**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

**x****                             ****Quarterly Report underSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For thequarterly period ended September 30, 2007**

** **

**o****                                ****Transition Report Pursuant toSection 13 or 15(d) of the Exchange Act**

** **

**For thetransition period from          to         **

** **

**CommissionFile number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of small business issuer asspecified in its charter)

** **

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

 

**25ATechnology DriveIrvine, CA 92618**

(Addressof principal executive offices)

 

**(949)442-4400**

(Issuer’stelephone number)

 

Checkwhether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes x  No o

 

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

 

As of September 30, 2007, there were 21,320,492shares of issuer’s Common Stock, $.10 par value, outstanding.

 

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

 

 

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**RAININGDATA CORPORATIONINDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                     |   |
|----------|---------------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.  | FINANCIAL STATEMENTS                                                                                                      |   |
|     | UNAUDITED CONDENSED  CONSOLIDATED BALANCE SHEETS — SEPTEMBER 30, 2007 AND MARCH 31, 2007                        |   |
|     | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS — THREE AND SIX MONTHS ENDED SEPTEMBER  30, 2007 AND 2006 |   |
|     | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS — SIX MONTHS ENDED SEPTEMBER 30, 2007  AND 2006           |   |
|     | 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. FINANCIAL INFORMATION**

 

ITEM 1. FINANCIAL STATEMENTS

 

**RAININGDATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 

| ** **                                                                                      | ** ** | **September 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                                                      | ** ** | **(In thousands)**      | ** ** |
| ASSETS                                                                                          |       |                         |       |                     |       |
|                                                                                            |       |                         |       |                     |       |
| Current assets                                                                                  |       |                         |       |                     |       |
| Cash and cash equivalents                                                                       |       | $                            | 12,234     |                     | $          | 11,654 |   |
| Trade accounts receivable, less allowance  for doubtful accounts of $287 and $200, respectively |       | 2,029                        |       | 1,609                    |       |
| Other current assets                                                                            |       | 446                          |       | 461                      |       |
| Total current assets                                                                            |       | 14,709                       |       | 13,724                   |       |
|                                                                                            |       |                         |       |                     |       |
| Property, furniture and equipment-net                                                           |       | 909                          |       | 949                      |       |
| Goodwill                                                                                        |       | 26,674                       |       | 26,751                   |       |
| Other assets                                                                                    |       | 102                          |       | 112                      |       |
| Total assets                                                                                    |       | $                            | 42,394     |                     | $          | 41,536 |   |
|                                                                                            |       |                         |       |                     |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                      |       |                         |       |                     |       |
|                                                                                            |       |                         |       |                     |       |
| Current liabilities                                                                             |       |                         |       |                     |       |
| Accounts payable                                                                                |       | $                            | 187        |                     | $          | 130 |   |
| Accrued liabilities                                                                             |       | 2,004                        |       | 2,536                    |       |
| Deferred revenue                                                                                |       | 5,084                        |       | 4,801                    |       |
| Debt-net of discount                                                                            |       | 951                          |       | —                   |       |
| Total current liabilities                                                                       |       | 8,226                        |       | 7,467                    |       |
| Long-term debt-net of discount                                                                  |       | 23,852                       |       | 24,150                   |       |
| Total liabilities                                                                               |       | 32,078                       |       | 31,617                   |       |
|                                                                                            |       |                         |       |                     |       |
| Commitments and contingencies                                                                   |       |                         |       |                     |       |
| Subsequent event                                                                                |       |                         |       |                     |       |
|                                                                                            |       |                         |       |                     |       |
| Stockholders’ equity                                                                       |       |                         |       |                     |       |
| Preferred stock                                                                                 |       | —                       |       | —                   |       |
| Common stock                                                                                    |       | 2,132                        |       | 2,118                    |       |
| Additional paid-in-capital                                                                      |       | 102,183                      |       | 101,385                  |       |
| Accumulated other comprehensive income                                                          |       | 1,305                        |       | 1,612                    |       |
| Accumulated deficit                                                                             |       | (95,304                      | )          | (95,196                  | )          |
| Total stockholders’ equity                                                                 |       | 10,316                       |       | 9,919                    |       |
|                                                                                            |       |                         |       |                     |       |
| Total liabilities and stockholders’ equity                                                 |       | $                            | 42,394     |                     | $          | 41,536 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

** **

| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Six Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                                 | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                          |       |                                                     |       |                                                   |       |   |   |   |   |
| Net revenues                                                  |       |                                                     |       |                                                   |       |   |   |   |   |
| Licenses                                                      |       | $                                                        | 1,959      |                                                   | $          | 1,686 |   | $ | 3,961 |   | $ | 3,340 |   |
| Services                                                      |       | 2,987                                                    |       | 2,910                                                  |       | 5,958 |   | 5,928 |   |
| Total net revenues                                            |       | 4,946                                                    |       | 4,596                                                  |       | 9,919 |   | 9,268 |   |
| Operating expenses                                            |       |                                                     |       |                                                   |       |   |   |   |   |
| Cost of license revenues                                      |       | 12                                                       |       | 19                                                     |       | 21 |   | 40 |   |
| Cost of service revenues                                      |       | 454                                                      |       | 488                                                    |       | 939 |   | 1,141 |   |
| Selling and marketing                                         |       | 1,373                                                    |       | 1,394                                                  |       | 2,677 |   | 2,850 |   |
| Research and development                                      |       | 1,922                                                    |       | 2,198                                                  |       | 3,919 |   | 4,844 |   |
| General and administrative                                    |       | 1,048                                                    |       | 1,002                                                  |       | 2,371 |   | 2,009 |   |
| Total operating expenses                                      |       | 4,809                                                    |       | 5,101                                                  |       | 9,927 |   | 10,884 |   |
| Operating income (loss)                                       |       | 137                                                      |       | (505                                                   | )          | (8 | ) | (1,616 | ) |
| Other income (expense)                                        |       |                                                     |       |                                                   |       |   |   |   |   |
| Interest expense-net                                          |       | (204                                                     | )          | (208                                                   | )          | (406 | ) | (431 | ) |
| Other income (expense)-net                                    |       | 205                                                      |       | (3                                                     | )          | 383 |   | 7 |   |
| Total other income (expense)                                  |       | 1                                                        |       | (211                                                   | )          | (23 | ) | (424 | ) |
| Income (loss) before income taxes                             |       | 138                                                      |       | (716                                                   | )          | (31 | ) | (2,040 | ) |
| Provision for income taxes                                    |       | 58                                                       |       | 59                                                     |       | 77 |   | 40 |   |
| Net income (loss)                                             |       | $                                                        | 80         |                                                   | $          | (775 | ) | $ | (108 | ) | $ | (2,080 | ) |
|                                                          |       |                                                     |       |                                                   |       |   |   |   |   |
| Basic net income (loss) per share                             |       | $                                                        | 0.00       |                                                   | $          | (0.04 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
|                                                          |       |                                                     |       |                                                   |       |   |   |   |   |
| Diluted net income (loss) per share                           |       | $                                                        | 0.00       |                                                   | $          | (0.04 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
|                                                          |       |                                                     |       |                                                   |       |   |   |   |   |
| Shares used in computing basic net income  (loss) per share   |       | 21,241                                                   |       | 20,989                                                 |       | 21,214 |   | 20,820 |   |
|                                                          |       |                                                     |       |                                                   |       |   |   |   |   |
| Shares used in computing diluted net income  (loss) per share |       | 22,073                                                   |       | 20,989                                                 |       | 21,214 |   | 20,820 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                                 | ** ** | **Six Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | **(In thousands)**                                | ** ** |
| Cash flows from operating activities:                                                      |       |                                                   |       |   |   |
| Net loss                                                                                   |       | $                                                      | (108       | ) | $ | (2,080 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                   |       |   |   |
| Depreciation and amortization of long-lived  assets                                        |       | 132                                                    |       | 154 |   |
| Provision for bad debt                                                                     |       | 74                                                     |       | — |   |
| Note payable discount amortization                                                         |       | 42                                                     |       | 41 |   |
| Stock-based compensation expense                                                           |       | 556                                                    |       | 457 |   |
| Deferred income tax expense                                                                |       | 77                                                     |       | 40 |   |
| Foreign currency exchange gain                                                             |       | (334                                                   | )          | (40 | ) |
| Change in assets and liabilities:                                                          |       |                                                   |       |   |   |
| Trade accounts receivable                                                                  |       | (64                                                    | )          | 391 |   |
| Other current and non-current assets                                                       |       | (3                                                     | )          | (95 | ) |
| Accounts payable                                                                           |       | 53                                                     |       | (133 | ) |
| Accrued liabilities                                                                        |       | 60                                                     |       | 158 |   |
| Deferred revenue                                                                           |       | (231                                                   | )          | (120 | ) |
| Net cash provided by (used in) operating  activities                                       |       | 254                                                    |       | (1,227 | ) |
|                                                                                       |       |                                                   |       |   |   |
| Cash flows used in investing  activities-purchase of property, furniture and equipment     |       | (33                                                    | )          | (140 | ) |
|                                                                                       |       |                                                   |       |   |   |
| Cash flows from financing activities:                                                      |       |                                                   |       |   |   |
| Proceeds from exercise of stock options                                                    |       | 204                                                    |       | 981 |   |
| Proceeds from issuance of common stock                                                     |       | 52                                                     |       | 112 |   |
| Net cash provided by financing activities                                                  |       | 256                                                    |       | 1,093 |   |
|                                                                                       |       |                                                   |       |   |   |
| Effect of exchange rate changes on cash                                                    |       | 103                                                    |       | 74 |   |
|                                                                                       |       |                                                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 580                                                    |       | (200 | ) |
| Cash and cash equivalents at beginning of  period                                          |       | 11,654                                                 |       | 10,789 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                      | 12,234     |   | $ | 10,589 |   |
|                                                                                       |       |                                                   |       |   |   |
| Non-cash financing activities:                                                             |       |                                                   |       |   |   |
| Accrued interest added to debt                                                             |       | $                                                      | 611        |   | $ | 568 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements.

