**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 
| **(Mark One)**                                                                                                                                                                                                 | ** ** | ** **                                                                                  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                     | ** ** | **Quarterly Report under Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                           |       |                                                                                        |
| **For the quarterly period ended December 31,  2004**                                                                                                                                                     |
|                                                                                                                                                                                                           |       |                                                                                        |
| **o**                                                                                                                                                                                                          | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Exchange Act**             |
| ** **                                                                                                                                                                                                     | ** ** | ** **                                                                                  |
| **For the transition period from                to              ** |

 

**CommissionFile number 0-16449**

 

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

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes ý  No o

 

As of December 31, 2004, there were 19,615,190shares of registrant’s Common Stock, $.10 par value, outstanding.

 

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

 

 

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**RAININGDATA CORPORATION**

**INDEX**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                          |   |
|----------|--------------------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.  | FINANCIAL STATEMENTS                                                                                                           |   |
|     | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS — DECEMBER 31, 2004 AND MARCH 31,  2004                        |   |
|     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — THREE AND NINE MONTHS ENDED  DECEMBER 31, 2004 AND 2003 |   |
|     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — NINE MONTHS ENDED DECEMBER 31,  2004 AND 2003           |   |
|     | CONDENSED  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                  |   |
| ITEM 2.  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                                |   |
| ITEM 3.  | CONTROLS AND  PROCEDURES                                                                                                       |   |
| PART II. | OTHER INFORMATION                                                                                                              |   |
| ITEM 1.  | LEGAL PROCEEDINGS                                                                                                              |   |
| ITEM 4.  | SUBMISSION OF MATTERS TO  A VOTE OF SECURITY HOLDERS                                                                           |   |
| ITEM 6.  | EXHIBITS                                                                                                                       |   |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

ITEM1.  FINANCIAL STATEMENTS

 

**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                       | ** ** | **December 31,****2004** | ** ** | **March 31,****2004** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **(In thousands)**            | ** ** |
|                                             |       |                          |       |                       |       |
| ASSETS                                           |       |                          |       |                       |       |
|                                             |       |                          |       |                       |       |
| Current  assets                                  |       |                          |       |                       |       |
| Cash                                             |       | $                             | 9,042      |                       | $          | 7,783 |   |
| Trade  accounts receivable-net                   |       | 2,372                         |       | 1,865                      |       |
| Other  current assets                            |       | 502                           |       | 390                        |       |
| Total  current assets                            |       | 11,916                        |       | 10,038                     |       |
|                                             |       |                          |       |                       |       |
| Property,  furniture and equipment-net           |       | 702                           |       | 795                        |       |
|                                             |       |                          |       |                       |       |
| Intangible  assets-net                           |       | —                        |       | 1,733                      |       |
| Goodwill                                         |       | 27,684                        |       | 27,684                     |       |
| Other assets                                     |       | 241                           |       | 201                        |       |
| Total assets                                     |       | $                             | 40,543     |                       | $          | 40,451 |   |
|                                             |       |                          |       |                       |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY       |       |                          |       |                       |       |
|                                             |       |                          |       |                       |       |
| Current  liabilities                             |       |                          |       |                       |       |
| Accounts  payable                                |       | $                             | 167        |                       | $          | 242 |   |
| Accrued liabilities                              |       | 2,746                         |       | 2,257                      |       |
| Deferred  revenue                                |       | 4,757                         |       | 5,006                      |       |
| Note payable                                     |       | —                        |       | 38                         |       |
| Total  current liabilities                       |       | 7,670                         |       | 7,543                      |       |
|                                             |       |                          |       |                       |       |
| Long term  debt-net of discount                  |       | 21,398                        |       | 23,117                     |       |
| Total  liabilities                               |       | 29,068                        |       | 30,660                     |       |
|                                             |       |                          |       |                       |       |
| Commitments  and contingencies                   |       | —                        |       | —                     |       |
|                                             |       |                          |       |                       |       |
| Stockholders’  equity                       |       |                          |       |                       |       |
| Preferred  stock                                 |       | 300                           |       | 300                        |       |
| Common stock                                     |       | 1,962                         |       | 1,840                      |       |
| Additional  paid-in capital                      |       | 98,144                        |       | 95,418                     |       |
| Deferred  stock-based compensation               |       | (17                           | )          | (41                        | )          |
| Accumulated  other comprehensive income          |       | 1,556                         |       | 1,509                      |       |
| Accumulated  deficit                             |       | (90,470                       | )          | (89,235                    | )          |
| Total  stockholders’ equity                 |       | 11,475                        |       | 9,791                      |       |
|                                             |       |                          |       |                       |       |
| Total  liabilities and stockholders’ equity |       | $                             | 40,543     |                       | $          | 40,451 |   |

 

See accompanying condensed notes to theunaudited condensed consolidated financial statements.

