  and equivalents at end of period                                                     |       | $                   | 10,341     |     | $          | 8,344 |   |
|                                                                                       |       |                |       |     |       |
| Non-cash  financing activities:                                                            |       |                |       |     |       |
| Issuance  of payment-in-kind notes for accrued interest                                    |       | $                   | 267        |     | $          | 289 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

5

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**CONDENSEDNOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2005**

 

**1.  INTERIM FINANCIAL STATEMENTS**

 

The unaudited interimcondensed consolidated financial information furnished herein reflects all adjustments,consisting only of normal recurring items, which in the opinion of managementare necessary to fairly state Raining Data Corporation and subsidiaries’ (the“Company”) consolidated financial position, the results of their operations andtheir cash flows for the dates and periods presented and to make suchinformation presented not misleading. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been omitted pursuant to SEC rules and regulations; nevertheless,management of the Company believes that the disclosures herein are adequate tomake the information presented not misleading. These 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 June 30, 2005, are not necessarily indicative of results tobe expected for any other interim period or the fiscal year endingMarch 31, 2006.

 

**StockOptions**

 

Proforma information, which assumes the Company had accounted for stock optionsgranted under the fair value method prescribed by Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-basedCompensation” as amended, is presented below. The per share weighted averagefair values of stock options granted for the three-month periods endedJune 30, 2005 and 2004, as estimated using the Black-Scholesoption-pricing model, were $2.16 and $2.83, respectively.  The following assumptions were used for thethree-month period ended June 30, 2005: dividend yield of 0%; expectedvolatility of 114%; risk-free interest rate of 3.99%; and expected life of 7years.  The following assumptions wereused for the three-month period ended June 30, 2004: dividend yield of 0%;expected volatility of 126%; risk-free interest rate of 4.18%; and expectedlife of 7 years.

 

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ vesting periods. The Company’shistorical and pro forma net loss per share for the three-month periods endedJune 30, 2005 and 2004 are as follows (in thousands, except per share data):

 
| ** **                                                                                              | ** ** | **Three Months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net loss:                                                                                               |       |                             |       |   |   |
| As  reported                                                                                            |       | $                                | (163       | ) | $ | (379 | ) |
|                                                                                                    |       |                             |       |   |   |
| Add:                                                                                                    |       |                             |       |   |   |
| Stock-based  employee compensation expense included in net loss                                         |       | 6                                |       | 32 |   |
|                                                                                                    |       |                             |       |   |   |
| Less:                                                                                                   |       |                             |       |   |   |
| Total  stock-based employee compensation expense determined under the fair value  method for all awards |       | (353                             | )          | (290 | ) |
|                                                                                                    |       |                             |       |   |   |
| Pro  forma net loss:                                                                                    |       | $                                | (510       | ) | $ | (637 | ) |
|                                                                                                    |       |                             |       |   |   |
| Basic  and diluted loss per share                                                                       |       |                             |       |   |   |
| As  reported                                                                                            |       | $                                | (0.01      | ) | $ | (0.02 | ) |
| Pro  forma                                                                                              |       | $                                | (0.03      | ) | $ | (0.03 | ) |

 

6

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**2.  RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123R, “Share-Based Payment,” which establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor employee services. A key provision of this statement is the requirement ofa public entity to measure the cost of employee services received in exchangefor an award of equity instruments (including stock options) based on thegrant-date fair value of the award. That cost will be recognized over theperiod during which an employee is required to provide service in exchange forthe award (i.e., the requisite service period or vesting period). With respectto the Company, which is a small business issuer, this statement becomeseffective on April 1, 2006. The future impact of the adoption of SFAS 123Ron the Company's consolidated financial position and results of operations hasnot been determined at this time, however, the adoption of this statement isexpected to reduce earnings in future periods.

 

**3.  LONG-TERM DEBT**

 

Long-term debt of theCompany, including the Convertible Subordinated Note payable to Astoria CapitalPartners, L.P. (“Astoria”), the Company’s controlling stockholder, as ofJune 30, 2005 and March 31, 2005, is as follows (in thousands):

 
| ** **                                        | ** ** | **June 30,****2005** | ** ** | **March 31,****2005** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|----------------------------|------------|
| Subordinated  Convertible Note payable to Astoria |       | $                    | 21,947     |                       | $          | 21,681 |   |
| Plus  accrued interest                            |       | 274                  |       | 267                        |       |
| Less  unamortized discount                        |       | (235                 | )          | (256                       | )          |
| Total debt                                        |       | 21,986               |       | 21,692                     |       |
|                                              |       |                 |       |                       |       |
| Less  current portion of long-term debt           |       | —               |       | —                     |       |
| Total  long-term debt                             |       | $                    | 21,986     |                       | $          | 21,692 |   |

 

**4.  STOCKHOLDERS’ EQUITY**

 

Basic loss per share iscomputed using the net loss and the weighted average number of common sharesoutstanding during the period. Diluted loss per share is computed using the netloss and the weighted average number of common shares and dilutive potentialcommon shares outstanding during the period when the potential common sharesare not anti-dilutive. Potential dilutive common shares include outstandingstock options and warrants, convertible debt, and convertible preferred stock.There were outstanding options to purchase 4,058,646 shares of the Company’scommon stock with exercise prices ranging from $0.75 to $33.13 per share as ofJune 30, 2005.  There were outstandingoptions to purchase 4,043,397 shares of the Company’s common stock withexercise prices ranging from $0.75 to $52.50 per share as of June 30,2004.  There were outstanding warrants to purchase 500,000 shares of theCompany’s common stock at an exercise price of $6.29 as of June 30, 2005.  There were outstanding warrants to purchase2,169,647 shares of the Company’s common stock with exercise prices rangingfrom $2.35 to $6.29 per share as of June 30, 2004.  There were 300,000shares of preferred stock, which are convertible into 500,100 shares of commonstock, outstanding at June 30, 2005 and 2004.  There was convertibledebt outstanding at June 30, 2005 and 2004, which is convertible into4,389,556 and 4,692,407 shares of common stock, respectively.  The effectsof these items were not included in the computation of diluted earnings per sharebecause their effect would have been anti-dilutive.