 

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**NOTES TOTHE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2007**

 

**1. INTERIM FINANCIAL 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 its subsidiaries’ (collectively, “Company” or “we,” “us” or “our”)results of the operations and cash flows for the dates and periods presentedand to make such information presented not misleading. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to SEC rules and regulations;nevertheless, management of the Company believes that the disclosures hereinare adequate to make the information presented not misleading. These condensedconsolidated financial statements should be read in conjunction with theCompany’s audited financial statements for the year ended March 31, 2007,contained in the Company’s Annual Report on Form 10-KSB. The results ofoperations for the three and six months ended September 30, 2007, are notnecessarily indicative of results to be expected for any other interim periodor the fiscal year ending March 31, 2008.

 

**2. RECENTLYADOPTED ACCOUNTING STANDARDS**

 

*SAB No. 108*

 

InSeptember 2006, the Securities and Exchange Commission issued StaffAccounting Bulletin (“SAB”) No. 108, *“Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.”* We adopted SAB No. 108 in the fourthquarter of fiscal 2007. In accordance with SAB No. 108, we recorded acumulative effect adjustment to beginning retained earnings as of April 1,2006, as further described in the Company’s audited financial statements forthe year ended March 31, 2007, contained in the Company’s Annual Report on Form10-KSB. For comparative purposes, the statement of operations for the three andsix months ended September 30, 2006 has been adjusted to reflect the adoptionof SAB No. 108 as decribed below. The adoption of SAB No. 108 did not requirerevision to cash flows from operating, investing or financing activities forthe three and six months ended September 30, 2006.

 

For the threemonths ended September 30, 2006, the effect of adopting SAB No. 108 was adecrease in general and administrative expenses of $73,000, and an increase inother expense of $17,000. The effect on net loss for the three months endedSeptember 30, 2006 was a decrease in net loss of $56,000 with no effect onbasic or diluted net loss per share. For the six months ended September 30,2006, the effect of adopting SAB No. 108 was an increase in general andadministrative expenses of $128,000, and an increase in other expense of$29,000. The effect on net loss was an increase in net loss of $157,000, andthe effect on basic and diluted net loss per share was an increase in net lossper share of $0.01. 

 

*FIN 48*

 

InJuly 2006, the FASB issued FASB Interpretation No. 48, *“Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”*(“FIN 48”), which clarifies the accounting and disclosure for uncertainty intax positions by prescribing a minimum probability threshold a tax positionmust meet to be recognized in the financial statements. FIN 48 requires anentity to recognize all or a portion of the financial statement benefit of anuncertain income tax position only if the position, based solely on itstechnical merits and on all relevant information as of the reporting date,would have a greater than 50% probability of being sustained were the relevanttaxing authority to audit the applicable tax returns. If a tax position meetsthe threshold, then the entity will evaluate the benefits it would recognize atincreasing levels

 

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ofcumulative probabilities, and will record the largest amount of benefit thatwould have a greater than 50% probability of being sustained on audit(including resolution of any related appeals or litigation). An entity will notrecognize any benefit of an uncertain income tax position that fails to meetthe greater than 50% probability threshold.

 

TheCompany is subject to the provisions of FIN 48 as of April 1, 2007, and hasanalyzed filing positions in the federal and state jurisdictions where it isrequired to file income tax returns, as well as open tax years in thesejurisdictions. As a result of adoption, we have recorded no additional taxliability. As of the date of adoption, the Company’s uncertain tax positionstotaled $94,000, all of which would affect our annual effective income tax rateif recognized. 

 

TheCompany files consolidated and separate income tax return in the United StatesFederal jurisdiction and in certain state jurisdictions as well as foreignjurisdictions including France, Germany, and the United Kingdom. With limitedexceptions, the Company is no longer subject to US Federal income taxexaminations for fiscal years before 2004 and is no longer subject to state andlocal income tax examinations by tax authorities for fiscal years before 2003.

 

Neitherthe Company nor its subsidiaries is currently under examination by any taxingauthorities.

 

TheCompany recognizes potential accrued interest and penalties related touncertain tax positions in income tax expense. During the six months endedSeptember 30, 2007, the Company did not recognize a significant amount inpotential interest and penalties associated with uncertain tax positions. As ofSeptember 30, 2007, the Company has accrued approximately $18,000 in interestand penalties. To the extent interest and penalties are not assessed withrespect to uncertain tax positions, amounts accrued will be reduced andreflected as a reduction of the overall income tax provision.

 

TheCompany does not anticipate that total unrecognized tax benefits willsignificantly change due to the settlement of audits and the expiration ofstatute of limitation prior to September 30, 2008.

 

**3.STOCK-BASED COMPENSATION**

 

TheCompany has a stock option plan (“1999 Plan”) that provides for the granting ofstock options, restricted stock and restricted stock units to directors,employees and consultants. The Company also has an Employee Stock Purchase Plan(“ESPP”) which allows the employees to purchase the Company’s common stock at adiscount.

 

Totalstock-based compensation expense included in the unaudited condensedconsolidated statements of operations for the three and six months endedSeptember 30, 2007 and 2006, (in thousands) were as follows:

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Cost of revenue                        |       | $                                                    | 2          |                                               | $          | — |   | $ | 2 |   | $ | 4 |   |
| Operating expenses:                    |       |                                                 |       |                                               |       |   |   |   |   |
| Selling and marketing                  |       | 146                                                  |       | 95                                                 |       | 233 |   | 185 |   |
| Research and development               |       | 64                                                   |       | 74                                                 |       | 142 |   | 136 |   |
| General and administrative             |       | 89                                                   |       | 77                                                 |       | 179 |   | 132 |   |
| Total stock-based compensation expense |       | 301                                                  |       | 246                                                |       | 556 |   | 457 |   |
| Income tax benefit                     |       | —                                               |       | —                                             |       | — |   | — |   |
| Net stock-based compensation expense   |       | $                                                    | 301        |                                               | $          | 246 |   | $ | 556 |   | $ | 457 |   |

 

Asof September 30, 2007, there was approximately $2.9 million of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the plans. That cost is expected to be recognizedover a weighted-average period of 2.9 years.

 

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**4. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 157, “*Fair Value Measurements*” (“SFAS No. 157”).This statement defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements. It also applies under other accountingpronouncements that require or permit fair value measurement as a relevantattribute. SFAS No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and all interim periods within thatfiscal year. Management of the Company is evaluating the impact of thispronouncement on the Company’s consolidated results of operations and financialcondition.

 

**5. DEBT**

 

AstoriaCapital Partners, L.P. (“Astoria”), GFAM Hedge Partnership (“GFAM”) and CAMSmall Cap Fund L.P., are each holders of a 5% Convertible Subordinated Note Duein May 2008. The interest rate of the Convertible Subordinated Notes is 5% perannum, payable quarterly, which has been refinanced through increases to theoutstanding principal of the Convertible Subordinated Notes. The ConvertibleSubordinated Notes have a maturity date of May 30, 2008. The ConvertibleSubordinated Notes are convertible into common stock, at the option of theholder, at a price of $5.00 per share, at any time through May 29, 2008.