 

3

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                     | ** ** | **Three Months Ended  December 31,**  | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                   | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share  data)** | ** ** |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Net revenues                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Licenses                                                       |       | $                                          | 2,667      |                                     | $          | 2,731 |   | $ | 6,907 |   | $ | 7,264 |   |
| Services                                                       |       | 3,053                                      |       | 3,059                                    |       | 9,082 |   | 9,297 |   |
| Total net  revenues                                            |       | 5,720                                      |       | 5,790                                    |       | 15,989 |   | 16,561 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Costs of  revenues                                             |       |                                       |       |                                     |       |   |   |   |   |
| Cost of  license revenues                                      |       | 91                                         |       | 100                                      |       | 241 |   | 290 |   |
| Cost of  service revenues                                      |       | 593                                        |       | 518                                      |       | 1,712 |   | 1,622 |   |
| Total cost  of revenues                                        |       | 684                                        |       | 618                                      |       | 1,953 |   | 1,912 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Gross profit                                                   |       | 5,036                                      |       | 5,172                                    |       | 14,036 |   | 14,649 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Cost of  operations                                            |       |                                       |       |                                     |       |   |   |   |   |
| Selling and  marketing                                         |       | 1,552                                      |       | 1,570                                    |       | 4,288 |   | 4,336 |   |
| Research and  development                                      |       | 2,029                                      |       | 1,789                                    |       | 5,503 |   | 5,606 |   |
| General and  administrative                                    |       | 1,054                                      |       | 1,021                                    |       | 2,850 |   | 2,937 |   |
| Stock-based  compensation                                      |       | 8                                          |       | 48                                       |       | 58 |   | 171 |   |
| Amortization  of intangible assets                             |       | 433                                        |       | 650                                      |       | 1,733 |   | 1,950 |   |
| Total  operating expenses                                      |       | 5,076                                      |       | 5,078                                    |       | 14,432 |   | 15,000 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Operating  income (loss)                                       |       | (40                                        | )          | 94                                       |       | (396 | ) | (351 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Other  expense                                                 |       |                                       |       |                                     |       |   |   |   |   |
| Interest  expense-net                                          |       | (292                                       | )          | (307                                     | )          | (900 | ) | (908 | ) |
| Other  income-net                                              |       | 67                                         |       | 10                                       |       | 61 |   | 21 |   |
|                                                           |       | (225                                       | )          | (297                                     | )          | (839 | ) | (887 | ) |
| Net loss                                                       |       | $                                          | (265       | )                                        | $          | (203 | ) | $ | (1,235 | ) | $ | (1,238 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Basic and  diluted net loss per share                          |       | $                                          | (0.01      | )                                        | $          | (0.01 | ) | $ | (0.07 | ) | $ | (0.07 | ) |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Shares used  in computing basic and diluted net loss per share |       | 18,687                                     |       | 18,159                                   |       | 18,518 |   | 18,073 |   |
|                                                           |       |                                       |       |                                     |       |   |   |   |   |
| Departmental  allocation of stock-based compensation           |       |                                       |       |                                     |       |   |   |   |   |
| Cost of  service revenues                                      |       | $                                          | —     |                                     | $          | 16 |   | $ | — |   | $ | 49 |   |
| Selling and  marketing                                         |       | —                                     |       | 3                                        |       | — |   | 8 |   |
| Research and  development                                      |       | 6                                          |       | 26                                       |       | 51 |   | 106 |   |
| General and  administrative                                    |       | 2                                          |       | 3                                        |       | 7 |   | 8 |   |
| Total  stock-based compensation                                |       | $                                          | 8          |                                     | $          | 48 |   | $ | 58 |   | $ | 171 |   |

 

See accompanying condensed notes to theunaudited condensed consolidated financial statements.

 

4

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**NINE****MONTHS ENDED DECEMBER 31,**

 
| ** **                                                                       | ** ** | **2004**           | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                       | ** ** | **(In thousands)** | ** ** |
| Cash flows  from operating activities:                                           |       |               |       |     |       |
| Net loss                                                                         |       | $                  | (1,235     | )        | $          | (1,238 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |               |       |     |       |
| Depreciation  and amortization of long-lived assets                              |       | 1,948              |       | 2,213    |       |
| Note payable  discount amortization                                              |       | 62                 |       | 62       |       |
| Amortization  of deferred stock-based compensation                               |       | 58                 |       | 171      |       |
| Change in  assets and liabilities:                                               |       |               |       |     |       |
| Trade  accounts receivable                                                       |       | (336               | )          | 164      |       |
| Other  current and non-current assets                                            |       | (194               | )          | (234     | )          |
| Accounts  payable and accrued liabilities                                        |       | 895                |       | (85      | )          |
| Deferred  revenue                                                                |       | (100               | )          | (607     | )          |
| Net cash  provided by operating activities                                       |       | 1,098              |       | 446      |       |
|                                                                             |       |               |       |     |       |
| Cash flows  from investing activities:                                           |       |               |       |     |       |
| Purchase of  property, furniture and equipment                                   |       | (22                | )          | (24      | )          |
| Net cash  used in investing activities                                           |       | (22                | )          | (24      | )          |
|                                                                             |       |               |       |     |       |
| Cash flows  from financing activities:                                           |       |               |       |     |       |
| Proceeds  from exercise of stock options and warrants                            |       | 42                 |       | 133      |       |
| Proceeds  from issuance of common stock                                          |       | 99                 |       | 83       |       |
| Repayment of  debt                                                               |       | (38                | )          | (304     | )          |
| Net cash  provided by (used in) financing activities                             |       | 103                |       | (88      | )          |
|                                                                             |       |               |       |     |       |
| Effect of  exchange rate changes on cash                                         |       | 80                 |       | 110      |       |
|                                                                             |       |               |       |     |       |
| Net increase  in cash and equivalents                                            |       | 1,259              |       | 444      |       |
|                                                                             |       |               |       |     |       |
| Cash and  equivalents at beginning of period                                     |       | 7,783              |       | 5,279    |       |
| Cash and  equivalents at end of period                                           |       | $                  | 9,042      |     | $          | 5,723 |   |
|                                                                             |       |               |       |     |       |
| Non-cash  financing activities:                                                  |       |               |       |     |       |
| Issuance of  payment-in-kind notes for accrued interest                          |       | $                  | 881        |     | $          | 851 |   |
| Reduction of  long-term debt through exercise of warrants                        |       | $                  | 2,671      |     | $          | — |   |

 

See accompanying condensed notes to theunaudited condensed consolidated financial statements.

