**UNITED STATES**

**SECURITIES 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 September 30, 2005**                                                                                                                                                       |
|                                                                                                                                                                                                              |       |                                                                                              |
| **o**                                                                                                                                                                                                             | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Exchange Act**              |
| ** **                                                                                                                                                                                                        | ** ** | ** **                                                                                        |
| **For the  transition period from                to                ** |

 

**CommissionFile number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of registrant as specified in itscharter)

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

 

**25ATechnology DriveIrvine, CA 92618**

(Address of principal executive offices)

 

**(949) 442-4400**

(Registrant’s telephone number)

 

**17500 Cartwright Road**

**Irvine, CA  92614**

(Former name, former address and formerfiscal year, if changed since last report)

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

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

 

As of September 30, 2005, there were 20,355,236shares of registrant’s Common Stock, $.10 par value, outstanding.

 

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

 

 

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**RAININGDATA CORPORATION**

**INDEX**

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

 

2

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**PART I.  FINANCIALINFORMATION**

 

ITEM1.  FINANCIAL STATEMENTS

 

**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                      | ** ** | **September 30,****2005** | ** ** | **March 31,****2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**             | ** ** |
| ASSETS                                          | ** ** | ** **                     | ** ** | ** **                 | ** ** |
|                                            |       |                           |       |                       |       |
| Current  assets                                 |       |                           |       |                       |       |
| Cash                                            |       | $                              | 10,059     |                       | $          | 10,625 |   |
| Trade accounts receivable-net                   |       | 1,516                          |       | 2,009                      |       |
| Other current assets                            |       | 452                            |       | 403                        |       |
| Total current assets                            |       | 12,027                         |       | 13,037                     |       |
|                                            |       |                           |       |                       |       |
| Property,  furniture and equipment-net          |       | 998                            |       | 871                        |       |
|                                            |       |                           |       |                       |       |
| Goodwill                                        |       | 27,684                         |       | 27,684                     |       |
| Other assets                                    |       | 194                            |       | 218                        |       |
| Total assets                                    |       | $                              | 40,903     |                       | $          | 41,810 |   |
|                                            |       |                           |       |                       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                           |       |                       |       |
|                                            |       |                           |       |                       |       |
| Current  liabilities                            |       |                           |       |                       |       |
| Accounts payable                                |       | $                              | 384        |                       | $          | 542 |   |
| Accrued liabilities                             |       | 2,374                          |       | 2,548                      |       |
| Deferred revenue                                |       | 5,010                          |       | 5,258                      |       |
| Total current liabilities                       |       | 7,768                          |       | 8,348                      |       |
|                                            |       |                           |       |                       |       |
| Long term  debt-net of discount                 |       | 22,287                         |       | 21,692                     |       |
| Total liabilities                               |       | 30,055                         |       | 30,040                     |       |
|                                            |       |                           |       |                       |       |
| Commitments  and contingencies                  |       |                           |       |                       |       |
|                                            |       |                           |       |                       |       |
| Stockholders’  equity                      |       |                           |       |                       |       |
| Preferred stock                                 |       | —                         |       | 300                        |       |
| Common stock                                    |       | 2,036                          |       | 1,975                      |       |
| Additional paid-in capital                      |       | 98,692                         |       | 98,267                     |       |
| Deferred stock-based compensation               |       | —                         |       | (10                        | )          |
| Accumulated other comprehensive income          |       | 1,244                          |       | 1,394                      |       |
| Accumulated deficit                             |       | (91,124                        | )          | (90,156                    | )          |
| Total stockholders’ equity                 |       | 10,848                         |       | 11,770                     |       |
|                                            |       |                           |       |                       |       |
| Total liabilities and stockholders’ equity |       | $                              | 40,903     |                       | $          | 41,810 |   |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

3

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share data)**  | ** ** |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Net revenues                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Licenses                                                       |       | $                                          | 1,626      |                                     | $          | 2,018 |   | $ | 3,937 |   | $ | 4,240 |   |
| Services                                                       |       | 2,983                                      |       | 3,054                                    |       | 5,965 |   | 6,029 |   |
| Total net revenues                                             |       | 4,609                                      |       | 5,072                                    |       | 9,902 |   | 10,269 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Costs of  revenues                                             |       |                                       |       |                                     |       |   |   |   |   |
| Cost of license revenues                                       |       | 60                                         |       | 83                                       |       | 147 |   | 155 |   |
| Cost of service revenues                                       |       | 583                                        |       | 646                                      |       | 1,203 |   | 1,114 |   |
| Total cost of revenues                                         |       | 643                                        |       | 729                                      |       | 1,350 |   | 1,269 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Gross profit                                                   |       | 3,966                                      |       | 4,343                                    |       | 8,552 |   | 9,000 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Cost of  operations                                            |       |                                       |       |                                     |       |   |   |   |   |
| Selling and marketing                                          |       | 1,257                                      |       | 1,322                                    |       | 2,586 |   | 2,736 |   |
| Research and development                                       |       | 2,385                                      |       | 1,736                                    |       | 4,623 |   | 3,474 |   |
| General and administrative                                     |       | 862                                        |       | 907                                      |       | 1,740 |   | 1,796 |   |
| Stock-based compensation                                       |       | 4                                          |       | 18                                       |       | 10 |   | 50 |   |
| Amortization of intangible assets                              |       | —                                     |       | 650                                      |       | — |   | 1,300 |   |
| Total operating expenses                                       |       | 4,508                                      |       | 4,633                                    |       | 8,959 |   | 9,356 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Operating  loss                                                |       | (542                                       | )          | (290                                     | )          | (407 | ) | (356 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Other  expense                                                 |       |                                       |       |                                     |       |   |   |   |   |
| Interest expense-net                                           |       | (242                                       | )          | (305                                     | )          | (489 | ) | (608 | ) |
| Other income-net                                               |       | (21                                        | )          | 4                                        |       | (72 | ) | (6 | ) |
|                                                           |       | (263                                       | )          | (301                                     | )          | (561 | ) | (614 | ) |
| Net loss                                                       |       | $                                          | (805       | )                                        | $          | (591 | ) | $ | (968 | ) | $ | (970 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Basic and  diluted net loss per share                          |       | $                                          | (0.04      | )                                        | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.05 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Shares used  in computing basic and diluted net loss per share |       | 19,945                                     |       | 18,452                                   |       | 19,854 |   | 18,433 |   |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

4

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**SIX****MONTHS ENDED SEPTEMBER 30,**

 
| ** **                                                                                 | ** ** | **2005**            | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(In  thousands)** | ** ** |
| Cash flows  from operating activities:                                                     |       |                |       |     |       |
| Net loss                                                                                   |       | $                   | (968       | )        | $          | (970 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                |       |     |       |
| Depreciation and amortization of long-lived  assets                                        |       | 147                 |       | 1,450    |       |
| Note payable discount amortization                                                         |       | 41                  |       | 41       |       |
| Amortization of deferred stock-based  compensation                                         |       | 10                  |       | 50       |       |
| Change in assets and liabilities:                                                          |       |                |       |     |       |
| Trade accounts receivable                                                                  |       | 408                 |       | 299      |       |
| Other current and non-current assets                                                       |       | (61                 | )          | (15      | )          |
| Accounts payable                                                                           |       | (149                | )          | (107     | )          |
| Accrued liabilities                                                                        |       | 418                 |       | 6        |       |
| Deferred revenue                                                                           |       | (254                | )          | 9        |       |
| Net cash provided by (used in) operating activities                                        |       | (408                | )          | 763      |       |
|                                                                                       |       |                |       |     |       |
| Cash flows  from investing activities:                                                     |       |                |       |     |       |
| Purchase of property, furniture and  equipment                                             |       | (290                | )          | (9       | )          |
| Net cash used in investing activities                                                      |       | (290                | )          | (9       | )          |
|                                                                                       |       |                |       |     |       |
| Cash flows  from financing activities:                                                     |       |                |       |     |       |
| Proceeds from exercise of stock options and  warrants                                      |       | 120                 |       | 37       |       |
| Proceeds from issuance of common stock                                                     |       | 65                  |       | 99       |       |
| Repayment of debt                                                                          |       | —              |       | (33      | )          |
| Net cash provided by financing activities                                                  |       | 185                 |       | 103      |       |
|                                                                                       |       |                |       |     |       |
| Effect of  exchange rate changes on cash                                                   |       | (53                 | )          | —   |       |
|                                                                                       |       |                |       |     |       |
| Net increase  (decrease) in cash and equivalents                                           |       | (566                | )          | 857      |       |
|                                                                                       |       |                |       |     |       |
| Cash and  equivalents at beginning of period                                               |       | 10,625              |       | 7,783    |       |
| Cash and  equivalents at end of period                                                     |       | $                   | 10,059     |     | $          | 8,640 |   |
|                                                                                       |       |                |       |     |       |
| Non-cash  financing activities:                                                            |       |                |       |     |       |
| Issuance of payment-in-kind notes for  accrued interest                                    |       | $                   | 540        |     | $          | 581 |   |
| Conversion of preferred stock to common  stock                                             |       | 300                 |       | —   |       |

 

See accompanying notes to the unauditedcondensed consolidated financial statements.