 

7

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The change in accumulatedother comprehensive income during the three-month periods ended June 30,2005 and 2004 is the result of the effect of foreign exchange rate changes. Thefollowing table reconciles net loss as reported with total comprehensive loss(in thousands):

 
| ** **                        | ** ** | **Three Months ended  June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net  loss reported                |       | $                                | (163       | ) | $ | (379 | ) |
| Translation  adjustments—net |       | (71                              | )     | (207 | )  |
| Total  comprehensive loss         |       | $                                | (234       | ) | $ | (586 | ) |

 

**5.  BUSINESS SEGMENT**

 

The Company operates in one reportablesegment. International operations consist primarily of foreign sales officesselling software developed in the United States of America combined with localservice revenue. The following table summarizes consolidated financialinformation of the Company’s operations by geographic location (in thousands):

 
| ** **                                             | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
| *As of  and for Three Months Ended June 30, 2005* |       |               |       |       |       |      |       |
| Net  revenues                                          |       | $                  | 3,680      |       | $          | 1,613     |       | $ | 5,293 |   |
| Long  lived assets                                     |       | 27,781             |       | 972        |       | 28,753    |       |
| *As of  and for Three Months Ended June 30, 2004*      |       |               |       |       |       |      |       |
| Net  revenues                                          |       | $                  | 3,724      |       | $          | 1,473     |       | $ | 5,197 |   |
| Long  lived assets                                     |       | 29,050             |       | 639        |       | 29,689    |       |

 

The Company operates in one reportablesegment and is engaged in the design, development, sale and support of softwareinfrastructure. The Company divides its products into two main categories:(1) Pick-based database technology (“Databases”), which includesMulti-dimensional Database Management Systems, XML Data Management Servers andthe Pick Data Provider for the Microsoft .NET development environment; 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  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Databases           |       | $                                     | 4,200      |   | $ | 4,149 |   |
| RAD  Tools          |       | 1,093                                 |       | 1,048 |   |
| Total  Net Revenues |       | $                                     | 5,293      |   | $ | 5,197 |   |

 

**6.  COMMITMENTS AND CONTINGENCIES**

 

TheCompany is subject from time to time to litigation, claims and suits arising inthe ordinary course of business.  As ofJune 30, 2005, the Company was not a party to any known material litigation,claim or suit.

 

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

 

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

 

This Form 10-QSB contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”). These statements may generally be identified by the useof such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,”or “shall,” or the negative of those terms or similar terms. We have basedthese forward-looking statements on our current expectations and 

 

8

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projections about future events.Forward-looking statements involve certain risks and uncertainties and actualresults may differ materially from those discussed in any such statement.Factors that could cause actual results to differ materially from suchforward-looking statements include the risks described under the heading “RiskFactors” of this Form 10-QSB and elsewhere in this Form 10-QSB. Theforward-looking statements contained in this Form 10-QSB include, but are notlimited to statements about the following: (1) our future success, (2) ourresearch and development efforts and expenses, (3) our future operating resultsand cash flow, (4) our competitive ability and position, (5) the markets inwhich we operate, (6) our revenue, (7) our cost of license revenue and cost ofservice revenue, (8) our selling and marketing costs, (9) our general andadministrative costs, (10) our stock-based compensation expense, (11) thepossibility that we may seek to take advantage of opportunities in the equityand capital markets, (12) our belief that our existing cash balances combinedwith our cash flow from operating activities will be sufficient to meet ouroperating and capital expenditure requirements for the remainder of the fiscalyear ending March 31, 2006 and through the foreseeable future and (13) theissuance of additional PIK notes to Astoria. All forward-looking statements inthis document are made as of the date hereof, based on information available tous as of the date hereof, and we assume no obligation to update anyforward-looking statement.

 

**OVERVIEW**

We were incorporated in the State of Delawarein 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 the design,development, sale and support of software infrastructure. Our products allowcustomers to create and enhance flexible software applications for their ownneeds and our software may be categorized into four product lines: XML datamanagement server (“XDMS”), Multi-dimensional database management systems(“MDMS”), Microsoft .NET integration software based on our Pick Data Provider(“PDP”) for .NET products and Rapid Application Development (“RAD”) softwaretools.

 

Many of our products are based on the PickUniversal Data Model (“Pick UDM”), which we created, and are capable ofhandling data from many sources. The Pick UDM is a core component across theMDMS, XDMS and PDP product lines.

 

Beginning in 2001, we began an extensiveeffort to leverage our time-proven Pick UDM and core intellectual property tocreate an enterprise class XML database management system for the emerging XMLmarket and the growing need for native XML data stores and the ability tohandle structured and unstructured data. This significant investment of timeand resources resulted in the TigerLogic XDMS product line. We are focused onthe continued development and enhancement of this product line, identificationof new and emerging application areas and discussions with channel partners forthe sale and distribution of the TigerLogic product line.

 

TigerLogicXML Data ManagementServer provides high-performance management and query of XML data by leveragingthe time-proven Pick UDM. TigerLogic also enables the ability to query externaldata sources as if they were one logical database and maintains referentialintegrity across data sources. TigerLogic’s patent-pending XML Indexing andProfiling technology enables it to access XML data via XQuery between 10x to150x faster in internal tests than relational databases, XML repositories orXML Index and Search engines. TigerLogic provides XML, Java, WSDL and SOAPcompatibility for simplified plug-in and integration with developmentenvironments of choice.

 

TigerLogic provides an extensible andflexible development and deployment environment. Unlike other XML datamanagement alternatives, TigerLogic XDMS does not need to know the schema orstructure of data before  processing andstoring it. We believe the ability to make XML schemas optional is a vitalinnovation because the structures of operational systems frequently change, andmapping schemas for the purpose of linking to a new data source is bothdifficult and time-consuming. The system also enables support for schemaversioning, which is critical when addressing evolving standards and XMLschemas. The General Availability Release of TigerLogic XDMS version 2.1, whichincluded many feature enhancements and the full implementation of our XQueryengine, was released in May 2005.

 

The MDMS product line consists principally ofthe D3 Data Base Management System (“D3”), which runs on many operating systemssuch as IBM AIX, Linux and Windows NT. D3 allows application programmers tocreate new business solution software in less time than it normally takes inmany other environments. This can translate into lower costs for the developer,lower software prices for the customer and reduced costs of ownership for boththe developer and end user. 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.

 

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Our PDP product line includes the Pick DataProvider for .Net and our Pick Reporting Services Connector. The PDP componentfor the Microsoft .NET Framework is tightly integrated with Microsoft VisualStudio .NET. It allows software developers using IBM’s Universe and Unidatadatabases and our D3 database platform to build client/server applications, Webapplications or Web services using any of the languages and technologies thatrun on the Microsoft .NET Framework, such as Microsoft ASP.NET, Visual Basic..NET, Visual C# .NET and Visual J# .NET. Announced in February 2005 and releasedin May 2005, our Pick Reporting Services Connector enables a dataconnection that allows Pick database users to unlock the benefits of MicrosoftReporting Services to take advantage of a comprehensive, server-based reportingsolution that can author, manage, and deliver both paper-oriented andinteractive, Web-based reports. This solution also allows access to IBMUniVerse, IBM UniData and Pick D3 data.