 

Asof September 30, 2007 and March 31, 2007, the outstanding amounts under suchnotes were as follows (in thousands):

 
| ** **                             | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2007**               | ** ** | **2007**           | ** ** |
| Subordinated convertible notes payable |       | $                      | 24,543     |               | $          | 23,946 |   |
| Plus accrued interest                  |       | 309                    |       | 295                |       |
| Less unamortized discount              |       | (49                    | )          | (91                | )          |
| Total notes payable                    |       | $                      | 24,803     |               | $          | 24,150 |   |

 

**6.SUBSEQUENT EVENT**

 

OnOctober 4, 2007, the Company received a conversion notice from Astoria and onOctober 5, 2007, the Company received a conversion notice from GFAM, eachelecting to convert its Convertible Subordinated Note in full. As a result,$22,917,000 of outstanding principal owed to Astoria under its ConvertibleSubordinate Note was converted into 4,583,400 shares of the Company’s commonstock, and $981,000 of outstanding principal owed to GFAM under its ConvertibleSubordinated Note was converted into 196,200 shares of the Company’s commonstock. Per the terms of the Convertible Subordinated Notes, the Company made acash payment to Astoria and GFAM of approximately $13,181 and $1,264,respectively, for amounts outstanding under the Convertible Subordinated Notesthat were not converted into shares of common stock. Following the conversionof such Convertible Subordinated Notes and the cash payment to Astoria andGFAM, the Convertible Subordinated Notes held by Astoria and GFAM werecancelled. After the conversion by Astoria and GFAM, one Convertible SubordinatedNote remains outstanding, with a principal balance of approximately $1 million.

 

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**7. STOCKHOLDERS’ EQUITY**

 

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share:

 

| ** **                                                     | ** ** | **Three Months Ended**                                      | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**                                                | ** ** | **September 30,**         | ** ** |
| ** **                                                     | ** ** | **2007**                                                              | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                           |       |                                                                  |       |                           |       |   |   |   |   |
| Net income (loss)                                              |       | $                                                                     | 80         |                           | $          | (775 | ) | $ | (108 | ) | $ | (2,080 | ) |
| Shares:                                                        |       |                                                                  |       |                           |       |   |   |   |   |
| Weighted-average shares outstanding-basic                      |       | 21,241                                                                |       | 20,989                         |       | 21,214 |   | 20,820 |   |
| Potential dilutive common shares, using  treasury stock method |       | 832                                                                   |       | —                         |       | — |   | — |   |
| Weighted-average shares outstanding-diluted                    |       | 22,073                                                                |       | 20,989                         |       | 21,214 |   | 20,820 |   |
| Net income (loss) per share:                                   |       |                                                                  |       |                           |       |   |   |   |   |
| Basic                                                          |       | $                                                                     | 0.00       |                           | $          | (0.04 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
| Diluted                                                        |       | $                                                                     | 0.00       |                           | $          | (0.04 | ) | $ | (0.01 | ) | $ | (0.10 | ) |

 

Basicincome (loss) per share is computed using the net income (loss) and theweighted average number of common shares outstanding during the period. Dilutedincome (loss) per share is computed using the net income (loss) and theweighted average number of common shares and potential common sharesoutstanding during the period when the potential common shares are dilutive.Potential dilutive common shares include outstanding stock options andconvertible debt.

 

 Weighted outstanding options to purchase 2,348,853 shares of theCompany’s common stock, and convertible debt outstanding, which was convertibleinto 4,908,600 shares, have been excluded from the computation of diluted netincome per share for the three months ended September 30, 2007. Weightedoutstanding options to purchase 4,284,018 shares of the Company’s common stock wereexcluded from diluted net loss per share calculation for the six months endedSeptember 30, 2007. Weighted outstanding options to purchase 4,441,223 sharesand 4,460,971 shares of the Company’s common stock were excluded from dilutednet loss per share calculation for the three and six months ended September 30,2006, respectively.  Convertible debtoutstanding, which was convertible into 4,848,200 shares of the Company's commonstock was excluded from the computation of diluted net loss per share for thesix months ended September 30, 2007. Convertible debt outstanding, which wasconvertible into 4,670,600 shares and 4,613,000 shares of the Company's commonstock was excluded from the computation of diluted net loss per share for thethree and six months ended September 30, 2006, respectively. The effects ofthese items were not included in the computation of diluted income (loss) pershare because their effect would have been anti-dilutive.

 

Thechange in accumulated other comprehensive loss during the three and six monthperiods ended September 30, 2007 and 2006, is the result of the effect offoreign exchange rate changes. The following table reconciles net income (loss)as reported with total comprehensive loss (in thousands):

 

| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                       | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (loss) reported       |       | $                                | 80         |                           | $          | (775 | ) | $ | (108 | ) | $ | (2,080 | ) |
| Translation adjustments—net |       | (118                             | )          | (77                            | )          | (307 | ) | 84 |   |
| Total comprehensive loss         |       | $                                | (38        | )                              | $          | (852 | ) | $ | (415 | ) | $ | (1,996 | ) |

 

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**8. BUSINESS SEGMENT**

 

TheCompany operates in one reportable segment. International operations consistprimarily of foreign sales offices selling software developed in the UnitedStates of America combined with local maintenance revenue. The following tablesummarizes consolidated financial information of the Company’s operations bygeographic location (in thousands):

 

| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                             | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net revenue** | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America        |       | $                                                    | 3,303      |                                               | $          | 3,185 |   | $ | 6,692 |   | $ | 6,436 |   |
| Europe/Africa        |       | 1,643                                                |       | 1,411                                              |       | 3,227 |   | 2,832 |   |
| Total                |       | $                                                    | 4,946      |                                               | $          | 4,596 |   | $ | 9,919 |   | $ | 9,268 |   |

 

| ** **                 | ** ** | **September 30, 2007** | ** ** | **March 31,2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|----------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| **Long-lived assets** |       |                             |       |                   |       |       |       |       |       |
| North America              |       | $                                | 27,048     |                   | $          | 27,174     |       |       |       |   |   |
| Europe/Africa              |       | 637                              |       | 638                    |       |       |       |       |       |
| Total                      |       | $                                | 27,685     |                   | $          | 27,812     |       |       |       |   |   |

 

The Company operates inone reportable segment and is engaged in the design, development, sale, andsupport of three software product lines: 1) XML Data Management Servers (“XDMS”),2) Multidimensional Database Management Systems (“MDMS”), and3) Rapid Application Development (“RAD”) software tools. The followingtable represents the net revenue from the Company’s segment by product line (inthousands):

 

| ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                             | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** ** | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Databases  |       | $                                                    | 3,969      |                                               | $          | 4,187 |   | $ | 8,025 |   | $ | 7,512 |   |
| RAD Tools  |       | 977                                                  |       | 409                                                |       | 1,894 |   | 1,756 |   |
| Total      |       | $                                                    | 4,946      |                                               | $          | 4,596 |   | $ | 9,919 |   | $ | 9,268 |   |

 

**9. COMMITMENTS AND CONTINGENCIES**

 

The Company is subject from time to time tolitigation, claims and suits arising in the ordinary course of business. As of September30, 2007, the Company was a party to the following legal proceedings:

 

*RainingData v. Intrametrics*. On or about January 19, 2007, the Company filed a complaint in Orange CountySuperior Court that sets forth allegations that Intrametrics threatens to andhas misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that Intrametrics has obtained the Company’ssource code in violation of the Parties’ OEM (Original Equipment Manufacturer)Distribution Agreement and in violation of California’s laws prohibiting themisappropriation of trade secrets.  The Company seeks injunctive relieffrom Intrametrics, including, but not limited to, compelling Intrametrics tofully comply with all of the termination provisions set forth in the OEMAgreement; enjoining Intrametrics and its employees and agents from using ordisclosing the Company’s trade secrets; prohibiting Intrametrics fromsoliciting the Company’s current or potential customers for 3 years, and fromsoliciting or employing certain of the Company’s former employees for 3years.  Intrametrics filed a motion to quash the Complaint, which theCompany opposed, but on the morning of the hearing, Intrametrics first notifiedthe Company that it filed Chapter 11 bankruptcy, effectively staying thelitigation in Orange County Superior Court.  The Company is pursuingfurther discovery and litigation in the bankruptcy court in Houston, TX.

 

10

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*RainingData v. Soheil Raissi (formerly the Company’s Vice President, ProductDevelopment and Professional Services), Mario Barrenechea (formerly the Company’sSenior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),and Adevnet, LLC*. On or about December 8, 2006, the Company filed a complaint in Orange CountySuperior Court that sets forth allegations that the defendants threaten to andhave misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that the individual defendants have usedand/or disclosed the Company’s trade secrets (in the form of source code andlicenses and other trade secret information) in violation of their agreementswith the Company to maintain the confidentiality of such trade secretinformation, and in violation of California laws prohibiting themisappropriation of trade secrets. The Company seeks injunctive relief from thedefendants, including, but not limited to, compelling the defendants toimmediately return all of the Company’s trade secrets and property; enjoiningthe defendants and their employees and agents from using or disclosing theCompany’s trade secrets, including the Company’s source code; ordering thedefendants to disclose all gains and profits they have derived from themisappropriation of the Company’s trade secrets; enjoining the defendants fromdirectly or indirectly supplying, selling or promoting any product that incorporatesthe Company’s trade secrets.