 

5

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

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

**September 30,2005**

 

**1.  INTERIMFINANCIAL STATEMENTS**

 

Theunaudited interim condensed consolidated financial information furnished hereinreflects all adjustments, consisting only of normal recurring items, which inthe opinion of management are necessary to fairly state Raining DataCorporation and subsidiaries’ (the “Company”) consolidated financial position,the results of their operations and their cash flows for the dates and periodspresented and to make such information presented not misleading. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to SEC rules andregulations; nevertheless, management of the Company believes that thedisclosures herein are adequate to make the information presented notmisleading. These unaudited condensed consolidated financial statements shouldbe read in conjunction with the Company’s audited financial statements for theyear ended March 31, 2005, contained in the Company’s Annual Report on Form 10-KSB.The results of operations for the period ended September 30, 2005, are notnecessarily indicative of results to be expected for any other interim periodor the fiscal year ending March 31, 2006.

 

**Stock Options**

 

Pro forma information, which assumes the Company hadaccounted for stock options granted under the fair value method prescribed byStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-based Compensation,” as amended is presented below. The per shareweighted average fair values of stock options granted for the three and six-monthperiods ended September 30, 2005, as estimated using the Black-Scholesoption-pricing model, were $2.10 and $2.12, respectively.  The per share weighted average fair values ofstock options granted for the three and six-month periods ended September 30,2004, as estimated using the Black-Scholes option-pricing model, were $2.32 and$2.71, respectively.  The following weightedaverage assumptions were used for the three-month period ended September 30,2005: dividend yield of 0%; expected volatility of 112%; risk-free interestrate of 4.11%; and expected life of 7 years. The following weighted average assumptions were used for the six-monthperiod ended September 30, 2005: dividend yield of 0%; expected volatilityof 112%; risk-free interest rate of 4.05%; and expected life of 7 years.  The following weighted average assumptionswere used for the three-month period ended September 30, 2004: dividendyield of 0%; expected volatility of 123%; risk-free interest rate of 3.92%; andexpected life of 7 years.  The followingweighted average assumptions were used for the six-month period ended September 30,2004: dividend yield of 0%; expected volatility of 123%; risk-free interestrate of 4.05%; and expected life of 7 years.

 

For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the options’ vestingperiods. The Company’s historical and pro forma net loss per share for thethree and six-month periods ended September 30, 2005 and 2004 are asfollows (in thousands, except per share data):

 
| ** **                                                                                             | ** ** | **Three Months ended  September 30,** | ** ** | **Six Months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Net loss:                                                                                              |       |                                       |       |                                     |       |   |   |   |   |
| As reported                                                                                            |       | $                                          | (805       | )                                        | $          | (591 | ) | $ | (968 | ) | $ | (970 | ) |
|                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Add:                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Stock-based employee compensation expense  included in net loss                                        |       | 4                                          |       | 18                                       |       | 10 |   | 50 |   |
|                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Less:                                                                                                  |       |                                       |       |                                     |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under the fair value method for all awards |       | (333                                       | )          | (288                                     | )          | (686 | ) | (578 | ) |
|                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Pro forma  net loss:                                                                                   |       | $                                          | (1,134     | )                                        | $          | (861 | ) | $ | (1,644 | ) | $ | (1,498 | ) |
|                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Basic and  diluted loss per share                                                                      |       |                                       |       |                                     |       |   |   |   |   |
| As reported                                                                                            |       | $                                          | (0.04      | )                                        | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.05 | ) |
| Pro forma                                                                                              |       | $                                          | (0.06      | )                                        | $          | (0.05 | ) | $ | (0.08 | ) | $ | (0.08 | ) |

 

6

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**2. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment,” which establishes standardsfor the accounting for transactions in which an entity exchanges its equityinstruments for employee services. A key provision of this statement is therequirement of a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments (including stockoptions) based on the grant-date fair value of the award. That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award (i.e., the requisite service 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-TERMDEBT**

 

TheConvertible Subordinated Note payable to Astoria Capital Partners, L.P. (“Astoria”),the Company’s controlling stockholder, as of September 30, 2005 and March 31,2005, is as follows (in thousands):

 
| ** **                                        | ** ** | **September 30,****2005** | ** ** | **March 31,****2005** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|
| Convertible  Subordinated Note payable to Astoria |       | $                              | 22,221     |                       | $          | 21,681 |   |
| Plus accrued interest                             |       | 281                            |       | 267                        |       |
| Less unamortized discount                         |       | (215                           | )          | (256                       | )          |
| Total debt                                        |       | 22,287                         |       | 21,692                     |       |
|                                              |       |                           |       |                       |       |
| Less current  portion of long-term debt           |       | —                         |       | —                     |       |
| Total  long-term debt                             |       | $                              | 22,287     |                       | $          | 21,692 |   |

 

**4.  STOCKHOLDERS’EQUITY**

 

Basicloss per share is computed using the net loss and the weighted average numberof common shares outstanding during the period. Diluted loss per share iscomputed using the net loss and the weighted average number of common sharesand dilutive potential common shares outstanding during the period when thepotential common shares are not anti-dilutive. Potential dilutive common sharesinclude outstanding stock options and warrants, convertible debt, andconvertible preferred stock. There were outstanding options to purchase 4,389,990shares of the Company’s common stock with exercise prices ranging from $0.75 to$33.13 per share as of September 30, 2005. There were outstanding options to purchase 4,030,877 shares of theCompany’s common stock with exercise prices ranging from $0.75 to $52.50 pershare as of September 30, 2004.  There were outstanding warrants topurchase 500,000 shares of the Company’s common stock at an exercise price of$6.29 as of September 30, 2005. There were outstanding warrants to purchase 2,169,647 shares of theCompany’s common stock with exercise prices ranging from $2.35 to $6.29 pershare as of September 30, 2004.  There were 300,000 shares ofpreferred stock, which were convertible into 500,100 shares of common stock,outstanding at September 30, 2004.  There was convertible debtoutstanding at September 30, 2005 and 2004, which was convertible into 4,244,275and 4,750,992 shares of common stock, respectively.  The effects of theseitems were not included in the computation of diluted earnings per sharebecause their effect would have been anti-dilutive.

 

Thechange in accumulated other comprehensive income during the three and six-monthperiods ended September 30, 2005 and 2004 is the result of the effect offoreign exchange rate changes. The following table reconciles net loss asreported with total comprehensive loss (in thousands):

 
| ** **                          | ** ** | **Three Months ended  September 30,** | ** ** | **Six Months ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                       |       |                                     |       |   |   |   |   |
| Net loss                            |       | $                                          | (805       | )                                        | $          | (591 | ) | $ | (968 | ) | $ | (970 | ) |
| Translation  adjustments – net |       | (79                                        | )          | 82                                       |       | (150 | ) | (125 | ) |
| Total  comprehensive loss           |       | $                                          | (884       | )                                        | $          | (509 | ) | $ | (1,118 | ) | $ | (1,095 | ) |

 

Effective September 6,2005, all of the outstanding shares of preferred stock were converted into500,100 shares of common stock.