 

Our RAD products support the full life cycleof software application development and are designed for rapid prototyping,development and deployment of graphical user interface (“GUI”) client/serverand Web applications. The RAD products include Omnis Studio, Omnis Studio forSAP and Omnis Classic, and are object-oriented and component-based, providingthe ability to deploy applications on operating system platforms such asWindows, Unix and Linux, as well as database environments such as MySQL,Oracle, DB2, Sybase, Microsoft SQL Server and other Open Data Base Connectivity(“ODBC”) compatible database management systems.

 

As part of our sales efforts, we offertraining programs to our customers and prospective customers. These programsinclude classes on basic and advanced skills as well as classes designed toassist customers in the implementation and use of our products.

 

Our products are used by our customers tobuild and deploy applications that may become a critical component of theirbusiness operations. As a result, continuing to provide customer technicalsupport services is an important element of our business strategy. Customerswho participate in our support programs receive periodic maintenance releasesand direct technical support when required.

 

In the United States, we sell our productsthrough established distribution channels consisting of OEMs, systemintegrators, 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. Approximately30% and 28% of our revenue came from sales through our offices located outsidethe United States for the three-month periods ended June 30, 2005 and 2004,respectively.

 

We sell our products in U.S. Dollars in NorthAmerica, British Pounds Sterling in the United Kingdom and Euros in Germany andFrance. Because we recognize revenue and expense in these various currenciesbut report our financial results in U.S. Dollars, changes in exchange rates maycause variances in our period-to-period revenue and results of operations infuture periods. Recorded foreign exchange gains and losses have not beenmaterial to our performance to date.

 

We license our software on a per CPU,per-server, per-port or per-user basis. Therefore, the addition of CPU’s,servers, ports or users to existing systems increases our revenue from ourinstalled base of licenses. 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 classified into twogeneral 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-month periods endedJune 30, 2005 and 2004, no single customer accounted for more than 10% ofour revenue.

 

We have devoted significant resources to theresearch and development of our products and technology.  We believe that our future success willdepend largely on a strong development effort with respect to both our existingand new products.  These developmentefforts have resulted in updates and upgrades to existing MDMS and RAD productsand the launch of new products including the XDMS and PDP product lines.  New product releases in all of ourproduct lines are currently in progress. We expect to continue our researchand development efforts in all product lines for the foreseeable future.  We intend for these efforts to improve ourfuture operating results and increase cash flow. However, such efforts may notresult in additional new products or revenue, and we can make no assurancesthat the recently announced products or future products will be successful.

 

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The application development tools softwaremarket is rapidly changing and intensely competitive. Our MDMS products competewith products developed by companies such as Oracle, Microsoft and IBM. Our RADproducts currently encounter competition from several direct competitors,including Microsoft, and competing development environments, including JAVA.Competition is developing and evolving in the XML market for which our XDMSproducts are intended. Companies that do or are expected to compete in thismarket include Oracle, IBM, Microsoft and Sybase, as well as a number ofsmaller companies with products that directly and indirectly compete with ourXDMS products. Our PDP products compete primarily with products developed byMicrosoft and Oracle. 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 to compete in thevarious MDMS, RAD, XDMS and PDP markets depends on factors both within andoutside our control, including the timing of release, performance and price ofnew products developed by both us and our competitors. Although we believe thatwe currently compete favorably with respect to most of these factors, we maynot be able to maintain our competitive position against current and potentialcompetitors, especially those with greater resources.

 

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, TigerLogic, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, andmvDesigner, among others. We also have one pending U.S. patent application asof June 30, 2005.

 

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

 

We generally ship software products as ordersare received and have historically operated with little backlog. As a result,our license revenue in any given quarter is dependent upon orders received andproduct shipped during the quarter. Historically, there has been a short cyclebetween receipt of an order and shipment. Consequently, we do not believe thatour backlog as of any particular date is meaningful.

 

At June 30, 2005, wehad 146 employees worldwide of which 111 were in the United States and 35 werein our international offices. Of the 146 employees, 143 are full-time andapproximately 50% are in research and development, 15% in technicalsupport, 20% in sales and marketing and 15% in general and administrativefunctions.

 

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The discussion and analysis of our financialcondition and results of operations is based on our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses anddisclosure of contingent liabilities.

 

On an on-going basis, we evaluate ourestimates, including those related to revenue recognition and accounting forintangible assets and goodwill. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

We have identified the accounting policiesbelow as the policies critical to our business operations and the understandingof our results of operations. We believe the following critical accountingpolicies and the related judgments and estimates affect the preparation of ourcondensed consolidated financial statements:

 

REVENUE RECOGNITION.   We recognize revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2,“Software Revenue Recognition” (“SOP 97-2”), as amended. Under the residualmethod, 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 

 

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and recognize revenue for the remainder ofthe arrangement fee attributable to the elements initially delivered in thearrangement (e.g., software license) when the basic criteria in SOP 97-2 havebeen met.

 

Under SOP 97-2, revenue attributable to anelement in a customer arrangement is recognized when persuasive evidence of anarrangement exists and delivery has occurred, provided the fee is fixed ordeterminable, collectibility is probable and the arrangement does not requiresignificant customization of the software. If, at the outset of the customerarrangement, we determine that the arrangement fee is not fixed ordeterminable, we defer the revenue and recognize the revenue when thearrangement fee becomes due and payable.

 

Service revenue relates primarily to consultingservices, maintenance and training. Maintenance revenue is initially deferredand then recognized ratably over the term of the maintenance contract,typically 12 months. Consulting and training revenue is recognized as theservices are performed and is usually calculated on a time and materials basis.Such services primarily consist of implementation services related to theinstallation of our products and do not include significant customization to ordevelopment of the underlying software code. We do not have price protectionprograms, conditional acceptance agreements or warranty programs, and sales ofour products are made without right of return.

 

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;

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

·           Significantnegative industry or economic trends;

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

·           Our marketcapitalization relative to net book value.

 

When we determine that the carrying value oflong-lived assets may not be recoverable based upon the existence of one ormore of the above indicators of impairment and the carrying value of the assetcannot be recovered from projected undiscounted cash flows, we measure anyimpairment based on a projected discounted cash flow method using a discountrate determined by our management to be commensurate with the risk inherent inthe current business model. Significant management judgment is required indetermining whether an indicator of impairment exists and in projecting cashflows.