 

*Cross-Complaintby Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.*On or about January 10, 2007, the defendantsfiled a cross-complaint against the Company and Carlton Baab (the Company’sPresident and Chief Executive Officer) for the following claims:  unfair business practices, violation of civilrights, intentional interference with prospective economic advantage, negligentinterference with prospective economic advantage, malicious prosecution, abuseof process, negligence, and civil conspiracy. Cross-complainants allegegeneral, compensatory, special, and punitive and exemplary damages in amounts “accordingto proof”, and seek to enjoin the Company from engaging in improper andunlawful conduct.  The Company and Carlton Baab (the “Cross-Defendants”)contend that all of the claims are baseless, and filed a special motion tostrike all of the claims in the cross-complaint.  The Company’s specialmotion to strike is scheduled to be heard in April 2008.  TheCross-Defendants will continue to vigorously defend their rights in thislitigation.  We are unable to estimate any loss or range of loss atthis time. Management believes that the ultimate disposition of this matterwill not have a material adverse effect on the Company’s consolidated financialstatements, results of operations, cash flows or liquidity.

 

*Indemnification*

 

TheCompany’s standard customer license and software agreements containindemnification and warranty provisions which are generally consistent withpractice in the Company’s industry. The duration of the Company’s servicewarranties generally does not exceed 30 days following completion of itsservices. The Company has not incurred significant obligations under customerindemnification or warranty provisions historically and does not expect toincur significant obligations in the future. Accordingly, the Company does notmaintain accruals for potential customer indemnification or warranty-relatedobligations. The maximum potential amount of future payments that the Companycould be required to make is generally limited under the indemnificationprovisions in its customer license and service agreements.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

** **

This Form 10-QSBcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”), andSection 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). These statements may generally be identified by the use of such words as“expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall,” or thenegative of those terms. We have based these forward-looking statements on ourcurrent expectations and projections about future events. Forward-lookingstatements involve certain risks and uncertainties and actual results maydiffer materially from those discussed in any such statement. Factors thatcould cause actual results to differ materially from such forward-lookingstatements include the risks described under the heading “Risk Factors” inItem 2 of this Form 10-QSB and elsewhere in this Form 10-QSB.The forward-looking statements contained in this Form 10-QSB include, butare not limited to statements about the following: (1) our future success,(2) our research and development efforts, (3) our future operatingresults and cash flow, (4) our competitive ability and position,(5) the markets in which we operate, (6) our revenue, (7) costof license revenue and cost of service revenue, (8) our selling andmarketing costs, (9) our backlog, (10) the adoption of certain criticalaccounting policies and the related judgments and estimates , (11) ourbelief that our existing cash balances combined with our cash flow from operatingactivities will be sufficient to meet our operating and capital expenditurerequirements for the remainder of the fiscal year ending March 31, 2008, (12)our liquidity, (13) our focus on the continued development and enhancement ofthe TigerLogic XDMS product line, and identification of new and emergingapplication areas and discussions with channel partners for the sale anddistribution of the TigerLogic product line and (14) the sales cycle for ourproducts being longer than anticipated. All forward-looking statements in thisdocument are made as of the date hereof, based on information available to usas of the date hereof, and we assume no obligation to update anyforward-looking statement.

 

11

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**Overview**

** **

We were incorporated inthe State of Delaware in August 1987. We were originally incorporated asBlyth Holdings, Inc. and our name was changed to Omnis TechnologyCorporation in September 1997. Effective December 1, 2000, wecompleted the acquisition of PickAx, Inc., a Delaware corporation (“PickAx”).Concurrent with the acquisition, we changed our name to Raining DataCorporation.

 

**Products**

** **

Ourprincipal business is the design, development, sale and support of softwareinfrastructure. Our products allow customers to create and enhance flexiblesoftware applications for their own needs, and our software may be categorizedinto three product lines: XDMS, MDMS, RAD software tools.

 

Manyof our products are based on the Pick Universal Data Model (“Pick UDM”), whichwe created, and are capable of handling data from many sources. The Pick UDM isa core component across the XDMS and MDMS product lines.

 

Beginningin 2001, we began an extensive effort to leverage our time-proven Pick UDM andcore intellectual property to create an enterprise class XML databasemanagement system for the emerging XML market, the growing need for native XMLdata stores and the ability to handle structured and unstructured data. Thissignificant investment of time and resources resulted in the TigerLogic XDMSproduct line. We are focused on the continued development and enhancement ofthis product line, identification of new and emerging application areas anddiscussions with channel partners for the sale and distribution of theTigerLogic product line.

 

***TigerLogic XDMS***

* *

TigerLogicXMLData Management Server provides high-performance management and query of XMLdata by leveraging the time-proven Pick UDM. TigerLogic also enables theability to query external data sources as if they were one logical database andmaintains referential integrity across data sources. TigerLogic’spatent-pending XML Indexing and Profiling technology enables it to access XMLdata via XQuery between 10x to 150x faster in internal tests than relationaldatabases, XML repositories or XML Index and Search engines. TigerLogicprovides XML, Java, .NET, WSDL and SOAP compatibility for simplified plug-inand integration with development environments of choice.

 

TigerLogic provides anextensible and flexible development and deployment environment. Unlike otherXML data management alternatives, TigerLogic XDMS does not need to know theschema or structure of data before processing and storing it. We believe theability to make XML schemas optional is a vital innovation because the structuresof operational systems frequently change, and mapping schemas for the purposeof linking to a new data source is both difficult and time-consuming. Thesystem also enables support for schema versioning, which is critical whenaddressing evolving standards and XML schemas. The General Availability Releaseof TigerLogic XDMS version 2.6, which included support for enhanced XQueryfeatures, including XQuery stored procedures and full-text search and supportfor High Availability clustering, was released in July 2006. Version 3.0, whichis the third generation release of the product and includes compliance with theXML Query 1.0 specification, released in January 2007, cache management of datasources, in-memory cache, support for Geospatial data, enhanced APIs and datareplication was released for beta testing in June 2007.

 

***Multi-dimensional Databases (MDMS)***

* *

The MDMS product lineconsists principally of the D3 Data Base Management System (“D3”), which runson many operating systems such as IBM AIX, Linux and Windows NT. D3 allowsapplication programmers to create new business solution software in less timethan it normally takes in many other environments. This can translate intolower costs for the developer, lower software prices for the customer and reducedcosts of ownership for both the developer and end user. Our MDMS products alsoinclude mvEnterprise, a scalable multi-dimensional database solution thatallows the user to leverage the capabilities of the UNIX operating system, andmvBase, a multi-dimensional database solution that runs on all Windowsplatforms.

 

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MDMS components includethe Pick Data Provider for .Net (“PDP”) and our Pick Reporting ServicesConnector. The PDP component for the Microsoft .NET Framework is tightlyintegrated with Microsoft Visual Studio .NET. It allows software developersusing IBM’s Universe and Unidata databases and our D3 database platform tobuild client/server applications, Web applications or Web services using any ofthe languages and technologies that run on the Microsoft .NET Framework, suchas Microsoft ASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET. OurPick Reporting Services Connector enables a data connection that allows Pickdatabase users to unlock the benefits of Microsoft Reporting Services to takeadvantage of a comprehensive, server-based reporting solution that can author,manage, and deliver both paper-oriented and interactive, Web-based reports.This solution also allows access to IBM UniVerse, IBM UniData and Pick D3 data.

 

***Rapid Application Development (RAD) Tools***

* *

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

 

**Technical Support**

** **

Our products are used byour customers to build and deploy applications that may become a criticalcomponent of their business operations. As a result, continuing to providecustomer technical support services is an important element of our businessstrategy. Customers who participate in our support programs receive periodicmaintenance releases on a when-and-if available basis and direct technicalsupport when required.

 

**Sales and Distribution**

** **

Inthe United States, we sell our products through established distributionchannels consisting of OEMs, system integrators, specialized verticalapplication software developers and consulting organizations. We also sell ourproducts directly through our sales personnel to end user organizations.Outside the United States, we maintain direct sales offices in the UnitedKingdom, France and Germany. Approximately 33% of our revenue came from salesthrough our offices located outside the United States for the three and sixmonths ended September 30, 2007, compared to 31% for the same periods in 2006.

 

We sell our products inU.S. Dollars in North America, British Pounds Sterling in the United Kingdomand Euros in France and Germany. Because we recognize revenue and expense inthese various currencies but report our financial results in U.S. Dollars, changesin exchange rates may cause variances in our period-to-period revenue andresults of operations in future periods.

 

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

 

**Customers**

** **

Our customers may beclassified 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.

 

Foreach of the three and six months ended September 30, 2007 and 2006, no singlecustomer accounted for more than 10% of our revenue.

 

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**Research and Development**

** **

Wehave devoted significant resources to the research and development of ourproducts and technology. We believe that our future success will depend largelyon a strong development effort with respect to both our existing and newproducts. These development efforts have resulted in updates and upgrades toexisting MDMS and RAD products and the launch of new products including theXDMS product line. New product releases in all of our product lines arecurrently in progress. We expect to continue our research and developmentefforts in all product lines for the foreseeable future. We intend for theseefforts to improve our future operating results and increase cash flow.However, such efforts may not result in additional new products or revenue, andwe can make no assurances that the recently announced products or futureproducts will be successful. We recognized $1.9 million and $3.9 million ofresearch and development expense for the three and six months ended September30, 2007, respectively, compared to $2.2 million and $4.8 million for the sameperiods in 2006.