 

5

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

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

**December 31,2004**

 

**1.  INTERIMFINANCIAL STATEMENTS**

 

Theunaudited interim condensed consolidated financial information furnished hereinreflects all adjustments, consisting only of normal recurring items, which inthe opinion of management are necessary to fairly state Raining DataCorporation and Subsidiaries’ (the “Company”) consolidated financial position,the results of their operations and their cash flows for the dates and periodspresented and to make such information presented not misleading. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to SEC rules andregulations; nevertheless, management of the Company believes that thedisclosures herein are adequate to make the information presented notmisleading. These condensed consolidated financial statements should be read inconjunction with the Company’s audited financial statements for the year ended March 31,2004, contained in the Company’s Annual Report on Form 10-KSB. The resultsof operations for the period ended December 31, 2004, are not necessarilyindicative of results to be expected for any other interim period or the fiscalyear ending March 31, 2005.

 

**Stock Options**

 

Pro forma information, which assumes the Company hadaccounted for stock options granted under the fair value method prescribed byStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-based Compensation” as amended, is presented below. The per shareweighted average fair values of stock options granted for the three andnine-month periods ended December 31, 2004, as estimated using theBlack-Scholes option-pricing model, were $2.50 and $2.59, respectively.  There were no options granted during thethree-month period ended December 31, 2003.  The per share weighted average fair values ofstock options granted for the nine-month period ended December 31, 2003,as estimated using the Black-Scholes option-pricing model, was $2.64.  The following assumptions were used for thethree-month period ended December 31, 2004: dividend yield of 0%; expectedvolatility of 114%; risk-free interest rate of 3.85%; and expected life of 7years.  The following assumptions wereused for the nine-month period ended December 31, 2004: dividend yield of0%; expected volatility of 119%; risk-free interest rate of 3.99%; and expectedlife of 7 years.  The followingassumptions were used for the nine-month period ended December 31, 2003:dividend yield of 0%; expected volatility of 140%; risk-free interest rate of3.54%; and expected life of 7 years.

 

For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the options’ vestingperiods. The Company’s historical and pro forma net loss per share for thethree and nine-month periods ended December 31, 2004 and 2003 are asfollows (in thousands, except per share data):

 
| ** **                                                                                              | ** ** | **Three Months ended  December 31,** | ** ** | **Nine Months ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Net loss:                                                                                               |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                             |       | $                                         | (265       | )                                        | $          | (203 | ) | $ | (1,235 | ) | $ | (1,238 | ) |
|                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Add:                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Stock-based  employee compensation expense included in net loss                                         |       | 8                                         |       | 48                                       |       | 58 |   | 171 |   |
|                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Less:                                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Total  stock-based employee compensation expense determined under the fair value  method for all awards |       | (297                                      | )          | (493                                     | )          | (874 | ) | (1,489 | ) |
|                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Pro forma  net loss:                                                                                    |       | $                                         | (554       | )                                        | $          | (648 | ) | $ | (2,051 | ) | $ | (2,556 | ) |
|                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Basic and  diluted loss per share                                                                       |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                             |       | $                                         | (0.01      | )                                        | $          | (0.01 | ) | $ | (0.07 | ) | $ | (0.07 | ) |
| Pro forma                                                                                               |       | $                                         | (0.03      | )                                        | $          | (0.04 | ) | $ | (0.11 | ) | $ | (0.14 | ) |

 

6

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**Reclassifications**

 

Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentation.

 

**2. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment,” which establishes standards forthe accounting for transactions in which an entity exchanges its equityinstruments for employee services. A key provision of this statement is therequirement of a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments (including stockoptions) based on the grant-date fair value of the award. That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award (i.e., the requisite service period orvesting period). With respect to the Company, which is a small business issuer,this statement becomes effective on January 1, 2006. The impact of thisstatement on the Company’s consolidated financial position and results ofoperations cannot be determined at this time.

 

**3.  LONG-TERMDEBT**

 

Long-termdebt of the Company, including the Convertible Subordinated Note payable toAstoria Capital Partners, L.P. (“Astoria”), the Company’s controllingstockholder, as of December 31, 2004 and March 31, 2004, is asfollows (in thousands):

 
| ** **                                        | ** ** | **December 31,****2004** | ** ** | **March 31,****2004** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                                              |       |                          |       |                       |       |
| Subordinated  Convertible Note payable to Astoria |       | $                             | 21,630     |                       | $          | 23,172 |   |
| Plus accrued  interest                            |       | 50                            |       | 289                        |       |
| Less  unamortized discount                        |       | (282                          | )          | (344                       | )          |
|                                              |       | 21,398                        |       | 23,117                     |       |
|                                              |       |                          |       |                       |       |
| Other  long-term liabilities                      |       | —                        |       | 38                         |       |
| Total debt                                        |       | 21,398                        |       | 23,155                     |       |
| Less current  portion of long-term debt           |       | —                        |       | (38                        | )          |
| Total  long-term debt                             |       | $                             | 21,398     |                       | $          | 23,117 |   |

 

OnDecember 14, 2004, Astoria exercised a warrant to purchase 1,136,555shares of the Company’s common stock for $2,670,904.  In lieu of a cash payment, the Company usedthe proceeds from the exercise to paydown a portion of the indebtedness toAstoria.