 

7

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**5.  BUSINESSSEGMENT**

 

The Company operates in one reportable segment. Internationaloperations consist primarily of foreign sales offices selling softwaredeveloped in the United States of America combined with local service revenue.The following table summarizes consolidated financial information of theCompany’s operations by geographic location (in thousands):

 
| ** **                                                | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
| *Three  Months Ended September 30, 2005*             |       |               |       |       |       |      |       |
| Net revenues                                              |       | $                  | 3,318      |       | $          | 1,290     |       | $ | 4,609 |   |
| *Three  Months Ended September 30, 2004*             |       |               |       |       |       |      |       |
| Net revenues                                              |       | $                  | 3,625      |       | $          | 1,447     |       | $ | 5,072 |   |
| *As of and  for Six Months Ended September 30, 2005* |       |               |       |       |       |      |       |
| Net revenues                                              |       | $                  | 6,999      |       | $          | 2,903     |       | $ | 9.902 |   |
| Long lived  assets                                        |       | 28,033             |       | 843        |       | 28,876    |       |
| *As of and  for Six Months Ended September 30, 2004* |       |               |       |       |       |      |       |
| Net revenues                                              |       | $                  | 7,349      |       | $          | 2,920     |       | $ | 10,269 |   |
| Long lived  assets                                        |       | 28,340             |       | 625        |       | 28,965    |       |

 

The Company is engaged in the design, development, sale and support ofsoftware infrastructure. The Company divides its products into two maincategories: (1) Pick-based database technology (“Pick UDM Products”),which includes Multi-dimensional Database Management Systems and relatedcomponents, and XML Data Management Servers; and (2) Rapid ApplicationDevelopment software tools (“RAD Tools”). The following table represents thenet revenue from the Company’s segment by product line (in thousands):

 
| ** **          | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Databases:**      |       |                                       |       |                                     |       |   |   |   |   |
| Pick UDM  Products  |       | $                                          | 4,172      |                                     | $          | 3,961 |   | $ | 8,371 |   | $ | 7,935 |   |
| RAD Tools           |       | 437                                        |       | 1,111                                    |       | 1,531 |   | 2,334 |   |
| Total net  revenues |       | $                                          | 4,609      |                                     | $          | 5,072 |   | $ | 9,902 |   | $ | 10,269 |   |

 

**6.  COMMITMENTSAND CONTINGENCIES**

 

The Company is subject from time to time tolitigation, claims and suits arising in the ordinary course of business.  As of September 30, 2005, the Companywas not a party to any known material litigation, claim or suit.

 

The Company’s standard customer license and softwareagreements contain indemnification and warranty provisions which are generallyconsistent with practice in the Company’s industry.  The duration of the Company’s servicewarranties generally does not exceed 30 days following completion of itsservices.  Based on prior experience, theCompany believes that it has not incurred significant future obligations.  Accordingly, the Company does not maintainaccruals for potential customer indemnification or warranty-relatedobligations.  The maximum potentialamount of future payments that the Company could be required to make isgenerally limited under the indemnification provisions in its customer licenseeand service agreements.

 

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

 

This Form 10-QSB contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thesestatements may generally be identified by the use of such words as “expect,” “anticipate,”“believe,” “intend,” “plan,” “will,” or “shall,” or the negative of those termsor similar terms. We have based these forward-looking statements on our currentexpectations and projections about future events. Forward-looking statementsinvolve certain risks and uncertainties and actual results may differmaterially from those discussed in any such statement. Factors that could causeactual results to differ materially from such forward-looking statementsinclude the risks described under the heading “Risk Factors” of this Form 10-QSBand

 

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elsewhere in this Form 10-QSB. The forward-looking statementscontained in this Form 10-QSB include, but are not limited to statementsabout the following: (1) our future success, (2) our research anddevelopment efforts and expenses, (3) our future operating results andcash flow, (4) our competitive ability and position, (5) the marketsin which we operate, (6) our revenue, (7) our cost of license revenueand cost of service revenue, (8) our selling and marketing costs, (9) ourgeneral and administrative costs, (10) our stock-based compensationexpense, (11) the possibility that we may seek to take advantage ofopportunities in the equity and capital markets, (12) our belief that ourexisting cash balances combined with our cash flow from operating activitieswill be sufficient to meet our operating and capital expenditure requirementsfor the remainder of the fiscal year ending March 31, 2006 and through theforeseeable future, (13) the issuance of additional PIK notes, (14) the effectof the Company’s reduction in force, (15) the effect of SFAS 123R, (16) ourbelief that the Silicon Valley Bank credit facility is not required forliquidity purposes or to meet our cash flow needs for the foreseeable future,and (17) our expectation about future move-in costs in connection with our newfacilities.  All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and we assume no obligationto update any forward-looking statement.

 

**OVERVIEW**

 

We were incorporated in the State of Delaware in August 1987. Wewere originally incorporated as Blyth Holdings, Inc. and our name waschanged to Omnis Technology Corporation in September 1997. Effective December 1,2000, we completed the acquisition of PickAx, Inc., a Delaware corporation(“PickAx”). Concurrent with the acquisition, we changed our name to RainingData Corporation.

 

Our principal business is the design, development, sale and support ofsoftware infrastructure. Our products allow customers to create and enhanceflexible software applications for their own needs and our software may becategorized into three product lines: XML data management server (“XDMS”),Multi-dimensional database management systems and related components (“MDMS”),and Rapid Application Development (“RAD”) software tools.

 

Many of our products are based on the Pick Universal Data Model (“PickUDM”), which we created, and are capable of handling data from many sources. ThePick UDM is a core component across the MDMS and XDMS product lines.

 

Beginning in 2001, we began an extensive effort to leverage ourtime-proven Pick UDM and core intellectual property to create an enterpriseclass XML database management system for the emerging XML market and thegrowing need for native XML data stores and the ability to handle structuredand unstructured data. This significant investment of time and resourcesresulted in the TigerLogic XDMS product line. We are focused on the continueddevelopment and enhancement of this product line, identification of new andemerging application areas and discussions with channel partners for the saleand distribution of the TigerLogic product line.

 

TigerLogicXML Data Management Server provides high-performancemanagement and query of XML data by leveraging the time-proven Pick UDM.TigerLogic also enables the ability to query external data sources as if theywere one logical database and maintains referential integrity across datasources. TigerLogic’s patent-pending XML Indexing and Profiling technologyenables it to access XML data via XQuery between 10x to 150x faster in internaltests than relational databases, XML repositories or XML Index and Searchengines. TigerLogic provides XML, Java, WSDL and SOAP compatibility forsimplified plug-in and integration with development environments of choice.

 

TigerLogic provides an extensible and flexible development anddeployment environment. Unlike other XML data management alternatives,TigerLogic XDMS does not need to know the schema or structure of data beforeprocessing and storing it. We believe the ability to make XML schemas optionalis a vital innovation because the structures of operational systems frequentlychange, and mapping schemas for the purpose of linking to a new data source isboth difficult 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 and in September 2005, the Companyannounced its first commercial OEM agreement for TigerLogic XDMS.

 

The MDMS product line consists principally of the D3 Data BaseManagement System (“D3”), which runs on many operating systems such as IBM AIX,Linux and Windows NT. D3 allows application programmers to create new businesssolution software in less time than it normally takes in many otherenvironments. This can translate into lower costs for the developer, lowersoftware prices for the customer and reduced costs of ownership for both thedeveloper and end user.