 

**Competition**

 

The applicationdevelopment tools software market is rapidly changing and intenselycompetitive. Our MDMS products compete with products developed by companiessuch as Oracle, Microsoft and IBM. Our RAD products currently encountercompetition from several direct competitors, including Microsoft, and competingdevelopment environments, including JAVA. Competition is developing andevolving in the XML market for which our XDMS products are intended. Companiesthat do or are expected to compete in this market include Oracle, IBM,Microsoft and Sybase, as well as a number of smaller companies with productsthat directly and indirectly compete with our XDMS products. Most of ourcompetitors have significantly more financial, technical, marketing and otherresources than we do. As a result, these competitors may be able to respondmore quickly to new or emerging technologies, evolving markets and changes incustomer requirements, and may devote greater resources to the development,promotion and sale of their products.

 

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

 

**Intellectual Property and Other Proprietary Rights**

** **

We rely primarily on acombination of trade secret, copyright and trademark laws and contractualprovisions to protect our intellectual property and proprietary rights. Ourtrademarks include Raining Data, Pick, TigerLogic, D3, Omnis, Omnis Studio,mvEnterprise, mvBase, and mvDesigner, among others. We also have one pendingU.S. patent application as of September 30, 2007.

 

We license our productsto end users on a “right to use” basis pursuant to a perpetual licenseagreement that restricts use of products to a specified number of users. Wegenerally rely on “click-wrap” licenses that become effective when a customerdownloads and installs the software on its system. In order to retain exclusiveownership rights to our software and technology, we generally provide oursoftware in object code only, with contractual restrictions on copying, disclosure,and transferability. There can be no assurance that these protections will beadequate, or that our competitors will not independently develop technologiesthat are substantially equivalent or superior to our technology.

 

**Backlog**

** **

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

 

**Employees**

** **

AtSeptember 30, 2007, we had 106 employees worldwide of which 76 were in theUnited States and 30 were in our international offices. Of the 106 employees,99 are full-time and approximately 46% are in research and development, 21% intechnical support, 16% in sales and marketing and 17% in general andadministrative functions.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenueand expenses and disclosure of contingent liabilities.

 

On an on-going basis, weevaluate our estimates, including those related to revenue recognition andaccounting for goodwill. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

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

 

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 recognized in amultiple element arrangement when company-specific objective evidence of fairvalue exists for all of the undelivered elements in the arrangement, but doesnot exist for one or more of the delivered elements in the arrangement. At theoutset of the arrangement with the customer, we defer revenue for the fairvalue of our undelivered elements (e.g., maintenance) based on company-specificobjective evidence of the amount such items are sold individually to ourcustomers and recognize revenue for the remainder of the arrangement feeattributable to the elements initially delivered in the arrangement (e.g.,software license) when the basic criteria in SOP 97-2 have been met.

 

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

 

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

 

For contracts thatrequire significant modification or customization to the software in accordancewith customers’ specifications, we recognize revenue using thecompleted-contract method pursuant to the requirements of Statement of PositionNo. 81-1, “*Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.*” Under this method, revenue and expenses are deferred until customer acceptanceof the finished product occurs.

 

GOODWILL.   We assess the impairment of goodwillwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. We also assess the value of goodwill at least annually.Factors we consider to be important which could trigger an impairment reviewinclude the following:

 

• Significantunderperformance relative to expected historical or projected future operatingresults;

• Timing ofour revenue, significant changes in the manner of use of the acquired assets orthe strategy for the overall business;

• Significantnegative industry or economic trends;

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

• Our marketcapitalization relative to net book value.

 

In accordance withStatement of Financial Accounting Standards No. 142, “*Goodwill and Other Intangible Assets*” (“SFASNo. 142”), we do not amortize goodwill, but test for goodwill impairmentfollowing a two-step process. The first

 

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step is used to identify potential impairment bycomparing the fair value of a reporting unit with its net book value (orcarrying amount), including goodwill. If the fair value exceeds the carryingamount, goodwill of the reporting unit is considered not impaired and thesecond step of the impairment test is unnecessary. If the carrying amount of areporting unit exceeds its fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, if any.The second step of the goodwill impairment test compares the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill. Ifthe carrying amount of the reporting unit’s goodwill exceeds the implied fairvalue of that goodwill, an impairment loss is recognized in an amount equal tothat excess. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. That is,the fair value of the reporting unit is allocated to all of the assets andliabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit. Currently, we have one reporting unit for goodwill impairmenttesting.

 

Determining the fairvalue of a reporting unit under the first step of the goodwill impairment testand determining the fair value of individual assets and liabilities of areporting unit (including unrecognized intangible assets) under the second stepof the goodwill impairment test is judgmental in nature and often involves theuse of significant estimates and assumptions. These estimates and assumptionscould have a significant impact on whether or not an impairment charge isrecognized and the magnitude of any such charge. Estimates of fair value arecurrently based on our stock price as reported by Nasdaq.

 

EMPLOYEESTOCK-BASED COMPENSATION. We account for stock-based compensation in accordancewith SFAS No. 123(R). Under the fair value recognition provisions of thisstatement, share-based compensation cost is measured at the grant date based onthe value of the award and is recognized as expense over the requisite serviceperiod. We estimate the fair value of stock-based awards using a Black-Scholesvaluation model. Determining the fair value of share-based awards at the grantdate requires judgment, including estimating volatility, expected terms, andforfeitures. If actual results differ significantly from these estimates,stock-based compensation expense and our results of operations could bematerially impacted. See footnote 3 in the accompanying unaudited condensedconsolidated financial statements.

 

*Reclassifications* — Certain reclassifications have been made to prior period amounts toconform with the current period presentation.

 

**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 licenserevenues and cost of service revenues are expressed as a percentage of therelated revenues. This information should be read in conjunction with theCondensed Consolidated Financial Statements included elsewhere in thisForm 10-QSB.

 

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| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** | **Six Months Ended**   | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                                             | ** ** | **Results**                      | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change**              | ** ** | **Results**                      | ** ** | **% of Net  Revenues** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| ** **                                             | ** ** | **(In   thousands)**        | ** ** | ** **                       | ** ** | ** **                       | ** ** | **(In   thousands)**        | ** ** | ** ** | ** ** | **(In   thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(In   thousands)** | ** ** | ** ** | ** ** |
| Net revenues                                           |       |                             |       |                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                               |       | $                                | 1,959      |                             | 40%        |                             | 16%        |                             | $          | 1,686 |   | 37% |   | $ | 3,961 |   | 40% |   | 19% |   | $ | 3,340 |   | 36% |   |
| Services                                               |       | 2,987                            |       | 60%                              |       | 3%                               |       | 2,910                            |       | 63% |   | 5,958 |   | 60% |   | 1% |   | 5,928 |   | 64% |   |
| Total net  revenues                                    |       | 4,946                            |       | 100%                             |       | 8%                               |       | 4,596                            |       | 100% |   | 9,919 |   | 100% |   | 7% |   | 9,268 |   | 100% |   |
| Operating expenses                                     |       |                             |       |                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues:                                      |       |                             |       |                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license  revenues (as a % of license revenues) |       | 12                               |       | 1%                               |       | (37)%                            |       | 19                               |       | 1% |   | 21 |   | 1% |   | (48)% |   | 40 |   | 1% |   |
| Cost of service  revenues (as a % of service revenues) |       | 454                              |       | 15%                              |       | (7)%                             |       | 488                              |       | 17% |   | 939 |   | 16% |   | (18)% |   | 1,141 |   | 19% |   |
| Selling and  marketing                                 |       | 1,373                            |       | 28%                              |       | (2)%                             |       | 1,394                            |       | 30% |   | 2,677 |   | 27% |   | (6)% |   | 2,850 |   | 31% |   |
| Research and  development                              |       | 1,922                            |       | 39%                              |       | (13)%                            |       | 2,198                            |       | 48% |   | 3,919 |   | 40% |   | (19)% |   | 4,844 |   | 52% |   |
| General and administrative                             |       | 1,048                            |       | 21%                              |       | 5%                               |       | 1,002                            |       | 22% |   | 2,371 |   | 24% |   | 18% |   | 2,009 |   | 22% |   |
| Total operating  expenses                              |       | 4,809                            |       | 97%                              |       | (6)%                             |       | 5,101                            |       | 111% |   | 9,927 |   | 100% |   | (9)% |   | 10,884 |   | 117% |   |
| Operating income  (loss)                               |       | 137                              |       | 3%                               |       | 127%                             |       | (505)                            |       | (11)% |   | (8) |   | 0% |   | 100% |   | (1,616) |   | (17)% |   |
| Other income  (expense)-net                            |       | 1                                |       | 0%                               |       | 100%                             |       | (211)                            |       | (5)% |   | (23) |   | 0% |   | 95% |   | (424) |   | (5)% |   |
| Income (loss)  before income taxes                     |       | 138                              |       | 3%                               |       | 119%                             |       | (716)                            |       | (16)% |   | (31) |   | 0% |   | 98% |   | (2,040) |   | (22)% |   |
| Provision for  income taxes                            |       | 58                               |       | 1%                               |       | 2%                               |       | 59                               |       | 1% |   | 77 |   | 1% |   | 92% |   | 40 |   | 0% |   |
| Net income (loss)                                      |       | $                                | 80         |                             | 2%         |                             | 110%       |                             | $          | (775) |   | (17)% |   | $ | (108) |   | (1)% |   | 95% |   | $ | (2,080) |   | (22)% |   |