 

Following the adoption of Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets” (“SFAS No. 142”), we revised our policy for assessing anddetermining impairment of goodwill. The SFAS No. 142 goodwill impairmentmodel is a two-step process. The first step is used to identify potentialimpairment by comparing the fair value of a reporting unit with its net bookvalue (or carrying amount), including goodwill. If the fair value exceeds thecarrying amount, goodwill of the reporting unit is considered not impaired andthe second step of the impairment test is unnecessary. If the carrying amountof a reporting unit exceeds its fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, if any.The second step of the goodwill impairment test compares the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill. Ifthe carrying amount of the reporting unit’s goodwill exceeds the implied fairvalue of that goodwill, an impairment loss is recognized in an amount equal tothat excess. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. That is,the fair value of the reporting unit is allocated to all of the assets andliabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit.

 

Determining the fair value of a reportingunit under the first step of the goodwill impairment test and determining thefair value of individual assets and liabilities of a reporting unit (includingunrecognized intangible assets) under the second step of the goodwillimpairment 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. Estimates of fair value are based on ourstock price as reported by Nasdaq.

 

 

**Results of Operations**

 

The following table sets forth certain Condensed Consolidated Statementof Operations data in total dollars, as a percentage of total net revenues andas a percentage change from the same period in the prior year.  Cost of license revenues, cost of servicerevenues, gross profit and margin on license revenues and gross profit andmargin on service revenues are expressed 

 

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as a percentage of the related revenues. This information should beread in conjunction with the Condensed Consolidated Financial Statementsincluded elsewhere in this Form 10-QSB.

 
| ** **                                             | ** ** | **Three  Months Ended  June 30, 2005** | ** ** | **Three  Months Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **Results**                            | ** ** | **% of Net  Revenues**                 | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| Net  revenues                                          |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Licenses                                               |       | $                                      | 2,311      |                                   | 44         | % | 4 | % | $ | 2,222 |   | 43 | % |
| Services                                               |       | 2,982                                  |       | 56                                     | %          | 0 | % | 2,975 |   | 57 | % |
| Total  net revenues                                    |       | 5,293                                  |       | 100                                    | %          | 2 | % | 5,197 |   | 100 | % |
| Cost  of revenues                                      |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Cost  of license revenues (as a % of license revenues) |       | 87                                     |       | 4                                      | %          | 21 | % | 72 |   | 3 | % |
| Cost  of service revenues (as a % of service revenues) |       | 620                                    |       | 21                                     | %          | 32 | % | 468 |   | 16 | % |
| Gross  margin on license revenues                      |       | 2,224                                  |       | 96                                     | %          | 3 | % | 2,150 |   | 97 | % |
| Gross  margin on service revenues                      |       | 2,362                                  |       | 79                                     | %          | (6 | %) | 2,507 |   | 84 | % |
| Operating  expenses                                    |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Selling  and marketing                                 |       | 1,329                                  |       | 25                                     | %          | (6 | %) | 1,414 |   | 27 | % |
| Research  and development                              |       | 2,238                                  |       | 42                                     | %          | 29 | % | 1,738 |   | 33 | % |
| General  and administrative                            |       | 878                                    |       | 17                                     | %          | (1 | %) | 889 |   | 17 | % |
| Stock-based  compensation                              |       | 6                                      |       | 0                                      | %          | (81 | %) | 32 |   | 1 | % |
| Amortization  of intangible assets                     |       | —                                 |       | 0                                      | %          | (100 | %) | 650 |   | 13 | % |
| Total  operating costs                                 |       | 4,451                                  |       | 84                                     | %          | (6 | %) | 4,723 |   | 91 | % |
| Operating  income (loss)                               |       | 135                                    |       | 3                                      | %          | (305 | %) | (66 | )  | (1 | %) |
| Other  expense-net                                     |       | (298                                   | )          | (6                                     | %)         | (5 | %) | (313 | ) | (6 | %) |
| Net  loss                                              |       | $                                      | (163       | )                                      | (3         | %) | (57 | %) | $ | (379 | ) | (7 | %) |

** **

**REVENUE**

 

NET REVENUE. Our revenue is derived principally from two sources:fees from software licensing and fees for services, including maintenance,consulting, training and technical support. We license our software on aper-CPU, per-server, per-port or per-user basis. Therefore, the addition ofCPU’s, servers, ports or users to existing systems increases our revenue fromour installed base of licenses. We view the MDMS and RAD markets in which weoperate to be relatively stable and consistent from period to period andanticipate that our revenue on an annual basis from those products will remainstable for the foreseeable future. Fluctuations in revenue between quarters oryear-to-year are primarily the result of the timing of orders and customerordering patterns. We do not view the increase in year-to-year revenues for thethree-month periods ended June 30, 2005 and 2004 to be representative ofimmediate market trends. In the longer term, we expect that the MDMS and RADmarkets will eventually contract as customers adopt newer technologies, and,therefore, the revenue generated from sales of our MDMS and RAD products isexpected to decrease.

 

We have been activelydeveloping and marketing our XDMS and PDP product lines. Should our developmentefforts and the adoption of these product lines be successful, we anticipateadditional revenues in future periods related to the sale of these products.However, we can give no assurances as to customer acceptance of any newproducts or services, or the ability of the current or any new products andservices to generate revenue. While we are committed to research anddevelopment efforts that are intended to allow us to penetrate new markets andgenerate new sources of revenue, such efforts may not result in additionalproducts, services or revenue. There have been no sales of the XDMS products,and, to date, PDP product revenues have not been material.

 

**COSTOF REVENUE**

 

COST OF LICENSE REVENUE. Cost of license revenue iscomprised of direct costs associated with software license sales includingsoftware packaging, documentation, physical media costs and royalties. Cost oflicense revenue remained relatively consistent in the three-month period endedJune 30, 2005 as compared to the same period in the prior year. We anticipatethat the cost of license revenue, as a percentage of license revenue and inabsolute dollars, will be relatively stable in future periods.

 

COST OF SERVICE REVENUE. Cost of service revenueincludes primarily personnel costs relating to providing consulting, technicalsupport and training services.  In thethree-month period ended June 30, 2005, cost of service revenue increased as aresult of consulting costs related to external customer support as well asproduct mix changes.  We anticipate thatthe cost of service revenue, as a percentage of service revenue and in absolutedollars, will be relatively stable in future periods.

 

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**OPERATINGEXPENSES**

 

SELLING AND MARKETING. Selling and marketingexpense consists primarily of salaries, benefits, advertising, tradeshows,travel and overhead costs for our sales and marketing personnel. Selling andmarketing expense remained relatively consistent in the three-month periodended June 30, 2005 as compared to the same period in the prior year. Weanticipate that selling and marketing costs related to XDMS products mayincrease as we further develop the sales channel for these products and ifcustomer acceptance of these products increases. In addition, if our continuedresearch and development efforts are successful, including with respect to ourXDMS products, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products in future periods.