 

**4.  STOCKHOLDERS’EQUITY**

 

Basicloss per share is computed using the net loss and the weighted average numberof common shares outstanding during the period. Diluted loss per share iscomputed using the net loss and the weighted average number of common sharesand dilutive potential common shares outstanding during the period when the potentialcommon shares are not anti-dilutive. Potential dilutive common shares includeoutstanding stock options and warrants, convertible debt, and convertiblepreferred stock. There were 4,280,069 and 4,023,893 outstanding options topurchase shares of the Company’s common stock with exercise prices ranging from$0.75 to $52.50 per share as of December 31, 2004 and 2003, respectively. There were 1,033,092 and 2,422,501 outstanding warrants to purchase shares ofthe Company’s common stock with exercise prices ranging from $2.35 to $6.29 and$2.35 to $6.51 per share as of December 31, 2004 and 2003,respectively.  There were 300,000 shares of preferred stock, which areconvertible into 500,100 shares of common stock, outstanding at December 31,2004 and 2003.  There was convertible debt outstanding at December 31,2004 and 2003, which was convertible into 4,326,021 and 4,576,950 shares ofcommon stock, respectively.  The total of these items were not included inthe computation of diluted earnings per share because their effect would havebeen anti-dilutive.

 

7

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Thechange in accumulated other comprehensive income during the three andnine-month periods ended December 31, 2004 and 2003, is the result of theeffect of foreign exchange rate changes. The following table reconciles netloss as reported with total comprehensive loss (in thousands):

 
| ** **                          | ** ** | **Three Months ended  December 31,** | ** ** | **Nine Months ended  December 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                |       |                                      |       |                                     |       |   |   |   |   |
| Net loss  reported                  |       | $                                         | (265       | )                                        | $          | (203 | ) | $ | (1,235 | ) | $ | (1,238 | ) |
| Translation  adjustments – net |       | 172                                       |       | 55                                       |       | 47 |   | 208 |   |
| Total  comprehensive loss           |       | $                                         | (93        | )                                        | $          | (148 | ) | $ | (1,188 | ) | $ | (1,030 | ) |

 

**5.  BUSINESSSEGMENT**

 

TheCompany operates in one reportable segment. International operations consistprimarily of foreign sales offices selling software developed by or for theCompany’s entities in the United States of America, combined with local servicerevenue. The following table summarizes consolidated financial information ofthe Company’s operations by geographic location (in thousands):

 
| ** **                                                 | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
|                                                       |       |               |       |       |       |      |       |
| *As of and  for Three Months Ended December 31, 2004* |       |               |       |       |       |      |       |
| Net revenues                                               |       | $                  | 3,914      |       | $          | 1,806     |       | $ | 5,720 |   |
| Long lived  assets                                         |       | 27,956             |       | 671        |       | 28,627    |       |
| *As of and  for Three Months Ended December 31, 2003* |       |               |       |       |       |      |       |
| Net revenues                                               |       | $                  | 4,047      |       | $          | 1,743     |       | $ | 5,790 |   |
| Long lived  assets                                         |       | 30,373             |       | 668        |       | 31,041    |       |
| *As of and  for Nine Months Ended December 31, 2004*  |       |               |       |       |       |      |       |
| Net revenues                                               |       | $                  | 11,263     |       | $          | 4,726     |       | $ | 15,989 |   |
| Long lived  assets                                         |       | 27,956             |       | 671        |       | 28,627    |       |
| *As of and  for Nine Months Ended December 31, 2003*  |       |               |       |       |       |      |       |
| Net revenues                                               |       | $                  | 12,039     |       | $          | 4,522     |       | $ | 16,561 |   |
| Long lived  assets                                         |       | 30,373             |       | 668        |       | 31,041    |       |

 

TheCompany is engaged in the design, development, sale and support of softwareinfrastructure. The Company divides its products into two main categories: (1)Pick Universal Data Model based technology (“Pick UDM Products”), whichincludes multi-dimensional database management systems, XML data managementsystems and the Pick Data Provider for .NET product line; and (2) RapidApplication Development software tools (“RAD Tools”), which includes the Omnisproduct line. The following table represents the net revenue from the Company’ssegment by product line (in thousands):

 
| ** **          | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Databases:**      |       |                                      |       |                                     |       |   |   |   |   |
| Pick UDM  Products  |       | $                                         | 4,387      |                                     | $          | 4,556 |   | $ | 12,322 |   | $ | 13,000 |   |
| RAD Tools           |       | 1,333                                     |       | 1,234                                    |       | 3,667 |   | 3,561 |   |
| Total net  revenues |       | $                                         | 5,720      |                                     | $          | 5,790 |   | $ | 15,989 |   | $ | 16,561 |   |

 

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

 

ThisForm 10-QSB contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Suchstatements include our expectations, hopes and intentions regarding the future,including but not limited to statements regarding (i) our strategy, (ii) ourresearch and development plans and costs, (iii) our expectation about sellingand marketing costs and general and administrative costs, (iv) the sufficiencyof our capital resources, (v) our capital expenditures, (vi) our financingplan, (vii) our revenue and cost of license and service revenue, (viii) ouroperations and operating results, (ix) our competitive position, (x) ourexpectation about certain markets, and (xi) our expectation about futureexpenses. Forward-looking statements involve certain risks and uncertainties, andactual results may differ materially from those discussed in any suchstatement. Factors that could cause actual results to differ materially

 

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fromsuch forward-looking statements include the risks described in the “RiskFactors” section and elsewhere in this Form 10-QSB. Allforward-looking statements in this document are made as of the date hereof,based on information available to us as of the date hereof, and we assume noobligation to update any forward-looking statement.