 

MDMS components include the Pick Data Provider for .Net (“PDP”) and ourPick Reporting Services Connector. PDP had previously been a separatelydisclosed product line but is now consolidated in MDMS. The PDP component forthe Microsoft .NET Framework is tightly integrated with Microsoft Visual Studio..NET. It allows software developers using IBM’s Universe and Unidata databasesand our D3 database platform to build client/server applications,

 

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Web applications or Web services using any of the languages andtechnologies that run on the Microsoft .NET Framework, such as MicrosoftASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET. Our PickReporting Services Connector enables a data connection that allows Pickdatabase users to unlock the benefits of Microsoft Reporting Services to takeadvantage of a comprehensive, server-based reporting solution that can author,manage, and deliver both paper-oriented and interactive, Web-based reports.This solution also allows access to IBM UniVerse, IBM UniData and Pick D3 data.Our MDMS products also include mvEnterprise, a scalable multi-dimensionaldatabase solution that allows the user to leverage the capabilities of the UNIXoperating system, and mvBase, a multi-dimensional database solution that runson all Windows platforms.

 

Our RAD products support the full life cycle of software applicationdevelopment and are designed for rapid prototyping, development and deploymentof graphical user interface (“GUI”) client/server and Web applications. The RADproducts include Omnis Studio, Omnis Studio for SAP and Omnis Classic, and areobject-oriented and component-based, providing the ability to deployapplications on operating system platforms such as Windows, Unix and Linux, aswell as database environments such as MySQL, Oracle, DB2, Sybase, Microsoft SQLServer and other Open Data Base Connectivity (“ODBC”) compatible databasemanagement systems.

 

As part of our sales efforts, we offer training programs to ourcustomers and prospective customers. These programs include classes on basicand advanced skills as well as classes designed to assist customers in theimplementation and use of our products.

 

Our products are used by our customers to build and deploy applicationsthat may become a critical component of their business operations. As a result,continuing to provide customer technical support services is an importantelement of our business strategy. Customers who participate in our supportprograms receive periodic maintenance releases and direct technical supportwhen required.

 

In the United States, we sell our products through establisheddistribution channels consisting of OEMs, system integrators, specializedvertical application software developers and consulting organizations. We alsosell our products directly through our sales personnel to end userorganizations. Outside the United States, we maintain direct sales offices inthe United Kingdom, France and Germany. Approximately 28% and 29% of ourrevenue came from sales through our offices located outside the United States forthe three-month periods ended September 30, 2005 and 2004, respectively.  Approximately 29% and 28% of our revenue camefrom sales through our offices located outside the United States for thesix-month periods ended September 30, 2005 and 2004, respectively.

 

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

 

We license our software on a per CPU, per-server, per-port or per-userbasis. Therefore, the addition of CPU’s, servers, ports or users to existingsystems increases our revenue from our installed base of licenses. In additionto software products, we provide continuing maintenance and other services toour customers, including professional services, technical support and trainingto help plan, analyze, implement and maintain application software based on ourproducts.

 

Our customers may be classified into two general categories:

 

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

 

•              CorporateInformation Technology (“IT”) Departments.

 

For the three and six-month periods ended September 30, 2005 and2004, no single customer accounted for more than 10% of our revenue.

 

We have devoted significant resources to the researchand development of our products and technology. We believe that our future success will depend largely on a strongdevelopment effort with respect to both our existing and new products.  These development efforts have resultedin updates and upgrades to existing MDMS and RAD products and the launch of new

 

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products including the XDMS product line.  New product releases in all of our product lines are currently inprogress.  We expect to continue our research and development efforts in all productlines for the foreseeable future.  Weintend for these efforts to improve our future operating results and increasecash flow. However, such efforts may not result in additional new products orrevenue, and we can make no assurances that the recently announced products orfuture products will be successful.

 

The application development tools software market is rapidly changingand intensely competitive. Our MDMS products compete with products developed bycompanies such as Oracle, Microsoft and IBM. Our RAD products currentlyencounter competition from several direct competitors, including Microsoft, andcompeting development environments, including JAVA. Competition is developingand evolving in the XML market for which our XDMS products are intended.Companies that do or are expected to compete in this market include Oracle,IBM, Microsoft and Sybase, as well as a number of smaller companies withproducts that directly and indirectly compete with our XDMS products. Most ofour competitors have significantly more financial, technical, marketing andother resources than we do. As a result, these competitors may be able torespond more quickly to new or emerging technologies, evolving markets andchanges in customer requirements, and may devote greater resources to thedevelopment, promotion and sale of their products.

 

We believe that our ability to compete in the various MDMS, RAD andXDMS markets depends on factors both within and outside our control, includingthe timing of release, performance and price of new products developed by bothus and our competitors. Although we believe that we currently compete favorablywith respect to most of these factors, we may not be able to maintain ourcompetitive position against current and potential competitors, especiallythose with greater resources.

 

We rely primarily on a combination of trade secret, copyright andtrademark laws and contractual provisions to protect our intellectual propertyand proprietary rights. Our trademarks include Raining Data, Pick, TigerLogic,D3, Omnis, Omnis Studio, mvEnterprise, mvBase, and mvDesigner, among others. Wealso have one pending U.S. patent application as of September 30, 2005.

 

We license our products to end users on a “right to use” basis pursuantto a perpetual license agreement that restricts use of products to a specifiednumber of users. We generally rely on “click-wrap” licenses that becomeeffective when a customer downloads and installs the software on its system. Inorder to retain exclusive ownership rights to our software and technology, wegenerally provide our software in object code only, with contractualrestrictions on copying, disclosure, and transferability. There can be noassurance that these protections will be adequate, or that our competitors willnot independently develop technologies that are substantially equivalent orsuperior to our technology.

 

We generally ship software products as orders are received and havehistorically operated with little backlog. As a result, our license revenue inany given quarter is dependent upon orders received and product shipped duringthe quarter. Historically, there has been a short cycle between receipt of anorder and shipment. Consequently, we do not believe that our backlog as of anyparticular date is meaningful.

 

At September 30, 2005, we had 144 employees worldwide of which 109were in the United States and 35 were in our international offices. Of the 144employees, 141 are full-time and approximately 50% are in research anddevelopment, 15% in technical support, 20% in sales and marketing and 15% ingeneral and administrative functions.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

On an on-going basis, we evaluate our estimates, including thoserelated to revenue recognition and accounting for intangible assets andgoodwill. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults may differ from these estimates under different assumptions orconditions.

 

We have identified the accounting policies below as the policiescritical to our business operations and the understanding of our results of operations.We believe the following critical accounting policies and the related judgmentsand estimates affect the preparation of our condensed consolidated financialstatements:

 

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

 

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recognized in a multiple element arrangement when company-specificobjective evidence of fair value exists for all of the undelivered elements inthe arrangement, but does not exist for one or more of the delivered elementsin the arrangement. At the outset of the arrangement with the customer, wedefer revenue for the fair value of our undelivered elements (e.g.,maintenance) based on company-specific objective evidence of the amount suchitems are sold individually to our customers and recognize revenue for theremainder of the arrangement fee attributable to the elements initiallydelivered in the arrangement (e.g., software license) when the basic criteriain SOP 97-2 have been met.

 

Under SOP 97-2, revenue attributable to an element in a customer arrangementis recognized when persuasive evidence of an arrangement exists and deliveryhas occurred, provided the fee is fixed or determinable, collectibility isprobable and the arrangement does not require significant customization of thesoftware. If, at the outset of the customer arrangement, we determine that thearrangement fee is not fixed or determinable, we defer the revenue andrecognize the revenue when the arrangement fee becomes due and payable.

 

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

 

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

 

•              Significantunderperformance relative to expected historical or projected future operatingresults;

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

•              Significantnegative industry or economic trends;

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

•              Ourmarket capitalization relative to net book value.