 

RESEARCH AND DEVELOPMENT. Research and developmentexpense consists primarily of salaries and other personnel-related expenses andoverhead costs for engineering personnel, including employees in the US and theUK and contractors in the US and India. In the three-month period ended June30, 2005, spending related to our development efforts increased as certain ofour new products reached general or production release and we continued torefine and add certain features and functionality to these products. Themajority of these costs have been personnel-related as we have hired employeesand contractors in association with the ongoing development and enhancement ofour product lines. We are committed to our research and development efforts andexpect research and development expense will remain at the current level in futureperiods or increase if we believe that additional spending is warranted. Suchefforts may not result in additional new products and any new products,including the XDMS products, may not generate sufficient revenue, if any, tooffset the research and development expense.

 

GENERAL AND ADMINISTRATIVE. General andadministrative expense consists primarily of costs associated with our finance,human resources, legal and other administrative functions. These costs consistprincipally of salaries and other personnel-related expenses, professionalfees, depreciation and overhead costs. General and administrative spendingremained relatively consistent in the three-month period ended June 30, 2005 ascompared to the same period in the prior year. We anticipate that general andadministrative costs as a percentage of revenue and in absolute dollars willremain relatively stable during fiscal 2006.

 

STOCK-BASED COMPENSATION.  The decreasesin stock-based compensation in the three-month period ended June 30, 2005 ascompared to the same period 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. Bycausing the Company to incur significantly increased compensation costs, suchaccounting changes are expected to reduce the Company's reported earnings andmay require the Company to reduce the availability and amount of equityincentives provided to employees, which may make it more difficult for theCompany to attract, retain and motivate key personnel. Each of these resultscould materially and adversely affect the Company's business. The future impactof the adoption of SFAS 123R on the Company's consolidated financial positionand results of operations has not been determined at this time, however, theadoption of this statement is expected to reduce earnings in future periods.

 

GOODWILL AND AMORTIZATION OF INTANGIBLEASSETS.   We amortize ouridentifiable intangible assets in accordance with their determined useful life.The life of our existing intangible assets was estimated to be four years. Asof June 30, 2005, our existing intangible assets were fully amortized.

 

OTHER INCOME (EXPENSE). Other expenseconsists primarily of net interest expense and, to a much lesser extent, gainsand losses on foreign currency transactions. Other expense remained relativelyconsistent during the three-month period ended June 30, 2005 as compared to thethree-month period ended June 30, 2004. Due to the uncertainty in exchange rates, we may experience transactiongains or losses in future periods, the effect of which cannot be determined atthis time.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

In connection with the acquisition of PickAx,we assumed a Secured Promissory Note issued to Astoria Capital Partners, L.P.(“Astoria”) dated November 30, 2000, in the amount of $18.5 million. InJanuary 2003, we entered into a Note Exchange Agreement (the “Exchange Agreement”)with Astoria to replace the existing Secured Promissory Note, as amended, witha Convertible Subordinated Note. Under the terms of the Exchange Agreement, theSecured Promissory Note was exchanged and replaced with a ConvertibleSubordinated Note having a principal amount of $22.1 million, which principalamount was equal to the outstanding principal and accrued interest payable onthe Secured Promissory Note as of the date of the Exchange Agreement. TheConvertible Subordinated Note is convertible into common stock at any time, atthe option of Astoria, at a price of $5.00 per share. The ConvertibleSubordinated Note matures on May 30, 2008, extending the May 30, 

 

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2003 maturity date of the Secured PromissoryNote. Under terms of the Note, the Company was unable to redeem the ConvertibleSubordinated Note prior to January 30, 2005. The interest rate of theConvertible Subordinated Note is 5% per annum as compared to an interest rateof 10% per annum under the Secured Promissory Note. The interest is payablequarterly at our option in cash or through increases to the outstandingprincipal of the Convertible Subordinated Note.

 

On December 14,2004, we entered into an Agreement Regarding Amended and Restated Common StockPurchase Warrant and 5% Convertible Subordinated Note Due 2008 with Astoriawhereby we could redeem, in part, the Note and the payment in kind (“PIK”)notes in advance of January 30, 2005. On December 14, 2004, Astoriaexercised its warrant in the amount of $2,670,904. In lieu of a cash payment,we used the proceeds of the exercise to paydown a portion of the indebtednessto Astoria. The paydown consisted of $247,129 for accrued and unpaid interest,$1,914,165 for the PIK Notes issued to date and $509,610 as a reduction ofprincipal of the Convertible Subordinated Note. As of June 30, 2005 therewere outstanding PIK notes to Astoria for the accrued interest due in theaggregate amount of $273,595. For the foreseeable future, we expect to issue additionalPIK notes to Astoria in lieu of cash payments for the interest due under theConvertible Subordinated Note. If the Convertible Subordinated Note or the PIK notes areconverted into common stock, our stockholders may experience substantial dilution.Unlike the Secured Promissory Note, the Convertible Subordinated Note is notsecured by our assets.

 

If our future financial performance improves,we may seek to take advantage of opportunities in the equity and capitalmarkets to raise additional funds for operating needs or to pay down our debtto Astoria. There can be no assurances that such opportunities will arise. Inaddition to holding the Convertible Subordinated Note, Astoria is a majorstockholder of ours, holding all of our preferred stock and a majority of ouroutstanding common stock. Richard W. Koe, Chairman of the Board of Directors,serves as the Managing General Partner for Astoria. Carlton H. Baab, ourPresident and Chief Executive Officer, served as a Managing Principal of AstoriaCapital Management, which is a general partner of Astoria, until taking aformal leave of absence to join us in August 2001. Gerald F. Chew, amember of our Board of Directors, is the cousin of Mr. Koe.

 

At June 30, 2005, we had$10.3 million in cash. We believe that our existing cash balances combinedwith our cash flow from operating activities will be sufficient to meet ouroperating and capital expenditure requirements for the remainder of the fiscalyear ending March 31, 2006 and through the foreseeable future. We arecommitted to research and development efforts that are intended to allow us topenetrate new markets and generate new sources of revenue and improve operatingresults. However, our research and development efforts have required, and willcontinue to require, cash outlays without the immediate or short-term receiptof related revenue. Our ability to service our long-term debt and meet ourexpenditure requirements is dependent upon our future financial performance,which will be affected by, among other things, prevailing economic conditions,our ability to penetrate new markets and attract new customers, marketacceptance of our new and existing products and services, the success ofresearch and development efforts and other factors beyond our control.