 

Thisdiscussion and analysis of the financial statements and results of operationsshould be read in conjunction with our unaudited condensed consolidatedfinancial statements, including the related notes thereto, contained elsewherein this Form 10-QSB.

 

**OVERVIEW**

 

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

 

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 four product lines: Multi-dimensional database management systems (“MDMS”),XML data management systems (“XDMS”), Pick Data Provider (“PDP”) for .NET basedproducts and Rapid Application Development (“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 MDMS, XDMS and PDP product lines.

 

TheMDMS product line consists principally of the D3 Data Base Management System (“D3”),which runs on many operating systems including but not limited to IBM AIX, Linuxand Windows NT.  D3 allows applicationprogrammers to create new business solution software in less time than itnormally takes in many other environments. This can translate into lower costsfor the developer, lower software prices for the customer and reduced costs ofownership for both the developer and end user. Our MDMS products also includemvEnterprise, a scalable multi-dimensional database solution that allows theuser to leverage the capabilities of the UNIX operating system, and mvBase, amulti-dimensional database solution that runs on all Windows platforms.

 

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. This significant investment oftime and resources resulted in the TigerLogic XDMS product line. TigerLogicXDMS is a high-performance information infrastructure software that providesboth scalability, XA-compliant transactional integrity and fine-grain searchcapabilities typically associated with enterprise databases, as well as thedynamic extensibility, n-tier hierarchies and ease of use and deployment,mostly found in data repositories and file systems. We have filed a patentapplication related to the technology utilized in the TigerLogic product andthis patent was pending as of December 31, 2004.

 

OurPDP product line includes the Pick Data Provider for .Net and our MicrosoftReporting Services Connector.  The PDPcomponent for the Microsoft .NET Framework is tightly integrated with MicrosoftVisual Studio .NET. It allows software developers using IBM’s Universe andUnidata databases and our D3 database platform to build client/serverapplications, Web applications or Web services using any of the languages andtechnologies that run on the Microsoft .NET Framework, such as MicrosoftASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET.  Our Reporting Services Connector enables adata connection that allows Pick database users to unlock the benefits ofMicrosoft Reporting Services to take advantage of a comprehensive,server-based reporting solution that can author, manage, and deliver bothpaper-oriented and interactive, Web-based reports and allows access to IBMUniVerse, IBM UniData and Pick D3 data.

 

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

 

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

 

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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 32% and 30% of our revenue came from sales through ouroffices located outside the United States for the three and nine-month periodsended December 31, 2004, respectively, and approximately 30% and 27% ofour revenue came from sales through our offices located outside the UnitedStates for the three and nine-month periods ended December 31, 2003,respectively.

 

Wesell our products in U.S. Dollars in North America, British Pounds Sterling inthe United Kingdom and Euros in Germany and France. Because we recognizerevenue and expense in these various currencies but report our financialresults in U.S. Dollars, changes in exchange rates may cause variances in ourperiod-to-period revenue and results of operations in future periods. Recordedforeign exchange gains and losses have not been material to our performance todate.

 

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

 

Ourcustomers may be classified into two general categories:

**•**                                         Independent Software Vendors and SoftwareDevelopers. The majority of our revenue is derived from independent softwarevendors, which typically write their own vertical application software thatthey sell as a complete package to end user customers. This category includesvalue added resellers (“VARs”) and software-consulting companies that providecontract programming services to their customers.

**•**                                          Corporate Information Technology (“IT”)Departments.

 

Forthe three and nine-month periods ended December 31, 2004 and 2003, nosingle customer accounted for more than 10% of our revenue.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our unaudited condensed consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses and disclosure ofcontingent liabilities.

 

Onan on-going basis, we evaluate our estimates, including those related torevenue recognition and accounting for intangible assets and goodwill. We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions.

 

Wehave identified the accounting policies below as the policies critical to ourbusiness operations and the understanding of our results of operations. Webelieve the following critical accounting policies and the related judgmentsand estimates affect the preparation of our condensed consolidated financialstatements:

 

REVENUERECOGNITION.  We recognize revenue usingthe residual method pursuant to the requirements of Statement of PositionNo. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended.  Under the residual method, revenue isrecognized in a multiple element arrangement when company-specific objectiveevidence of fair value exists for all of the undelivered elements in thearrangement, but does not exist for one or more of the delivered elements inthe arrangement. At the outset of the arrangement with the customer, we deferrevenue for the fair value of our undelivered elements (e.g., maintenance)based on company-specific objective evidence of the amount such items are soldindividually to our customers and recognize revenue for the remainder of thearrangement fee attributable to the elements initially delivered in thearrangement (e.g., software license) when the basic criteria in SOP 97-2 havebeen met.