 

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

 

Following the adoption of Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), we revised our policyfor assessing and determining impairment of goodwill. The SFAS 142 goodwillimpairment model is a two-step process. The first step is used to identifypotential impairment by comparing the fair value of a reporting unit with itsnet book value (or carrying amount), including goodwill. If the fair valueexceeds the carrying amount, goodwill of the reporting unit is considered notimpaired and the second step of the impairment test is unnecessary. If thecarrying amount of a reporting unit exceeds its fair value, the second step ofthe goodwill impairment test is performed to measure the amount of impairmentloss, if any. The second step of the goodwill impairment test compares theimplied fair value of the reporting unit’s goodwill with the carrying amount ofthat goodwill. If the carrying amount of the reporting unit’s goodwill exceedsthe implied fair value of that goodwill, an impairment loss is recognized in anamount equal to that excess. The implied fair value of goodwill is determinedin the same manner 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 assetsand liabilities of that unit (including any unrecognized intangible assets) asif the 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 reporting unit under the first step ofthe goodwill impairment test and determining the fair value of individualassets and liabilities of a reporting unit (including unrecognized intangibleassets) under the second step of the goodwill impairment test is judgmental innature and often involves the use of significant estimates and assumptions.These estimates and assumptions could have a significant impact on whether ornot an impairment charge is recognized and the magnitude of any such charge.Estimates of fair value of our market capitalization of $77.6 million as of September 30,2005 are based on our stock price as reported by Nasdaq.

 

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**Results of Operations**

 

Thefollowing table sets forth certain Condensed Consolidated Statement ofOperations data in total dollars, as a percentage of total net revenues and asa percentage change from the same period in the prior year.  Cost of license revenues, cost of servicerevenues, gross margin on license revenues and gross profit and margin onservice revenues are expressed as a percentage of the related revenues. Thisinformation should be read in conjunction with the Condensed ConsolidatedFinancial Statements included elsewhere in this Form 10-QSB.

 
| ** **                                                    | ** ** | **Three  Months Ended  September 30, 2005** | ** ** | **Three  Months Ended  September 30, 2004** | ** ** | **Six  Months Ended  September 30, 2005** | ** ** | **Six  Months Ended   September 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                    | ** ** | **Results**                                      | ** ** | **% of Net  Revenues**                           | ** ** | **Percent  Change**                            | ** ** | **Results**                                     | ** ** | **% of Net  Revenues** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| Net revenues                                                  |       |                                             |       |                                             |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                                      |       | $                                                | 1,626      |                                             | 35         | %                                              | (19        | )%                                              | $          | 2,018 |   | 40 | % | $ | 3,937 |   | 40 | % | (7 | )% | $ | 4,240 |   | 41 | % |
| Services                                                      |       | 2,983                                            |       | 65                                               | %          | (2                                             | )%         | 3,054                                           |       | 60 | % | 5,965 |   | 60 | % | (1 | )% | 6,029 |   | 59 | % |
| Total net  revenues                                           |       | 4,609                                            |       | 100                                              | %          | (9                                             | )%         | 5,072                                           |       | 100 | % | 9,902 |   | 100 | % | (4 | )% | 10,269 |   | 100 | % |
| Cost of revenues                                              |       |                                             |       |                                             |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license  revenues (as a% of license revenues)         |       | 60                                               |       | 4                                                | %          | (28                                            | )%         | 83                                              |       | 4 | % | 147 |   | 4 | % | (5 | )% | 155 |   | 4 | % |
| Cost of service  revenues (as a% of service revenues)         |       | 583                                              |       | 20                                               | %          | (10                                            | )%         | 646                                             |       | 21 | % | 1,203 |   | 20 | % | 8 | % | 1,114 |   | 18 | % |
| Gross margin on  license revenues (as a% of license revenues) |       | 1,566                                            |       | 96                                               | %          | (19                                            | )%         | 1,935                                           |       | 96 | % | 3,790 |   | 96 | % | (7 | )% | 4,085 |   | 96 | % |
| Gross margin on  service revenues (as a% of service revenues) |       | 2,400                                            |       | 80                                               | %          | 0                                              | %          | 2,408                                           |       | 79 | % | 4,762 |   | 80 | % | (3 | )% | 4,915 |   | 82 | % |
| Operating  expenses                                           |       |                                             |       |                                             |       |                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                                         |       | 1,257                                            |       | 27                                               | %          | (5                                             | )%         | 1,322                                           |       | 26 | % | 2,586 |   | 26 | % | (5 | )% | 2,736 |   | 27 | % |
| Research and  development                                     |       | 2,385                                            |       | 52                                               | %          | 37                                             | %          | 1,736                                           |       | 34 | % | 4,623 |   | 47 | % | 33 | % | 3,474 |   | 34 | % |
| General and  administrative                                   |       | 862                                              |       | 19                                               | %          | (5                                             | )%         | 907                                             |       | 18 | % | 1,740 |   | 18 | % | (3 | )% | 1,796 |   | 17 | % |
| Stock-based  compensation                                     |       | 4                                                |       | 0                                                | %          | (78                                            | )%         | 18                                              |       | 0 | % | 10 |   | 0 | % | (80 | )% | 50 |   | 0 | % |
| Amortization of  intangible assets                            |       | —                                           |       | 0                                                | %          | (100                                           | )%         | 650                                             |       | 13 | % | — |   | 0 | % | (100 | )% | 1,300 |   | 13 | % |
| Total operating  costs                                        |       | 4,508                                            |       | 98                                               | %          | (3                                             | )%         | 4,633                                           |       | 91 | % | 8,959 |   | 90 | % | (4 | )% | 9,356 |   | 91 | % |
| Operating loss                                                |       | (542                                             | )          | (12                                              | )%         | 87                                             | %          | (290                                            | )          | (6 | )% | (407 | ) | (4 | )% | 14 | % | (356 | ) | (3 | )% |
| Other expense,  net                                           |       | (263                                             | )          | (6                                               | )%         | (13                                            | )%         | (301                                            | )          | (6 | )% | (561 | ) | (6 | )% | (9 | )% | (614 | ) | (6 | )% |
| Net loss                                                      |       | $                                                | (805       | )                                                | (17        | )%                                             | 36         | %                                               | $          | (591 | ) | (12 | )% | $ | (968 | ) | (10 | )% | 0 | % | $ | (970 | ) | (9 | )% |

 

**REVENUE**

 

NETREVENUE. Our revenue is derived principally from two sources: fees fromsoftware licensing and fees for services, including maintenance, consulting,training and technical support. We license our software on a per-CPU,per-server, per-port or per-user basis. Therefore, the addition of CPU’s,servers, ports or users to existing systems increases our revenue from ourinstalled base of licenses. We view the MDMS and RAD markets in which weoperate to be relatively stable from period to period.  We anticipate that our revenue on an annualbasis from those products will remain stable or see slight declines for theforeseeable future. Fluctuations in revenue between quarters or year-to-yearare primarily the result of the timing of orders and customer ordering patterns.We do not view the specific decrease in year-to-year revenues for the three andsix-month periods ended September 30, 2005 and 2004 to be representativeof immediate market trends.  However, weexpect that the MDMS and RAD markets will eventually decline as customers adoptnewer technologies, and, therefore, the revenue generated from sales of ourMDMS and RAD products is expected to decrease.

 

We have been actively developing and marketing our XDMS product line.Should our development efforts and the adoption of this product line besuccessful, we anticipate additional revenues in future periods related to thesale of these products. However, we can give no assurances as to customeracceptance of any new products or services, or the ability of the current orany new products and services to generate revenue. While we are committed toresearch and development efforts that are intended to allow us to penetrate newmarkets and generate new sources of revenue, such efforts may not result inadditional products, services or revenue. In September 2005, we announced the Company’s first commercial OEMagreement for TigerLogic XDMS.

 

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**COST OF REVENUE**

 

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costsassociated with software license sales including software packaging,documentation, physical media costs and royalties. Cost of license revenueremained relatively consistent in the three and six-month periods ended September 30,2005 as compared to the same period in the prior year. We anticipate that thecost of license revenue, as a percentage of license revenue and in absolutedollars, will be relatively stable in future periods.

 

COSTOF SERVICE REVENUE. Cost of service revenue includes primarily personnelcosts relating to providing consulting, technical support and trainingservices.  In the six-month period ended September 30,2005, cost of service revenue increased as a result of consulting costs relatedto external customer support as well as product mix changes.  In the three-month period ended September 30,2005, cost of service revenue remained relatively stable.  We anticipate that the cost of servicerevenue, as a percentage of service revenue and in absolute dollars, will berelatively stable in future periods.