 

On February 11, 2004, we entered into acredit facility with Silicon Valley Bank which provides us with the ability toborrow up to $1.5 million at an annual interest rate of Prime plus 1.0%,provided that the annual interest rate shall never be less than 5%. The creditfacility is collateralized by our assets and expires in February 2006. Thecredit facility contains financial and reporting covenants that require us tomaintain certain financial ratios only when we have outstanding borrowings onthe line. There were no outstanding borrowings at June 30, 2005. Uponexpiration of the term of this facility we will assess our credit and liquidityneeds in relation to market factors. However, we believe that the facility isnot required for liquidity purposes or to meet our cash flow needs.

 

On November 9, 2004, we entered into alease agreement with The Irvine Company whereby we leased one building inIrvine, California, comprising approximately 29,000 square feet, toreplace our current headquarters facility. The lease will commence inNovember 2005 and has a five-year term. If certain conditions aremet, we have the option to extend the term of the lease for an additionalthirty-six months. The total basic rent over the five-year term isapproximately $2.6 million, which represents a lower per square foot cost thanour current property lease. The annual basic rent during the five-yearterm ranges from approximately $475,000 during the first year toapproximately $545,000 during the fifth year. The rent expense will be recordedon a straight line basis over the lease term commencing once we have physicalrights to the property. We expect to incur move-in costs in future periods;however, these costs are not expected to be material in the periods in which theyare incurred.

 

We had no material commitments for capitalexpenditures at June 30, 2005.

 

Net cash used in operating activities was$0.2 million and net cash provided by operating activities was $0.6 million forthe three-month periods ended June 30, 2005 and 2004, respectively.

 

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Our earnings beforeinterest, taxes, depreciation and amortization (EBITDA) were $0.2 million,or 4% of total net revenue, and $0.7 million, or 13% of total net revenue, forthe three-month periods ended June 30, 2005 and 2004, respectively. Thereduction in EBITDA was a result of the increased spendingfor research and development. EBITDA is defined as net loss with an add-backfor depreciation and amortization, non-cash stock-based compensation expense,interest expense, other income and income taxes. The following table reconcilesEBITDA to the reported net loss:

 

**RECONCILIATION OF EBITDA TO NET LOSS**

 
| ** **                     | ** ** | **Three months   ended June 30,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| **In $000’s**             | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Reported  net loss             |       | $                                      | (163       | ) | $ | (379 | ) |
| Depreciation  and amortization |       | 82                                     |       | 725 |   |
| Stock-based  compensation      |       | 6                                      |       | 32 |   |
| Interest  expense-net          |       | 247                                    |       | 303 |   |
| Other  expense-net             |       | 51                                     |       | 10 |   |
|                           |       |                                   |       |   |   |
| EBITDA                         |       | $                                      | 223        |   | $ | 691 |   |

 

EBITDA does not represent funds available formanagement’s discretionary use and is not intended to represent cash flow fromoperations. EBITDA should not be construed as a substitute for net loss or as abetter measure of liquidity than cash flow from operating activities, which aredetermined in accordance with United States generally accepted accountingprinciples (“GAAP”). EBITDA excludes components that are significant inunderstanding and assessing our results of operations and cash flows. Inaddition, EBITDA is not a term defined by GAAP and as a result our measure ofEBITDA might not be comparable to similarly titled measures used by othercompanies.

 

However, EBITDA is used by management toevaluate, assess and benchmark our operational results and we believe thatEBITDA is relevant and useful information, which is often reported and widelyused by analysts, investors and other interested parties in our industry.Accordingly, we are disclosing this information to permit a more comprehensiveanalysis of our operating performance, to provide an additional measure ofperformance and liquidity and to provide additional information with respect toour ability to meet future debt service, capital expenditure and workingcapital requirements.

 

Our EBITDA financial information is alsocomparable to net cash provided by (used in) operating activities. The tablebelow reconciles EBITDA to the GAAP disclosure of net cash provided by (usedin) operating activities:

 

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

 
| ** **                                           | ** ** | **Three months   ended June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| **In $000’s**                                   | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net  cash provided by (used in) operating activities |       | $                                      | (176       | )  | $ | 565 |   |
|                                                 |       |                                   |       |   |   |
| Interest  expense-net                                |       | 247                                    |       | 303 |   |
| Other  expense-net                                   |       | 51                                     |       | 10 |   |
| Change  in accounts receivable                       |       | 129                                    |       | (398 | ) |
| Change  in other assets                              |       | (24                                    | )     | (86 | )  |
| Change  in accounts payable                          |       | 217                                    |       | (29 | )  |
| Change  in accrued liabilities                       |       | (125                                   | )          | 631 |   |
| Change  in deferred revenue                          |       | (75                                    | )     | (284 | )  |
| Note  payable discount amortization                  |       | (21                                    | )          | (21 | ) |
|                                                 |       |                                   |       |   |   |
| EBITDA                                               |       | $                                      | 223        |   | $ | 691 |   |

 

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**RISK FACTORS**

 

We operate in a rapidly changing environmentthat involves numerous risks and uncertainties. The followingsection lists some, but not all, of these risks and uncertainties that mayhave a material adverse effect on our business, financial condition or resultsof operation.

 

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

 

We have devoted significant resources to theresearch and development of products and technology. We believe that our futuresuccess will depend in large part on a strong research and development effortwith respect to both our existing and new products. Beginning in 2001, we beganan extensive effort to leverage our time-proven Pick UDM and core intellectualproperty to create an enterprise class XML database management server for theemerging XML market. This significant investment of time and resources resultedin the TigerLogic XDMS product line. We have also introduced the PDP productline, which is designed to support the Microsoft.NET Framework and MicrosoftReporting Services. While we intend for these efforts to improve our futureoperating results and increase cash flow, such efforts may not result in newproducts or revenue, and any new products that do result may not be successful.The development of new or enhanced software products is a complex and uncertainprocess requiring high levels of innovation, as well as accurate anticipation ofcustomer and technical trends. In developing new products and services, we mayfail to develop and market products that respond to technological changes orevolving industry 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.

 

**OUR FAILURE TO COMPETEEFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

 

The market for our products is highlycompetitive, diverse and subject to rapid change. Our products and servicescompete on the basis of the following key characteristics: performance;inter-operability; scalability; functionality; reliability; pricing; post salecustomer support; quality; compliance with industry standards; and overalltotal cost of ownership.