 

UnderSOP 97-2, revenue attributable to an element in a customer arrangement isrecognized when persuasive evidence of an arrangement exists and delivery hasoccurred, provided the fee is fixed or determinable, collectibility is probableand the arrangement does not require significant customization of the software.If, at the outset of the customer arrangement, we determine that thearrangement fee is not fixed or determinable, we defer the revenue andrecognize the revenue when the arrangement fee becomes due and payable.

 

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Servicerevenue relates primarily to consulting services, maintenance and training.Maintenance revenue is initially deferred and then recognized ratably over theterm of the maintenance contract, typically 12 months. Consulting andtraining revenue is recognized as the services are performed and is usuallycalculated on a time and materials basis. Such services primarily consist ofimplementation services related to the installation of our products and do notinclude significant customization to or development of the underlying softwarecode. We do not have price protection programs, conditional acceptanceagreements or warranty programs, and sales of our products are made withoutright of return.

 

INTANGIBLEASSETS AND GOODWILL.  We assess theimpairment of identifiable intangibles, long-lived assets and goodwill wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. We also assess the value of goodwill at least annually.  Factors we consider to be important whichcould trigger an impairment review include the following:

 

**•**                                          Significant underperformance relative toexpected historical or projected future operating results;

**•**                                          Timing of our revenue, significant changes inthe manner of use of the acquired assets or the strategy for the overallbusiness;

**•**                                          Significant negative industry or economictrends;

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

**•**                                          Our market capitalization relative to net bookvalue.

 

Whenwe determine that the carrying value of intangibles and other long-lived assetsmay not be recoverable based upon the existence of one or more of the aboveindicators of impairment and the carrying value of the asset cannot berecovered from projected undiscounted cash flows, we measure any impairmentbased on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in thecurrent business model. Significant management judgment is required indetermining whether an indicator of impairment exists and in projecting cashflows.

 

Followingthe adoption of Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets” (“SFAS No. 142”), we revised our policy forassessing and determining impairment of goodwill. The SFAS No. 142goodwill impairment model is a two-step process. The first step is used toidentify potential impairment by comparing the fair value of a reporting unitwith its net book value (or carrying amount), including goodwill. If the fairvalue exceeds the carrying amount, goodwill of the reporting unit is considerednot impaired and the second step of the impairment test is unnecessary. If thecarrying amount of a reporting unit exceeds its fair value, the second step ofthe goodwill impairment test is performed to measure the amount of impairmentloss, if any. The second step of the goodwill impairment test compares theimplied fair value of the reporting unit’s goodwill with the carrying amount ofthat goodwill. If the carrying amount of the reporting unit’s goodwill exceedsthe implied fair value of that goodwill, an impairment loss is recognized in anamount equal to that excess. The implied fair value of goodwill is determined inthe same manner as the amount of goodwill recognized in a business combination.That is, the fair value of the reporting unit is allocated to all of the assetsand liabilities of that unit (including any unrecognized intangible assets) asif the reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit.

 

Determiningthe fair value of a reporting unit under the first step of the goodwillimpairment test and determining the fair value of individual assets andliabilities of a reporting unit (including unrecognized intangible assets)under the second step of the goodwill impairment test is judgmental in natureand often involves the use of significant estimates and assumptions. Theseestimates and assumptions could have a significant impact on whether or not animpairment charge is recognized and the magnitude of any such charge. Estimatesof fair value are primarily determined using discounted cash flows and arebased on our best estimate of future revenue and operating costs and generalmarket conditions.  This approach usessignificant assumptions, including projected future cash flows (includingtiming), the discount rate reflecting the risk inherent in future cash flows,and a terminal growth rate.  Theseestimates are subject to review and approval by management.  Changes to these estimates in future periodsmay have a material impact on our financial position and results of operations.

 

**Results of Operations**

 

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

 