 

**REVENUE**

 

NETREVENUE. Our revenue is derived principally from two sources: fees fromsoftware licensing and fees for post contract technical support. We license oursoftware on a per-CPU, per-server, per-port or per-user basis. Therefore, theaddition of CPU’s, servers, ports or users to existing systems increases ourrevenue from our installed base of licenses. The increase in revenue for thethree and six month periods ended September 30, 2007, as compared to the sameperiods in the prior year is due to an increase in license revenue fromadditional users on certain existing accounts. In the longer term, we expectthat the MDMS and RAD markets will eventually contract as customers adopt newertechnologies, and, therefore, the revenue generated from sales of our MDMS andRAD products is expected to decrease.

 

We have been activelydeveloping and marketing our XDMS product line. Should our development effortsand the adoption of these product lines be successful, we anticipate additionalrevenues in future periods related to the sale of these products. However, wecan give no assurances as to customer acceptance of any new products orservices, or the ability of the current or any new products and services togenerate revenue. While we are committed to research and development effortsthat are intended to allow us to penetrate new markets and generate new sourcesof revenue, such efforts may not result in additional products, services orrevenue.

 

**OPERATING EXPENSES**

 

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costsassociated with software license sales including software packaging and relatedpersonnel cost, documentation, physical media costs and royalties. Cost oflicense revenue decreased in the three and six month periods ended September30, 2007, as compared to the same periods in the prior year due to reducedheadcount. We anticipate that the cost of license revenue, as a percentage oflicense revenue and in absolute dollars, will be relatively stable in futureperiods.

 

COST OF SERVICE REVENUE.Cost of service revenue includes primarily personnel costs relating toproviding consulting, technical support and training services. Cost of servicerevenue decreased for three and six month periods ended September 30, 2007, ascompared to the same periods in the prior year due to reduced headcount. Weanticipate that the cost of service revenue, as a percentage of service revenueand in absolute dollars, will be relatively stable in future periods.

 

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SELLINGAND MARKETING. Selling and marketing expense consists primarily of salaries,benefits, advertising, tradeshows, travel and overhead costs for our sales andmarketing personnel. The decrease in selling and marketing expense in the threeand six month periods ended September 30, 2007, as compared to the same periodsin the prior year was due to reduced headcount. We anticipate that selling andmarketing costs related to XDMS products may increase as we further develop thesales channel for these products and if customer acceptance of these productsincreases. In addition, if our continued research and development efforts aresuccessful, including with respect to our XDMS products, and new products orservices are created, we may incur increased sales and marketing expense topromote 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. The decrease in research and development expense in thethree and six month periods ended September 30, 2007, as compared to the sameperiods in the prior year was mainly due to reduced headcount and terminationof contracted professional technical services in India. 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 believe thatadditional spending is warranted. Such efforts may not result in additional newproducts and any new products, including the XDMS products, may not generatesufficient revenue, if any, to offset the research and development expense.

 

GENERALAND ADMINISTRATIVE. General and administrative expense consists primarily ofcosts associated with our finance, human resources, legal and otheradministrative functions. These costs consist principally of salaries and otherpersonnel-related expenses, professional fees, depreciation and overhead costs.The increase in general and administrative expense in the three and six monthperiods ended September 30, 2007, as compared to the same periods in prior yearwas mainly due to costs incurred in legal services related to pendinglitigation matters and professional service expenses.

 

OTHEREXPENSE. Other expense consists primarily of net interest expense and gains andlosses on foreign currency transactions. The decrease in other expense duringthe three and six month periods ended September 30, 2007, as compared to thesame periods in the prior year was mainly due to foreign currency exchangegains. Due to the uncertainty in exchange rates, we may experience transactiongains or losses in future periods, the effect of which cannot be determined atthis time.

 

PROVISION FOR INCOMETAXES.   Our effective tax rate was 42.0% and (248.4%) for the three andsix month periods ended September 30, 2007, respectively, compared to (8.2%)and (2.0%) for the same periods in 2006. The provision for income taxesreflects the tax on earnings from foreign subsidiaries. We are able to reducethe current tax liability of foreign subsidiaries with net operating losscarryforwards. However, certain carryforwards were acquired in our acquisitionin December 2000. Therefore, the benefit realized from utilizing those netoperating loss carryforwards reduced goodwill instead of income tax expense.Due to uncertainties surrounding the timing of realizing the benefits of thenet operating loss carryforwards in the future, we have established a fullvaluation allowance against the related net deferred tax assets.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

In connection with theacquisition of PickAx, we assumed a Secured Promissory Note issued to Astoriadated November 30, 2000, in the amount of $18.5 million. InJanuary 2003, we entered into a Note Exchange Agreement (the “ExchangeAgreement”) with Astoria to replace the existing Secured Promissory Note, asamended, with a Convertible Subordinated Note. Under the terms of the ExchangeAgreement, the Secured Promissory Note was exchanged and replaced with aConvertible Subordinated Note having a principal amount of $22.1 million, whichprincipal amount was equal to the outstanding principal and accrued interestpayable on the Secured Promissory Note as of the date of the Exchange Agreement.In October 2005, Astoria assigned a portion of its common stock holdingstotaling 870,536 shares and a portion of the Subordinated Convertible Note,totaling $1,751,832, to two of its limited partners, including GFAM. As such,we issued an Amended and Restated Note to Astoria for $20,749,581 andcorresponding notes directly to the limited partners for $862,979 and $888,853,respectively. The Convertible Subordinated Notes are convertible into commonstock at any time, at the option of the holder, at a price of $5.00 per share.The Convertible Subordinated Notes mature on May 30, 2008. The interestrate of the Convertible Subordinated Notes is 5% per annum as compared to aninterest rate of 10% per annum under the Secured Promissory Note. The interestis payable quarterly at our option in cash or through increases to theoutstanding principal of the Convertible Subordinated Notes.

 

On December 14,2004, we entered into an Agreement Regarding Amended and Restated Common StockPurchase Warrant and 5% Convertible Subordinated Note Due 2008 with Astoriawhereby we could redeem, in part, the Convertible Subordinated Note in advanceof January 30, 2005. On December 14, 2004, Astoria exercised itswarrant in the amount of

 

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$2,670,904. In lieu of a cash payment, we used theproceeds of the exercise to pay down a portion of the indebtedness to Astoria.The pay down consisted of $247,129 for accrued and unpaid interest, and$2,423,775 as a reduction of principal of the Convertible Subordinated Note.

 

OnOctober 4, 2007, the Company received a conversion notice from Astoria and onOctober 5, 2007, the Company received a conversion notice from GFAM, eachelecting to convert its Convertible Subordinated Note in full. As a result,$22,917,000 of outstanding principal owed to Astoria under its ConvertibleSubordinate Note was converted into 4,583,400 shares of the Company’s commonstock, and $981,000 of outstanding principal owed to GFAM under its ConvertibleSubordinated Note was converted into 196,200 shares of the Company’s commonstock. Per the terms of the Convertible Subordinated Notes, the Company made acash payment to Astoria and GFAM of approximately $13,181 and $1,264,respectively, for amounts outstanding under the Convertible Subordinated Notesthat were not converted into shares of common stock. Following the conversionof such Convertible Subordinated Notes and the cash payment to Astoria andGFAM, the Convertible Subordinated Notes held by Astoria and GFAM werecancelled. After the conversion by Astoria and GFAM, one ConvertibleSubordinated Note remains outstanding, with a principal balance ofapproximately $1 million.

 

Astoria is a majorstockholder of ours, holding a majority of our outstanding common stock.Richard W. Koe, Chairman of the Board of Directors, serves as the ManagingGeneral Partner for Astoria. Carlton H. Baab, our President and ChiefExecutive Officer and a member of the Board of Directors, served as a ManagingPrincipal of ACM, which is a general partner of Astoria, until taking a formalleave of absence to join us in August 2001. Gerald F. Chew, a member ofour Board of Directors, is the cousin of Mr. Koe.