 

The application development tools softwaremarket is rapidly changing and intensely competitive. Our MDMS products competewith products developed by companies such as Oracle, Microsoft and IBM. Our RADproducts currently encounter competition from several direct competitors,including Microsoft, and competing development environments, including JAVA.Competition is developing and evolving in the XML market for which our XDMSproducts are intended. Companies that do or are expected to compete in thismarket include Oracle, IBM, Microsoft and Sybase, as well as a number ofsmaller companies with products that directly and indirectly compete with ourXDMS products. Our PDP products compete primarily with products developed byMicrosoft and Oracle. Additionally, as we expand our business, we expect tocompete with a different group of companies, including smaller, highly focusedcompanies offering single products.

 

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

 

**BECAUSE THE MARKET FOR OUR MDMSAND RAD PRODUCTS IS RELATIVELY STABLE, OUR REVENUE MAY DECLINE IF WECANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEWCUSTOMERS.**

 

We believe that the markets for our MDMS andRAD products are relatively stable and consistent from period to period. As aresult, to maintain or grow our revenue in these markets, we will need tomaintain 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 

 

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customers to competitors, or if the MDMS orRAD markets decline, our revenue may be adversely affected. In the longer term,it is expected that the MDMS and RAD markets will eventually contract ascustomers adopt newer technologies.

 

**IF WE ARE UNABLE TO SUCCESSFULLYRECRUIT AN ADDITIONAL INDEPENDENT DIRECTOR TO SERVE ON THE BOARD OF DIRECTORSAND AS A MEMBER OF THE AUDIT COMMITTEE WITHIN THE REQUIRED TIME PERIOD, OURSTOCK MAY BE DE-LISTED.**

 

On December 15, 2004, Geoffrey P. Wagnerresigned from our Board of Directors. Due to his resignation, the Company’sAudit Committee currently is comprised of only two members. Nasdaqrules require that, beginning July 31, 2005, our Audit Committee becomprised of three (3) members. We have received notice from Nasdaqregarding our non-compliance and have been provided a cure period until theearlier of our next annual shareholders meeting or one year from the occurrenceof the event that caused the noncompliance. Failure to comply with Nasdaq’saudit committee composition rules within the required time frame mayresult in Nasdaq de-listing our stock or taking other corrective actions.

 

**OUR PRODUCTS HAVE A LONG SALESCYCLE WHICH COULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

 

The sales cycle for our MDMS and RAD productstypically ranges from three to nine months or longer and the sales cycle forour XDMS and PDP products is anticipated to be significantly longer since thesemarkets are emerging and the products are still in the process of being adoptedby the marketplace. Our products are typically used by application developers,system integrators and value added resellers to develop applications that arecritical to their corporate end user’s business. Because our products are oftenpart of an end user’s larger business process, re-engineering initiative, orimplementation of client/server or web-based computing, the end usersfrequently view the purchase of our products as part of a long-term strategicdecision regarding the management of their workforce-related operations andexpenditures. Thus, this sometimes results in end users taking a significantperiod of time to assess alternative solutions by competitors or to defer apurchase decision as a result of an unrelated strategic issue beyond ourcontrol. As a result, a significant period of time may elapse between ourresearch and development efforts and recognition of revenue, if any.

 

**IF WE FAIL TO INCREASE REVENUE ORIMPROVE OUR OPERATING RESULTS, WE MAY NOT BE ABLE TO REPAY OUR DEBT TOASTORIA.**

 

We believe that our cashand cash flow from operating activities will be sufficient to meet ouroperating and capital expenditure requirements at least through the foreseeablefuture. Our ability to meet our expenditures and service ourdebt obligations 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 Note bears interest at 5% per annum and is convertibleinto common stock by Astoria 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 or to access opportunities in the equity and capital markets to raiseadditional funds for operating needs.

 

**THE CONCENTRATION OF OUR STOCKOWNERSHIP AND THE DEBT OWED TO ASTORIA GIVE CERTAIN STOCKHOLDERS SIGNIFICANTCONTROL OVER OUR BUSINESS.**

 

As of June 30, 2005, Astoriabeneficially owned approximately 59% of our outstanding common stock. As ofsuch date, Astoria also owned all of our outstanding preferred stock. Inaddition, as of June 30, 2005, the Convertible Subordinated Note issued toAstoria had a balance of approximately $22 million in principal andaccrued interest maturing on May 30, 2008. Richard W. Koe, Chairman of theBoard of Directors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria. Carlton H. Baab, ourPresident and Chief Executive Officer, served as a Managing Principal ofAstoria Capital Management until taking a formal leave of absence to join us inAugust 2001. This concentration of stock ownership, together with theoutstanding debt, would allow Astoria, acting alone, to block any actions thatrequire approval of our stockholders, including the election of members to theBoard of Directors and the approval of significant corporate transactions.Moreover, this concentration of ownership may delay or prevent a change incontrol.

 

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**RECENT RULEMAKING BY THEFINANCIAL ACCOUNTING STANDARDS BOARD WILL REQUIRE THE COMPANY TO EXPENSE EQUITYCOMPENSATION GIVEN TO EMPLOYEES AND WILL SIGNIFICANTLY HARM OPERATING RESULTSAND MAY REDUCE THE COMPANY’S ABILITY TO EFFECTIVELY UTILIZE EQUITYCOMPENSATION TO ATTRACT AND RETAIN EMPLOYEES.**

 

The Company historically has used stockoptions as a significant component of its employee compensation program inorder to align employees’ interests with the interests of the Company’sstockholders, encourage employee retention, and provide competitivecompensation packages. The FASB has adopted changes that will require companiesto record a charge to earnings for employee stock option grants and otherequity incentives, which will have a significant impact on the Company’sresults of operations. The Company is required to implement the standard nolater than its fiscal year 2007. By causing the Company to incur significantlyincreased compensation costs, such accounting changes are expected to reducethe Company’s reported earnings and may require the Company to reduce theavailability and amount of equity incentives provided to employees, which maymake it more difficult for the Company to attract, retain and motivate keypersonnel. Each of these results could materially and adversely affect theCompany’s business.  The future impact ofthe adoption of  SFAS 123R on theCompany’s consolidated 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.

 

**WE MAY EXPERIENCE QUARTERLYFLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY OF OURSTOCK PRICE.**

 

We expect to continue to spend substantialamounts of money in the area of research and development, sales and marketingand operations in order to promote new product development and introduction.Because the expenses associated with these activities are relatively fixed in theshort-term, we may be unable to timely adjust spending to offset any unexpectedshortfall in revenue growth or any decrease in revenue levels. Operatingresults may also fluctuate due to factors such as:

 

·                                          the size andtiming of customer orders;

·                                          changes inpricing policies by us or our competitors;

·                                          our ability todevelop, introduce, and market new and enhanced versions of our products;

·                                          the number,timing, and significance of product enhancements and new product announcementsby our competitors;

·                                          the demand forour products;

·                                          non-renewal ofcustomer support agreements;

·                                          softwaredefects and other product quality problems; and

·                                          personnelchanges.