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| ** **                                            | ** ** | **Three Months Ended  December 31, 2004** | ** ** | **Three Months Ended  December 31, 2003** | ** ** | **Nine Months Ended  December 31, 2004** | ** ** | **Nine Months Ended   December 31, 2003** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                            | ** ** | **Results**                                    | ** ** | **% of Net Revenues**                          | ** ** | **Percent Change**                            | ** ** | **Results**                                    | ** ** | **% of Net Revenues** | ** ** | **Results** | ** ** | **% of Net Revenues** | ** ** | **Percent Change** | ** ** | **Results** | ** ** | **% of Net Revenues** | ** ** |
| Net revenues                                          |       |                                           |       |                                           |       |                                          |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                              |       | $                                              | 2,667      |                                           | 47         | %                                             | (2         | %)                                             | $          | 2,731 |   | 47 | % | $ | 6,907 |   | 43 | % | (5 | %) | $ | 7,264 |   | 44 | % |
| Services                                              |       | 3,053                                          |       | 53                                             | %          | 0                                             | %          | 3,059                                          |       | 53 | % | 9,082 |   | 57 | % | (2 | %) | 9,297 |   | 56 | % |
| Total net revenues                                    |       | 5,720                                          |       | 100                                            | %          | (1                                            | %)         | 5,790                                          |       | 100 | % | 15,989 |   | 100 | % | (3 | %) | 16,561 |   | 100 | % |
| Cost of revenues                                      |       |                                           |       |                                           |       |                                          |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license revenues (as a % of license revenues) |       | 91                                             |       | 3                                              | %          | (9                                            | %)         | 100                                            |       | 4 | % | 241 |   | 3 | % | (17 | %) | 290 |   | 4 | % |
| Cost of service revenues (as a % of service revenues) |       | 593                                            |       | 19                                             | %          | 14                                            | %          | 518                                            |       | 17 | % | 1,712 |   | 19 | % | 6 | % | 1,622 |   | 17 | % |
| Gross profit on license revenues                      |       | 2,576                                          |       | 97                                             | %          | (2                                            | %)         | 2,631                                          |       | 96 | % | 6,666 |   | 97 | % | (4 | %) | 6,974 |   | 96 | % |
| Gross profit on service revenues                      |       | 2,460                                          |       | 81                                             | %          | (3                                            | %)         | 2,541                                          |       | 83 | % | 7,370 |   | 81 | % | (4 | %) | 7,675 |   | 83 | % |
| Operating expenses                                    |       |                                           |       |                                           |       |                                          |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                                 |       | 1,552                                          |       | 27                                             | %          | (1                                            | %)         | 1,570                                          |       | 27 | % | 4,288 |   | 27 | % | (1 | %) | 4,336 |   | 26 | % |
| Research and development                              |       | 2,029                                          |       | 35                                             | %          | 13                                            | %          | 1,789                                          |       | 31 | % | 5,503 |   | 34 | % | (2 | %) | 5,606 |   | 34 | % |
| General and administrative                            |       | 1,054                                          |       | 18                                             | %          | 3                                             | %          | 1,021                                          |       | 18 | % | 2,850 |   | 18 | % | (3 | %) | 2,937 |   | 18 | % |
| Stock-based compensation                              |       | 8                                              |       | 0                                              | %          | (83                                           | %)         | 48                                             |       | 1 | % | 58 |   | 0 | % | (66 | %) | 171 |   | 1 | % |
| Amortization of intangible assets                     |       | 433                                            |       | 8                                              | %          | (33                                           | %)         | 650                                            |       | 11 | % | 1,733 |   | 11 | % | (11 | %) | 1,950 |   | 12 | % |
| Total costs and expenses                              |       | 5,076                                          |       | 88                                             | %          | 0                                             | %          | 5,078                                          |       | 88 | % | 14,432 |   | 90 | % | (4 | %) | 15,000 |   | 91 | % |
| Operating loss                                        |       | (40                                            | )          | (1                                             | %)         | (1436                                         | %)         | 94                                             |       | 2 | % | (396 | ) | (2 | %) | 13 | % | (351 | ) | (2 | %) |
| Other expense, net                                    |       | (225                                           | )          | (4                                             | %)         | (24                                           | %)         | (297                                           | )          | (5 | %) | (839 | ) | (5 | %) | (5 | %) | (887 | ) | (5 | %) |
| Net loss                                              |       | $                                              | (265       | )                                              | (5         | %)                                            | 31         | %                                              | $          | (203 | ) | (4 | %) | $ | (1,235 | ) | (8 | %) | 0 | % | $ | (1,238 | ) | (7 | %) |

 

**REVENUE**

 

NETREVENUES. Our revenues are derived principally from two sources: fees fromsoftware licensing and fees for services, including maintenance, consulting,training and technical support.  Welicense our software on a per-CPU, per-server, per-port or per-user basis.Therefore, the addition of CPU’s, servers, ports or users to existing systemsincreases our revenue from our installed base of licenses.  We view the MDMS and RAD markets in which weoperate to be relatively stable and consistent from period to period andanticipate that our revenues on an annual basis from those products will remainrelatively stable for the foreseeable future. Fluctuations in revenues betweenquarters or year-to-year are primarily the result of the timing of orders andcustomer order patterns. We do not view the changes in year-to-year revenuesfor the three and nine-month periods ended December 31, 2004 and 2003, tobe representative of immediate market trends. However, in the longer term, we expect that the MDMS and RAD marketswill eventually contract as customers adopt newer technologies and, therefore,the revenues generated from sales of our MDMS and RAD products are expected todecrease.

 

Wehave been actively developing and marketing our XDMS and PDP productlines.  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 designed to allow us to penetrate new markets and generate new sourcesof revenue, such efforts may not result in additional products, services orrevenue.

 

**COST OF REVENUES**

 

COSTOF LICENSE REVENUES. Cost of license revenues is comprised of direct costsassociated with software license sales including software packaging,documentation, physical media costs and royalties.  We anticipate that the cost of licenserevenues, as a percentage of license revenues and in absolute dollars, will berelatively stable in future periods.

 

COSTOF SERVICE REVENUES. Cost of service revenues includes primarily personnelcosts related to providing consulting, technical support and trainingservices.  We anticipate that the cost ofservice revenues, as a percentage of service revenues and in absolute dollars,will be relatively stable in future periods.

 

**OPERATING EXPENSES**

 

SELLINGAND MARKETING. Selling and marketing expense consists primarily of salaries,benefits, advertising, tradeshows, travel and overhead costs for our sales andmarketing personnel.  We anticipate thatselling and marketing costs related to the XDMS and PDP products may increaseas we further develop the sales channel for these products and if customeracceptance of these products increases. In addition, if our continued research and development efforts aresuccessful, including with respect to our XDMS and PDP products, and newproducts or services are created, we may incur increased sales and marketingexpense to promote such products and services in future periods.