 

**OPERATING EXPENSES**

 

SELLINGAND MARKETING. Selling and marketing expense consists primarily ofsalaries, benefits, advertising, tradeshows, travel and overhead costs for oursales and marketing personnel. Selling and marketing expense remainedrelatively consistent in the three and six-month periods ended September 30,2005 as compared to the same periods in the prior year. We anticipate thatselling and marketing costs related to XDMS products may increase as we furtherdevelop the sales channel for these products and if customer acceptance ofthese products increases. In addition, if our continued research anddevelopment efforts are successful, including with respect to our XDMSproducts, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products in future periods.

 

RESEARCHAND DEVELOPMENT. Research and development expense consists primarily ofsalaries and other personnel-related expenses and overhead costs forengineering personnel, including employees in the US and the UK and contractorsin the US and India. In the three and six-month periods ended September 30,2005, spending related to our development efforts increased as certain of ournew products reached general or production release and we continued to refineand add certain features and functionality to these products. The majority ofthese costs have been personnel-related, including salary and recruiting costs,as we have hired employees and contractors in association with the ongoingdevelopment and enhancement of our product lines. We are committed to ourresearch and development efforts and expect research and development expensewill remain at the current level in future periods or increase if we believethat additional spending is warranted. Such efforts may not result inadditional new products and any new products, including the XDMS products, maynot generate sufficient revenue, if any, to offset the research and developmentexpense.

 

GENERAL AND ADMINISTRATIVE. General and administrative expense consistsprimarily of costs associated with our finance, human resources, legal andother administrative functions. These costs consist principally of salaries andother personnel-related expenses, professional fees, depreciation and overheadcosts. General and administrative spending remained relatively consistent inthe three and six-month periods ended September 30, 2005 as compared tothe same periods 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. In October 2005, the Company implemented a reduction in forcerelating to under utilized and non-strategic personnel.  The purpose of this initiative was to reduce theCompany’s operating expenses.  Althoughthe full impact has yet to be determined, it is anticipated that the Companywill achieve a savings of approximately $0.5 million per annum across variousoperating expense categories including General and Administrative, Cost ofService and Research and Development. However, such savings may be offset by cost increases relating to new productinitiatives.

 

STOCK-BASEDCOMPENSATION.  The decreases instock-based compensation in the three and six-month periods ended September 30,2005 as compared to the same periods in the prior year is attributableprimarily to cancellations of previously issued options with an exercise pricebelow fair value on date of grant for terminated employees, options reachingthe end of their vesting periods, no new options being granted with an exerciseprice below fair value at the date of grant, and fewer options granted tonon-employees. We do not anticipate significant changes in stock-based compensationexpense in future periods prior to the adoption of SFAS 123R.  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.

 

GOODWILL AND AMORTIZATION OF INTANGIBLE ASSETS.   We amortizeour identifiable intangible assets in accordance with their determined usefullife. The life of our existing intangible assets was estimated to be fouryears. As of September 30, 2005, our existing intangible assets were fullyamortized.

 

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OTHER INCOME (EXPENSE). Other expense consists primarily of netinterest expense and, to a much lesser extent, gains and losses on foreigncurrency transactions. Other expense remained relatively consistent during thethree and six-month periods ended September 30, 2005 as compared to thethree and six-month periods ended September 30, 2004.  Due to the uncertainty in exchange rates, wemay experience transaction gains or losses in future periods, the effect ofwhich cannot be determined at this time.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

In connection with the acquisition of PickAx, we assumed a SecuredPromissory Note issued to Astoria Capital Partners, L.P. (“Astoria”) dated November 30,2000, in the amount of $18.5 million. In January 2003, we entered into aNote Exchange Agreement (the “Exchange Agreement”) with Astoria to replace theexisting Secured Promissory Note, as amended, with a Convertible SubordinatedNote. Under the terms of the Exchange Agreement, the Secured Promissory Notewas exchanged and replaced with a Convertible Subordinated Note having aprincipal amount of $22.1 million, which principal amount was equal to theoutstanding principal and accrued interest payable on the Secured Promissory Noteas of the date of the Exchange Agreement. The Convertible Subordinated Note isconvertible into common stock at any time, at the option of Astoria, at a priceof $5.00 per share. The Convertible Subordinated Note matures on May 30,2008, extending the May 30, 2003 maturity date of the Secured PromissoryNote. Under terms of the Convertible Subordinate Note, the Company was unableto redeem the Convertible Subordinated Note prior to January 30, 2005. Theinterest rate of the Convertible Subordinated Note is 5% per annum as comparedto an interest rate of 10% per annum under the Secured Promissory Note. Theinterest is payable quarterly at our option in cash or through increases to theoutstanding principal of the Convertible Subordinated Note.

 

On December 14, 2004, we entered into an Agreement RegardingAmended and Restated Common Stock Purchase Warrant and 5% ConvertibleSubordinated Note Due 2008 with Astoria whereby we could redeem, in part, the ConvertibleSubordinated Note and the payment in kind (“PIK”) notes in advance of January 30,2005. On December 14, 2004, Astoria exercised its warrant in the amount of$2,670,904. In lieu of a cash payment, we used the proceeds of the exercise to paydown a portion of the indebtedness to Astoria. The pay down consisted of$247,129 for accrued and unpaid interest, $1,914,165 for the PIK Notes issuedto date and $509,610 as a reduction of principal of the ConvertibleSubordinated Note. As of September 30, 2005 there were outstanding PIKnotes to Astoria for the accrued interest due in the aggregate amount of $280,050.For the foreseeable future, we expect to issue additional PIK notes to Astoriain lieu of cash payments for the interest due under the ConvertibleSubordinated Note. If the Convertible Subordinated Note or the PIK notes areconverted into common stock, our stockholders may experience substantialdilution. Unlike the Secured Promissory Note, the Convertible Subordinated Noteis not secured by our assets.

 

Effective October 2005, Astoria assigned a portion of its CommonStock holdings totaling 870,306 shares and a portion of the SubordinatedConvertible Note, totaling $1,751,832, to two of its limited partners.  As such, the Company issued an Amended andRestated Note to Astoria for $20,749,581 and corresponding notes directly tothe limited partners for $862,979 and $888,853, respectively.

 

If our future financial performance improves, we may seek to takeadvantage of opportunities in the equity and capital markets to raiseadditional funds for operating needs or to pay down our debt to Astoria. Therecan be no assurances that such opportunities will arise. In addition to holdingthe Convertible Subordinated Note, Astoria is a major stockholder of ours,holding a majority of our outstanding common stock.  Richard W. Koe, Chairman of the Board ofDirectors, serves as the Managing General Partner for Astoria. CarltonH. Baab, our President and Chief Executive Officer, served as a ManagingPrincipal of Astoria Capital Management, which is a general partner of Astoria,until taking a formal leave of absence to join us in August 2001. GeraldF. Chew, a member of our Board of Directors, is the cousin of Mr. Koe.

 

At September 30, 2005, we had $10.1 million in cash. Webelieve that our existing cash balances combined with our cash flow fromoperating activities will be sufficient to meet our operating and capitalexpenditure requirements for the remainder of the fiscal year ending March 31,2006 and through the foreseeable future. We are committed to research and developmentefforts that are intended to allow us to penetrate new markets and generate newsources of revenue and improve operating results. However, our research anddevelopment efforts have required, and will continue to require, cash outlayswithout the immediate or short-term receipt of related revenue. Our ability toservice our long-term debt and meet our expenditure requirements is dependentupon our future financial performance, which will be affected by, among otherthings, prevailing economic conditions, our ability to penetrate new marketsand attract new customers, market acceptance of our new and existing productsand services, the success of research and development efforts and other factorsbeyond our control.