 

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

 

**THE SUCCESS OF OUR BUSINESSDEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEY PERSONNEL ANDMANAGEMENT.**

 

The majority of our executive officers joinedus subsequent to the acquisition of PickAx, including our President and ChiefExecutive Officer, Carlton Baab, who joined us in August 2001. Additionalchanges in management have occurred following Mr. Baab’s appointment,including the hiring of Brian Bezdek, Chief Financial Officer and SoheilRaissi, Vice President, Product Development and Professional Services. The lossof one or more of these or other executives could adversely affect ourbusiness. In addition, we believe that our future success will depend to asignificant extent on our ability to recruit, hire and retain highly skilledmanagement and employees with experience in engineering, product management,business development, sales, marketing and customer service. Competition forsuch personnel in the software industry can be intense, and there can be noassurance that we will be successful in attracting and retaining such personnel.If we are unable to do so, we may experience inadequate levels of staffing todevelop and license our products and perform services for our customers, whichcould adversely affect our business.

 

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**THE INABILITY TO PROTECT OURINTELLECTUAL PROPERTY COULD HARM OUR ABILITY TO COMPETE.**

 

Our ability to competesuccessfully will depend, in part, on our ability to protect our proprietarytechnology and operations without infringing upon the rights of others. We mayfail to do so. In addition, the laws of certain countries in which our productsare, or may be, licensed may not protect our proprietary rights to thesame extent as the laws of the United States. 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, D3, Omnis, Omnis Studio, mvEnterprise,mvBase, mvDesigner and TigerLogic, among others. We also have one pending U.S.patent application as of June 30, 2005. In addition to trademark andcopyright protections, we license our products to end users on a “right to use”basis pursuant to a perpetual license agreement that restricts use of productsto a specified number of users.

 

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

 

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

 

Our enterprise applications software maycontain undetected errors or failures. This includes our XDMS and PDP products,which are at higher risk given these products are in the earliest stages of theproduct life cycle. This may result in loss of, or delay in, customeracceptance of our products and could harm our reputation and our business.Undetected errors or failures in computer software programs are not uncommon.While we make every effort to thoroughly test our software, in the event thatwe experience significant software errors, we could experience delays inrelease, customer dissatisfaction and lost revenue. Any of these errors ordefects could harm our business.

 

**IF THE REGISTRATION RIGHTS HELDBY ASTORIA AND OTHER SECURITIES HOLDERS ARE EXERCISED, OR THESE SECURITIESHOLDERS SELL A SUBSTANTIAL AMOUNT OF RESTRICTED SECURITIES IN THE OPEN MARKET,OUR STOCK PRICE MAY DECLINE.**

 

As of June 30, 2005, we had 19,776,456outstanding shares of common stock, of which approximately 9,200,000 shareswere restricted securities held by Astoria and other holders. Restrictedsecurities may be sold in the public market only if they are registered or ifthey qualify for an exemption from registration promulgated under theSecurities Act of 1933, as amended. At present, all of our outstandingrestricted securities are either entitled to registration rights or eligiblefor public sale under Rule 144, subject to volume limitations and otherrequirements of Rule 144. If Astoria or other holders decide to exercisetheir demand registration rights, we would incur costs and expenses associatedwith the registration of securities.

 

Furthermore, sales of a substantial number ofshares by Astoria or other securities holders in the public market, or theperception that those sales may occur, could cause the market price of ourcommon stock to decline. In addition, if we register shares of our common stockin connection with a public offering of securities, we may be required toinclude shares of restricted securities in the registration, which may have anadverse effect on our ability to raise capital.

 

**OUR GLOBAL OPERATIONS EXPOSE USTO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESSINTERNATIONALLY.**

 

We operate on a global basis with offices ordistributors in Europe, Africa, Asia, Latin America, South America, Australiaand North America and development efforts in North America, India and Europe.Approximately 30% of our revenue for the three-month period ended June 30, 2005was generated from our international offices. We face several risks inherent inconducting business internationally, including but not limited to the following:

 

·                                          fluctuations ininterest rates or currency exchange rates;

·                                          language andcultural differences;

·                                          local andgovernmental requirements;

·                                          difficultiesand costs of staffing and managing international operations;

·                                          differences inintellectual property protections;

·                                          difficulties incollecting accounts receivable and longer collection periods;

·                                          seasonalbusiness activities in certain parts of the world; and

·                                          trade policies.

 

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

 

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**THE FAILURE OF OUR PRODUCTS TOCONTINUE TO CONFORM TO INDUSTRY STANDARDS MAY HARM OUR OPERATINGRESULTS.**

 

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

 

**THIRD PARTIES COULD ASSERT THATOUR SOFTWARE PRODUCTS AND SERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTYRIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS,PROHIBIT PRODUCT LICENSING OR REQUIRE US TO ENTER INTO ROYALTY OR LICENSINGAGREEMENTS.**

 

There has been a substantial amount of litigationin the software industry regarding intellectual property rights. Third partiesmay claim that our current or potential future products and services infringeupon their intellectual property. We expect that software product developersand providers of software applications will increasingly be subject toinfringement claims as the number of products and competitors in our industrysegment grow and the functionality of products in different industry segmentsoverlap. Any claims, with or without merit, could be time consuming, result incostly litigation, cause product shipment delays, prohibit product licensing orrequire us to enter into royalty or licensing agreements. Royalty or licensingagreements, if required, may not be available on terms acceptable to us or atall, which could seriously harm our business.

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

**EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES**

 

Our principal executive officer and principalfinancial officer evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.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, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Management necessarilyapplied its judgment in assessing the benefits of controls relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues,if any, within Raining Data Corporation have been detected.

 

**Changesin Internal Controls**

 

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

 

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**PARTII. OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from timeto time to claims and suits arising in the ordinary course of business.  As of June 30, 2005, we were not a partyto any material litigation, claim or suit.

 

ITEM 6. EXHIBITS

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

 

**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| Date:  August  11, 2005 | **RAINING  DATA CORPORATION**                          |
|-----------------------------------|--------------------------------------------------------|
| ** **                        | ** **                                             |
| * *                          | */s/  Brian C. Bezdek*                                 | * * |
|                              | Brian C. Bezdek                                        |
| * *                          | *Chief  Financial Officer and Duly Authorized Officer* |

 

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**EXHIBIT INDEX**

 
|   |   |                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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