 

As of September 30, 2007,we had $12.2 million in cash. We believe that our existing cash balancescombined with our cash flow from operating activities will be sufficient tomeet our operating and capital expenditure requirements for the remainder ofthe fiscal year ending March 31, 2008. We are committed to research anddevelopment efforts that are intended to allow us to penetrate new markets andgenerate new sources of revenue and improve operating results. However, ourresearch and development efforts have required, and will continue to require,cash outlays without the immediate or short-term receipt of related revenue.Our ability to meet our expenditure requirements is dependent upon our futurefinancial performance, which will be affected by, among other things,prevailing economic conditions, our ability to penetrate new markets andattract new customers, market acceptance of our new and existing products andservices, the success of research and development efforts and other factorsbeyond our control. On February 11, 2004, we entered into a two yearcredit facility with Silicon Valley Bank which provided us with the ability toborrow up to $1.5 million at an annual interest rate of Prime plus 1.0%,provided that the annual interest rate shall never be less than 5%. We renewed this credit facility onFebruary 11, 2006. The credit facility is collateralized by our assets andexpires in February 2008. The credit facility contains financial andreporting covenants that require us to maintain certain financial ratios onlywhen we have outstanding borrowings on the line. There were no outstandingborrowings at September 30, 2007. Upon expiration of the term of this facilitywe will assess our credit and liquidity needs in relation to market factors.

 

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

 

We had no materialcommitments for capital expenditures as of September 30, 2007.

 

Net cash provided by(used in) operating activities was $0.3 million and ($1.2) million for thesix-month periods ended September 30, 2007 and 2006, respectively.

 

Ourearnings before interest, taxes, depreciation and amortization (EBITDA) was $0.5 million,or 10% of total net revenue for the three months ended September 30, 2007, and$0.7 million, or 7% of total net revenue for the six months endedSeptember 30, 2007. Our EBITDA was ($0.2) million, or (4%) of total net revenuefor the three months ended September 30, 2006, and ($1.0) million, or (11%) oftotal net revenue for the six months ended September 30, 2006. The increase inEBITDA for the three and six months ended September 30, 2007, compared to thesame periods in the prior year was a result of increased license revenue andreduced personnel costs in the first three and six months of fiscal year 2008.

 

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EBITDAis defined as net income (loss) with an add-back for depreciation andamortization, non-cash stock-based compensation expense, interest expense,other income (expense) and income taxes. The following table reconciles EBITDAto the reported net income (loss):

 

**RECONCILIATIONOF EBITDA TO NET INCOME (LOSS)**

**(inthousands)**

** **

| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Six Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                                               | ** ** | **2006**                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | ** **                                                             | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported net income (loss)    |       | $                                                                      | 80         |                                                                 | $          | (775 | ) | $ | (108 | ) | $ | (2,080 | ) |
| Depreciation and amortization |       | 67                                                                     |       | 79                                                                   |       | 132 |   | 154 |   |
| Stock-based compensation      |       | 301                                                                    |       | 246                                                                  |       | 556 |   | 457 |   |
| Interest expense-net          |       | 204                                                                    |       | 208                                                                  |       | 406 |   | 431 |   |
| Other (income) expense-net    |       | (205                                                                   | )          | 3                                                                    |       | (383 | ) | (7 | ) |
| Provision for income taxes    |       | 58                                                                     |       | 59                                                                   |       | 77 |   | 40 |   |
| EBITDA                        |       | $                                                                      | 505        |                                                                 | $          | (180 | ) | $ | 680 |   | $ | (1,005 | ) |
|                               |            |                                                                        |            |                                                                      |            |  |  |  |  |  |  |  |  |  |

 

EBITDA does not representfunds available for management’s discretionary use and is not intended torepresent cash flow from operations. EBITDA should not be construed as asubstitute for net loss or as a better measure of liquidity than cash flow fromoperating activities, which are determined in accordance with United Statesgenerally accepted accounting principles (“GAAP”). EBITDA excludes componentsthat are significant in understanding and assessing our results of operationsand cash flows. In addition, EBITDA is not a term defined by GAAP and as aresult our measure of EBITDA might not be comparable to similarly titledmeasures used by other companies.

 

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

 

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

 

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

**(inthousands)**

** **

| ** **                                           | ** ** | **For the Six Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                             | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **                                                           | ** ** | ** ** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                                                    | 254        |   | $ | (1,227 | ) |
| Interest expense-net                                 |       | 406                                                                  |       | 431 |   |
| Other income-net                                     |       | (383                                                                 | )          | (7 | ) |
| Change in trade accounts receivable                  |       | 64                                                                   |       | (391 | ) |
| Change in other current and non-current  assets      |       | 3                                                                    |       | 95 |   |
| Change in accounts payable                           |       | (53                                                                  | )          | 133 |   |
| Change in accrued liabilities                        |       | (60                                                                  | )          | (158 | ) |
| Change in deferred revenue                           |       | 231                                                                  |       | 120 |   |
| Foreign currency exchange gain                       |       | 334                                                                  |       | 40 |   |
| Note payable discount amortization                   |       | (42                                                                  | )          | (41 | ) |
| Provision for bad debt                               |       | (74                                                                  | )          | — |   |
| EBITDA                                               |       | $                                                                    | 680        |   | $ | (1,005 | ) |

 

**RISK FACTORS**

** **

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

 

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

 

We have devotedsignificant resources to the research and development of products andtechnologies. We believe that our future success will depend in large part on astrong research and development effort with respect to both our existing andnew products. 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 server for the emerging XML market. Thissignificant investment of time and resources resulted in the TigerLogic XDMS productline. While we intend for these efforts to improve our future operating resultsand increase cash flow, such efforts may not result in new products or revenue,and any new

 

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products that do result may not be successful. Thedevelopment of new or enhanced software products is a complex and uncertainprocess requiring high levels of innovation, as well as accurate anticipationof customer and technical trends. In developing new products and services, wemay fail to develop and market products that respond to technological changesor evolving industry standards in a timely or cost-effective manner, orexperience difficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customerordering patterns and to ensure that adequate supplies of new products can bedelivered to meet customer demand. Failure to develop and introduce newproducts, or enhancements to existing products, in a timely manner in responseto changing market conditions or customer requirements, or lack of customeracceptance of our products, will materially and adversely affect our business,results of operations and financial condition.

 

**OUR FAILURE TOCOMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

** **

The market for ourproducts is highly competitive, diverse and subject to rapid change. Ourproducts and services compete on the basis of the following keycharacteristics: performance; inter-operability; scalability; functionality;reliability; pricing; post sale customer support; quality; compliance with industrystandards; and overall total cost of ownership.

 

The applicationdevelopment tools software market is rapidly changing and intenselycompetitive. Our MDMS products compete with products developed by companiessuch as Oracle, Microsoft and IBM. Our RAD products currently encountercompetition from several direct competitors, including Microsoft, and competingdevelopment environments, including JAVA. Competition is developing andevolving in the XML market for which our XDMS products are intended. Companiesthat do or are expected to compete in this market include Oracle, IBM,Microsoft and Sybase, as well as a number of smaller companies with productsthat directly and indirectly compete with our XDMS products. Additionally, aswe expand our business, we expect to compete with a different group ofcompanies, including smaller, highly focused companies offering singleproducts.

 

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

 

**BECAUSE THE MARKETFOR OUR MDMS AND RAD TOOLS PRODUCTS MAY BE DECLINING, OUR REVENUEMAY DECLINE IF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS ORGENERATE SALES TO NEW CUSTOMERS.**

** **

We believe that themarkets for our MDMS and RAD products may be declining as customers adopt othertechnologies. As a result, to maintain or grow our revenue in these markets, wewill need to maintain our sales to existing customers and to generate sales tonew customers, including corporate development teams, commercial applicationdevelopers, system integrators, independent software vendors and independentconsultants. If we fail to attract new customers, if we lose our customers tocompetitors, or if the MDMS or RAD markets further decline, our revenue may beadversely affected. In the longer term, it is expected that the MDMS and RADmarkets will eventually decline as customers adopt newer technologies.

 

**OUR PRODUCTS HAVEA LONG SALES CYCLE WHICH COULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

** **

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

 

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**THE CONCENTRATION OF OUR STOCK OWNERSHIP GIVES ONE STOCKHOLDERSIGNIFICANT CONTROL OVER OUR BUSINESS.**

** **

As of September 30, 2007,Astoria beneficially owned approximately 48% of our outstanding common stock.Richard W. Koe, Chairman of the Board of Directors, serves as the ManagingGeneral Partner for Astoria Capital Management, which is a general partner ofAstoria. Carlton H. Baab, our President, Chief Executive Officer, andDirector, served as a Managing Principal of Astoria Capital Management untiltaking a formal leave of absence to join us in August 2001. Thisconcentration of stock ownership allows Astoria, acting alone, to block anyactions that require approval of our stockholders, including the election ofmembers to the Board of Directors and the approval of significant corporatetransactions. Moreover, this concentration of ownership may delay or prevent achange in control.