 

On February 11, 2004, we entered into a credit facility withSilicon Valley Bank which provides us with the ability to borrow up to $1.5million at an annual interest rate of Prime plus 1.0%, provided that the annualinterest rate shall never be less than

 

15

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5%. The credit facility is collateralized by our assets and expires in February 2006.The credit facility contains financial and reporting covenants that require usto maintain certain financial ratios only when we have outstanding borrowingson the line. There were no outstanding borrowings at September 30, 2005.Upon expiration of the term of this facility we will assess our credit andliquidity needs in relation to market factors. However, we believe that thefacility is not required for liquidity purposes or to meet our cash flow needsfor the foreseeable future.

 

On November 9, 2004, we entered into a lease agreement with TheIrvine Company whereby we leased one building in Irvine, California,comprising approximately 29,000 square feet, to replace our currentheadquarters facility. The lease will commence in November 2005and has a five-year term. If certain conditions are met, we have theoption to extend the term of the lease for an additional thirty-sixmonths. The total basic rent over the five-year term is approximately $2.6million, which represents a lower per square foot cost than our currentproperty 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 whichthey are incurred.

 

We had no material commitments for capital expenditures at September 30,2005.

 

Net cash used in operating activities was $0.4 million and net cashprovided by operating activities was $0.8 million for the six-month periodsended September 30, 2005 and 2004, respectively.  The decrease in cash provided by operatingactivities is the result of a temporary reduction in revenues coupled withincreased investment in research and development activities surrounding our newproduct initiatives.

 

Our earnings before interest, taxes, depreciation and amortization(EBITDA) were negative $0.5 million, or negative 10% of total net revenueand negative $0.3 million, or negative 3% of total net revenue for the threeand six-month periods ended September 30, 2005, respectively and $0.5million, or 8% of total net revenue and $1.1 million, or 11% of total netrevenue for the three and six-month periods ended September 30, 2004,respectively. The reduction in EBITDA was a result of the reduced revenues inthe period and increased spending for research and development. EBITDA isdefined as net loss with an add-back for depreciation and amortization,non-cash stock-based compensation expense, interest expense, other income andincome taxes. The following table reconciles EBITDA to the reported net loss:

 

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**RECONCILIATIONOF EBITDA TO NET LOSS**

 
| ** **                    | ** ** | **Three months   ended September 30,** | ** ** | **Six months   ended September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**            | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                        |       |                                      |       |   |   |   |   |
| Reported net loss             |       | $                                           | (805       | )                                         | $          | (591 | ) | $ | (968 | ) | $ | (970 | ) |
| Depreciation and amortization |       | 65                                          |       | 725                                       |       | 147 |   | 1,450 |   |
| Stock-based compensation      |       | 4                                           |       | 18                                        |       | 10 |   | 50 |   |
| Interest expense-net          |       | 242                                         |       | 305                                       |       | 489 |   | 608 |   |
| Other income-net              |       | 21                                          |       | (4                                        | )          | 72 |   | 6 |   |
|                          |       |                                        |       |                                      |       |   |   |   |   |
| EBITDA                        |       | $                                           | (473       | )                                         | $          | 453 |   | $ | (250 | ) | $ | 1,144 |   |

 

EBITDA does not represent funds available for management’sdiscretionary use and is not intended to represent cash flow from operations.EBITDA should not be construed as a substitute for net loss or as a bettermeasure of liquidity than cash flow from operating activities, which aredetermined in accordance with 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 to evaluate, assess and benchmarkour operational results and we believe that EBITDA is relevant and usefulinformation, which is often reported and widely used by analysts, investors andother interested parties in our industry. Accordingly, we are disclosing thisinformation to permit a more comprehensive analysis of our operatingperformance, to provide an additional measure of performance and liquidity andto provide additional information with respect to our ability to meet futuredebt service, capital expenditure and working capital requirements.

 

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

 

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

 
| ** **                                           | ** ** | **Six months   ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                                         | (408       | ) | $ | 763 |   |
|                                                 |       |                                      |       |   |   |
| Interest expense-net                                 |       | 489                                       |       | 608 |   |
| Other expense-net                                    |       | 72                                        |       | 6 |   |
| Change in accounts receivable                        |       | (408                                      | )          | (299 | ) |
| Change in other assets                               |       | 61                                        |       | 15 |   |
| Change in accounts payable                           |       | 149                                       |       | 107 |   |
| Change in accrued liabilities                        |       | (418                                      | )          | (6 | ) |
| Change in deferred revenue                           |       | 254                                       |       | (9 | ) |
| Note payable discount amortization                   |       | (41                                       | )          | (41 | ) |
|                                                 |       |                                      |       |   |   |
| EBITDA                                               |       | $                                         | (250       | ) | $ | 1,144 |   |

 

**RISK FACTORS**

 

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

 

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

 

We have devoted significant resources to the research and developmentof products and technology. We believe that our future success will depend inlarge part on a strong research and development effort with respect to both ourexisting and new products. Beginning in 2001, we began an extensive effort toleverage our time-proven Pick UDM and core intellectual property to create anenterprise class XML database management server for the emerging XML market.This significant investment of time and resources resulted in the TigerLogicXDMS product line. 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 anticipationof customer and technical trends. In developing new products and services, wemay fail to develop and market products that respond to technological changesor evolving industry standards in a timely or cost-effective manner, orexperience difficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customerordering patterns and to ensure that adequate supplies of new products can bedelivered to meet customer demand. Failure to develop and introduce newproducts, or enhancements to existing products, in a timely manner in responseto changing market conditions or customer requirements, or lack of customeracceptance of our products, will materially and adversely affect our business,results of operations and financial condition.

 

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

 

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

 

The application development tools software market is rapidly changingand intensely competitive. Our MDMS products compete with products developed bycompanies such as Oracle, Microsoft and IBM. Our RAD products currentlyencounter competition from several direct competitors, including Microsoft, andcompeting development environments, including JAVA. Competition is developingand evolving in the XML market for which our XDMS products are intended.Companies that do or are expected to compete in this market include Oracle,IBM, Microsoft and Sybase, as well as a number of smaller companies withproducts that directly and indirectly compete with our XDMS products.Additionally, as we expand our business, we expect to compete with a differentgroup of companies, including smaller, highly focused companies offering singleproducts.

 

Most of our competitors have significantly more financial, technical,marketing and other resources than we do. As a result, these competitors may beable to respond more quickly to new or emerging technologies, evolving marketsand changes in customer requirements and may devote greater resources to thedevelopment, promotion and sale of their products. While we currently believethat our products and services compete favorably in the marketplace, ourproducts and services could fall behind marketplace demands at any time. If wefail to address the competitive challenges, our business would suffermaterially.

 

**BECAUSE THE MARKET FOR OUR MDMS AND RADPRODUCTS IS RELATIVELY STABLE OR MAY BE DECLINING, OUR REVENUE MAY DECLINEIF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

 

We believe that the markets for our MDMS and RAD products arerelatively stable and consistent from period to period. As a result, tomaintain or grow our revenue in these markets, we will need to maintain oursales to existing customers and to generate sales to new customers, includingcorporate development teams, commercial application developers, systemintegrators, independent software vendors and independent consultants. If wefail to attract new customers, if we lose our customers to competitors, or ifthe MDMS or RAD markets decline, our revenue may be adversely affected. In thelonger term, it is expected that the MDMS and RAD markets will eventually declineas customers adopt newer technologies.

 

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

 

The sales cycle for our MDMS and RAD products typically ranges fromthree to nine months or longer and the sales cycle for our XDMS products isanticipated to be significantly longer since these markets are emerging and theproducts are still in the process of being adopted by the marketplace. Ourproducts are typically used by application developers, system integrators andvalue added resellers to develop applications that are critical to theircorporate end user’s business. Because our products are often part of an enduser’s larger business process, re-engineering initiative, or implementation ofclient/server or web-based computing, the end users frequently view thepurchase of our products as part of a long-term strategic decision regardingthe management of their workforce-related operations and expenditures. Thus,this sometimes results in end users taking a significant period of time toassess alternative solutions by competitors or to defer a purchase decision asa result of an unrelated strategic issue beyond our control. As a result, asignificant period of time may elapse between our research and developmentefforts and recognition of revenue, if any.

 

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

 

We believe that our cash and cash flow from operating activities willbe sufficient to meet our operating and capital expenditure requirements atleast through the foreseeable future. Our ability to meetour expenditures and service our debt obligations is dependent uponour future financial performance, which will be affected by, among otherthings, prevailing economic conditions, our ability to penetrate new marketsand attract new customers, market acceptance of our new and existing productsand services, the success of research and development efforts and other factorsbeyond our control. As previously noted, in January 2003, we entered intothe Exchange Agreement with Astoria to replace the existing Secured PromissoryNote, which was due May 2003, with a Convertible Subordinated Note, whichis due and payable in May 2008. The Convertible Subordinated Note bearsinterest at 5% per annum and is convertible into common stock at any time at aprice of $5.00 per share. If we are unable to penetrate new markets, generatenew sources of revenue or otherwise improve our operating results, we may beunable to repay our debt to Astoria or to access opportunities in the equityand capital markets to raise additional funds for operating needs.

 

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

 

As of September 30, 2005, Astoria beneficially owned approximately58% of our outstanding common stock.  Inaddition, as of September 30, 2005, the Convertible Subordinated Noteissued to Astoria had a balance of approximately $22 million in principaland accrued interest maturing on May 30, 2008. Richard W. Koe, Chairman ofthe Board of Directors, serves as the Managing General Partner for AstoriaCapital Management, which is a general partner of Astoria. Carlton H.Baab, our President and Chief Executive Officer, served as a Managing Principalof Astoria Capital Management until taking a formal leave of absence to join usin August 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.

 

**RECENT RULEMAKING BY THE FINANCIAL ACCOUNTINGSTANDARDS BOARD WILL REQUIRE THE COMPANY TO EXPENSE EQUITY COMPENSATION GIVENTO EMPLOYEES AND WILL SIGNIFICANTLY HARM OPERATING RESULTS AND MAY REDUCETHE COMPANY’S ABILITY TO EFFECTIVELY UTILIZE EQUITY COMPENSATION TO ATTRACT ANDRETAIN EMPLOYEES.**

 

The Company historically hasused stock options as a significant component of its employee compensationprogram in order to align employees’ interests with the interests of theCompany’s stockholders, encourage employee retention, and provide competitivecompensation packages. The Financial Accounting Standards Board (“FASB”) hasadopted changes that will require companies to record a charge to earnings foremployee stock option grants and other equity incentives, which may have asignificant impact on the Company’s results of operations in future periods.The Company is required to implement the standard no later than its fiscal year2007. By causing the Company to incur significantly increased compensationcosts, such accounting changes are expected to reduce the Company’s reportedearnings and may require the Company to reduce the availability and amount ofequity incentives provided to employees, which may make it more difficult forthe Company to attract, retain and motivate key personnel. Each of theseresults could materially and adversely affect the Company’s business.  The future impact of the adoption of SFAS123R on the Company’s consolidated financial position and results of operationshas not been determined at this time, however, the adoption of this statementis expected to reduce earnings in future periods.

 

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

 

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

 

•              thesize and timing of customer orders;

•              changesin pricing 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 announcements by ourcompetitors;

•              the demand for ourproducts;

•              non-renewal ofcustomer support agreements;

•              softwaredefects and other product quality problems; and

•              personnelchanges.

 

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

 

**THE SUCCESS OF OUR BUSINESS DEPENDS IN PART UPONOUR ABILITY TO RECRUIT AND RETAIN KEY PERSONNEL AND MANAGEMENT.**

 

The majority of our executive officers joined us subsequent to theacquisition of PickAx, including our President and Chief Executive Officer,Carlton Baab, who joined us in August 2001. Additional changes inmanagement have occurred following Mr. Baab’s appointment, including thehiring of Brian Bezdek, Chief Financial Officer and others. The loss of one ormore of these or other executives could adversely affect our business. Inaddition, we believe that our future success will depend to a significantextent on our ability to recruit, hire and retain highly skilled management andemployees with experience in engineering, product management, businessdevelopment, sales, marketing and customer service. Competition for suchpersonnel in the software industry can be intense, and there can be noassurance that we will be successful in attracting and retaining suchpersonnel. If we are unable to do so, we may experience inadequate levels ofstaffing to develop and license our products and perform services for ourcustomers, which could adversely affect our business.

 

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

 

Our ability to compete successfully will depend, in part, on ourability to protect our proprietary technology and operations without infringingupon the rights of others. We may fail to do so. In addition, the laws ofcertain countries in which our products are, or may be, licensed may notprotect our proprietary rights to the same extent as the laws of the UnitedStates. We rely primarily on a combination of trade secret, copyright andtrademark laws and contractual provisions to protect our intellectual propertyand proprietary rights. Our trademarks include Raining Data, Pick, D3, Omnis,Omnis Studio, mvEnterprise, mvBase, mvDesigner and TigerLogic, among others. Wealso have one pending U.S. patent application as of September 30, 2005. Inaddition to trademark and copyright protections, we license our products to endusers on a “right to use” basis pursuant to a perpetual license agreement thatrestricts use of products to a specified number of users.

 

We generally rely on “click-wrap” licenses that become effective when acustomer downloads and installs software on its system. In order to retainexclusive ownership rights to our software and technology, we generally provideour software in object code only, with contractual restrictions on copying,disclosure and transferability. There can be no assurance that theseprotections will be adequate, or that our competitors will not independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.

 

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**OUR PRODUCTS MAY CONTAIN SOFTWAREDEFECTS WHICH COULD HARM OUR BUSINESS.**

 

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

 

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

 

As of September 30, 2005, we had 20,355,236 outstanding shares ofcommon stock, of which approximately 9,700,000 shares were restrictedsecurities held by Astoria and other holders. Restricted securities may be soldin the public market only if they are registered or if they qualify for anexemption from registration promulgated under the Securities Act of 1933, asamended. At present, all of our outstanding restricted securities are eitherentitled to registration rights or eligible for public sale under Rule 144,subject to volume limitations and other requirements of Rule 144. IfAstoria or other holders decide to exercise their demand registration rights,we would incur costs and expenses associated with the registration ofsecurities.

 

Furthermore, sales of a substantial number of shares by Astoria or othersecurities holders in the public market, or the perception that those sales mayoccur, could cause the market price of our common stock to decline. Inaddition, if we register shares of our common stock in connection with a publicoffering of securities, we may be required to include shares of restrictedsecurities in the registration, which may have an adverse effect on our abilityto raise capital.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONALRISKS AND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.**

 

We operate on a global basis with offices or distributors in Europe,Africa, Asia, Latin America, South America, Australia and North America anddevelopment efforts in North America, India and Europe. Approximately 28% and 29%of our revenue for the three and six-month periods ended September 30,2005, respectively, was generated from our international offices. We faceseveral risks inherent in conducting business internationally, including butnot limited to the following:

 

•              fluctuationsin interest rates or currency exchange rates;

•              languageand cultural differences;

•              localand governmental requirements;

•              difficultiesand costs of staffing and managing international operations;

•              differencesin intellectual property protections;

•              difficultiesin collecting accounts receivable and longer collection periods;

•              seasonalbusiness activities in certain parts of the world; and

•              tradepolicies.

 

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

 

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

 

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

 

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

 

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

 

**ITEM3.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

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

 

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

 

**Changes in Internal Control over Financial Reporting**

 

Therewas no change in our internal control over financial reporting that occurredduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

ITEM1.  LEGAL PROCEEDINGS

 

Weare subject from time to time to claims and suits arising in the ordinarycourse of business.  As of September 30,2005, we were not a party to any material litigation, claim or suit.

 

ITEM 6.  EXHIBITS

 
| **Exhibits:** | ** ** | ** **                                                                                                                                                                    |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                          |
| 4.10          |       | Form of 5% Subordinated Convertible Note and Schedule of  Holders                                                                                                   |
| 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**

 

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

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

 

**EXHIBIT INDEX**

 
| 4.10 |   | Form of 5% Subordinated Convertible Note and Schedule of  Holders                                                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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