 

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

** **

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

 

• the size and timing ofcustomer orders;

 

• changes in pricing policiesby us or our competitors;

 

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

 

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

 

• thedemand for our products;

 

• non-renewalof customer support agreements;

 

• software defects and otherproduct quality problems; and

 

• personnel changes.

 

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

 

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

** **

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

 

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**THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTYCOULD HARM OUR ABILITY TO COMPETE.**

** **

Our ability to competesuccessfully will depend, in part, on our ability to protect our proprietarytechnology and operations without infringing upon the rights of others. We mayfail to do so. In addition, the laws of certain countries in which our productsare, or may be, licensed may not protect our proprietary rights to the sameextent as the laws of the United States. We rely primarily on a combination oftrade secret, copyright and trademark laws and contractual provisions toprotect our intellectual property and proprietary rights. Our trademarksinclude Raining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase,mvDesigner and TigerLogic, among others. We also have one pending U.S. patentapplication as of September 30, 2007. In addition to trademark and copyrightprotections, we license our products to end users on a “right to use” basispursuant to a perpetual license agreement that restricts use of products to aspecified number of users.

 

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

 

As further described inPart II, Item 1 hereof, the Company has filed complaints in Orange CountySuperior Court that sets forth allegations that certain parties threaten to andhave misappropriated the Company’s trade secrets, including the possiblerelease of certain source code.

 

**OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS WHICHCOULD HARM OUR BUSINESS.**

** **

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

 

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

** **

Asof September 30, 2007, we had 21,320,492 outstanding shares of common stock, ofwhich approximately 9,700,000 shares were restricted securities held by Astoriaand other holders. Restricted securities may be sold in the public market onlyif they are registered or if they qualify for an exemption from registrationpromulgated under the Securities Act. At present, all of our outstandingrestricted securities are either entitled to registration rights or eligiblefor public sale under Rule 144, subject to volume limitations and otherrequirements of Rule 144. If Astoria or other holders decide to exercisetheir demand registration rights, we would incur costs and expenses associatedwith the registration of securities.

 

Furthermore,sales of a substantial number of shares by Astoria or other securities holdersin the public market, or the perception that those sales may occur, could causethe market price of our common stock to decline. In addition, if we registershares of our common stock in connection with a public offering of securities,we may be required to include shares of restricted securities in theregistration, which may have an adverse effect on our ability to raise capital.

 

**OUR GLOBAL OPERATIONS EXPOSEUS TO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESSINTERNATIONALLY.**

** **

Weoperate on a global basis with offices or distributors in Europe, Africa, Asia,Latin America, South America, Australia and North America and developmentefforts in North America and Europe. Approximately 33% of our revenue for thethree and six months ended September 30, 2007, was generated from ourinternational offices. We face several risks inherent in conducting businessinternationally, including but not limited to the following:

 

• fluctuations in interest rates or currencyexchange rates;

 

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• language and cultural differences;

 

• local and governmental requirements;

 

• difficulties and costs of staffing andmanaging international operations;

 

• differences in intellectual propertyprotections;

 

• difficulties in collecting accounts receivableand longer collection periods;

 

• seasonal business activities in certain partsof the world; and

 

• trade policies.

 

Any of these factorscould harm our international operations and, consequently, affect theinternational growth or maintenance of our business. These factors or anycombination of these factors may adversely affect our revenue or our overallfinancial performance.

 

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

** **

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

 

**THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTSAND SERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULTIN COSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSINGOR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS.**

** **

There has been asubstantial amount of litigation in the software industry regardingintellectual property rights. Third parties may claim that our current orpotential future products and services infringe upon their intellectualproperty. We expect that software product developers and providers of softwareapplications will increasingly be subject to infringement claims as the numberof products and competitors in our industry segment grow and the functionalityof products in different industry segments overlap. Any claims, with or withoutmerit, could be time consuming, result in costly litigation, cause productshipment delays, prohibit product licensing or require us to enter into royaltyor licensing agreements. Royalty or licensing agreements, if required, may notbe available on terms acceptable to us or at all, which could seriously harmour business.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourprincipal executive officer and principal financial officer evaluated theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on such evaluation, our principalexecutive officer and principal financial officer have concluded that ourdisclosure 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.

 

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

 

**Changes in Internal Control over Financial Reporting**

 

Management has committedresources to remediate the weaknesses in our internal controls that existed atJune 30, 2007. Management believes that these efforts have improved internalcontrol over financial reporting. The following changes in our internal controlover financial reporting that have materially affected our internal controlover financial reporting were identified during the quarter ended September 30,2007:

 

•       Implemented formal procedures and controlsregarding Directors’ and Officers’ exercise of Company’s stock;

 

•       Improved the documentation, communication andmonthly reviews of Directors’ and Officer’s Company’s stock activities;

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

The Company is subject from time to time tolitigation, claims and suits arising in the ordinary course of business. As ofSeptember 30, 2007, the Company was a party to the following legal proceedings:

 

*RainingData v. Intrametrics*. On or about January 19, 2007, the Company filed a complaint in Orange CountySuperior Court that sets forth allegations that Intrametrics threatens to andhas misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that Intrametrics has obtained the Company’ssource code in violation of the Parties’ OEM (Original Equipment Manufacturer)Distribution Agreement and in violation of California’s laws prohibiting themisappropriation of trade secrets.  The Company seeks injunctive relieffrom Intrametrics, including, but not limited to, compelling Intrametrics tofully comply with all of the termination provisions set forth in the OEMAgreement; enjoining Intrametrics and its employees and agents from using ordisclosing the Company’s trade secrets; prohibiting Intrametrics fromsoliciting the Company’s current or potential customers for 3 years, and fromsoliciting or employing certain of the Company’s former employees for 3years.  Intrametrics filed a motion to quash the Complaint, which theCompany opposed, but on the morning of the hearing, Intrametrics first notifiedthe Company that it filed Chapter 11 bankruptcy, effectively staying thelitigation in Orange County Superior Court.  The Company is pursuingfurther discovery and litigation in the bankruptcy court in Houston, TX.

 

*RainingData v. Soheil Raissi (formerly the Company’s Vice President, ProductDevelopment and Professional Services), Mario Barrenechea (formerly the Company’sSenior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),and Adevnet, LLC*. On or about December 8, 2006, the Company filed a complaint in Orange CountySuperior Court that sets forth allegations that the defendants threaten to andhave misappropriated the Company’s trade secrets.  The Company’sallegations in the complaint include that the individual defendants have usedand/or disclosed the Company’s trade secrets (in the form of source code andlicenses and other trade secret information) in violation of their agreementswith the Company to maintain the confidentiality of such trade secretinformation, and in violation of California laws prohibiting themisappropriation of trade secrets. The Company seeks injunctive relief from thedefendants, including, but not limited to, compelling the defendants toimmediately return all of the Company’s trade secrets and property; enjoiningthe defendants and their employees and agents from using or disclosing theCompany’s trade secrets, including the Company’s source code; ordering the defendantsto disclose all gains and profits they have derived from the misappropriationof the Company’s trade secrets; enjoining the defendants from directly orindirectly supplying, selling or promoting any product that incorporates theCompany’s trade secrets.

 

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*Cross-Complaintby Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.*On or about January 10, 2007, the defendantsfiled a cross-complaint against the Company and Carlton Baab (the Company’sPresident and Chief Executive Officer) for the following claims:  unfair business practices, violation of civilrights, intentional interference with prospective economic advantage, negligentinterference with prospective economic advantage, malicious prosecution, abuseof process, negligence, and civil conspiracy. Cross-complainants allegegeneral, compensatory, special, and punitive and exemplary damages in amounts “accordingto proof”, and seek to enjoin the Company from engaging in improper and unlawfulconduct.  The Company and Carlton Baab (the “Cross-Defendants”) contendthat all of the claims are baseless, and filed a special motion to strike allof the claims in the cross-complaint.  The Company’s special motion tostrike is scheduled to be heard in April 2008.  The Cross-Defendants willcontinue to vigorously defend their rights in this litigation.  Weare unable to estimate any loss or range of loss at this time. Managementbelieves that the ultimate disposition of this matter will not have a materialadverse effect on the Company’s consolidated financial statements, results ofoperations, cash flows or liquidity.

 

An unfavorable resolution of these legal proceedings could have amaterial adverse effect on the Company’s business, results of operations,financial condition and cash flows.

 

**ITEM 6. EXHIBITS**

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

 

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**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 14, 2007 | ** ** | **RAINING DATA CORPORATION**                         |
|------------------------------|------------|------------------------------------------------------|
| ** **                   | ** ** | ** **                                           |
|                         |       | /s/ Thomas Lim                                       |
|                         |       | Thomas Lim                                           |
|                         |       | Chief Financial Officer  and Duly Authorized Officer |

 

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**EXHIBIT INDEX**

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

 

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