 

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RESEARCHAND DEVELOPMENT. Research and development expense consists primarily ofsalaries and other personnel-related expenses for engineering personnel,including employees and contractors, in our Irvine, California and San Jose,California offices in the US, in India and in the UK. Additional costs includeexpensed hardware and software costs and overhead costs.  In the three-month period ended December 31,2004, as compared to the same period in the prior year, our research anddevelopment expense increased due to the nature and timing of certain expensesas well as increases in employee and contractor headcount and relatedexpenses.  We continue to incur costsrelated to the ongoing development and enhancement of all of our productlines.  We are committed to our researchand development efforts and expect research and development expense will remainrelatively stable in future periods or increase if we believe that additionalspending is warranted. Such efforts may not result in additional new products,and any new products, including the XDMS and PDP 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 overheadcosts.  We anticipate that general andadministrative costs as a percentage of revenue and in absolute dollars willremain relatively stable for the remainder of the fiscal year.  However, we anticipate an increase in generaland administrative expense beginning in fiscal 2006 as we initiate our effortsrelated to Sarbanes-Oxley section 404 internal control compliance and theassociated costs for implementation, testing and auditing related to suchcompliance.  The extent of these costs,which may be significant, cannot be determined at this time.

 

STOCK-BASEDCOMPENSATION.  The decreases instock-based compensation in the three and nine-month periods ended December 31,2004, as compared to the three and nine-month periods ended December 31,2003, are attributable primarily to cancellations of previously issued optionswith an exercise price below fair value on the date of grant for terminatedemployees, options reaching the end of their vesting periods, no new optionsbeing granted with an exercise price below fair value at the date of grant, andfewer options granted to non-employees. We do not anticipate significantchanges in stock-based compensation expense in the periods prior to theadoption of SFAS No. 123R.  The futureimpact of the adoption of SFAS No. 123R on the Company’s consolidated financialposition and results of operations cannot be determined at this time.

 

AMORTIZATIONOF INTANGIBLE ASSETS.  We amortize ouridentifiable intangible assets in accordance with their determined useful life.The life of our existing intangible assets was estimated to be four years.  As of December 31, 2004, our existingintangible assets were fully amortized.

 

OTHERINCOME (EXPENSE). Other expense consists primarily of net interest expense and,to a much lesser extent, gains and losses on foreign currency transactions.  Due to the uncertainty in exchange rates, wemay experience transaction gains or losses in future periods, the effect ofwhich cannot be determined at this time.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Inconnection with the acquisition of PickAx, we assumed a Secured Promissory Noteissued to Astoria Capital Partners, L.P. (“Astoria”) dated November 30,2000, in the amount of $18.5 million.  InJanuary 2003, we entered into a Note Exchange Agreement (the “ExchangeAgreement”) with Astoria to replace the existing Secured Promissory Note, asamended, with a Convertible Subordinated Note. Under the terms of the Exchange Agreement, the Secured Promissory Notewas exchanged and replaced with a Convertible Subordinated Note having aprincipal amount of $22.1 million, which principal amount was equal to theoutstanding principal and accrued interest payable on the Secured PromissoryNote as of the date of the Exchange Agreement. The Convertible Subordinated Note is convertible into common stock atany time, at the option of Astoria, at a price of $5.00 per share. TheConvertible Subordinated Note matures on May 30, 2008, extending the May 30,2003 maturity date of the Secured Promissory Note.  Under terms of the Note, the Company wasunable to redeem the Convertible Subordinated Note prior to January 30,2005.  The interest rate of the ConvertibleSubordinated Note is 5% per annum as compared to an interest rate of 10% perannum under the Secured Promissory Note. The interest is payable quarterly at our option in cash or throughincreases to the outstanding principal of the Convertible Subordinated Note.

 

OnDecember 14, 2004, we entered into an Agreement Regarding Amended andRestated Common Stock Purchase Warrant and 5% Convertible Subordinated Note Due2008 with Astoria whereby we could redeem, in part, the Note and the payment inkind (“PIK”) notes in advance of January 30, 2005.  On December 14, 2004, Astoria exercisedits warrant in the amount of $2,670,904. In lieu of a cash payment, we then used the proceeds of the exercise topaydown a portion of the indebtedness to Astoria.  The paydown consisted of $247,129 for accruedand unpaid interest, $1,914,165 for the PIK Notes issued to date and $509,610as a reduction of principal of the Convertible Subordinated Note.  As of December 31, 2004 there wereoutstanding PIK notes to Astoria for the accrued interest due in the aggregateamount of $50,370.  For the foreseeablefuture, we expect to issue additional PIK notes to Astoria in lieu of cash paymentsfor the interest due under the Convertible Subordinated Note.  If the Convertible Subordinated Note or thePIK notes are converted into common stock, our stockholders may experiencesubstantial dilution.  Unlike the SecuredPromissory Note, the Convertible Subordinated Note is not secured by ourassets.

 

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Ifour future financial performance improves, we may seek to take advantage ofopportunities in the equity and capital markets to raise additional funds foroperating needs or to pay down our debt to Astoria.  There can be no assurances that suchopportunities will arise. In addition to holding the Convertible SubordinatedNote, Astoria is a major stockholder of ours, holding all of our preferredstock and a majority of our outstanding common stock. Richard W. Koe, Chairmanof the Board of Directors, serves as the Managing General Partner forAstoria.  Carlton H. Baab, ourPresident and Chief Executive Officer, served as a Managing Principal ofAstoria Capital Management, which is a general partner of Astoria, until takinga formal leave of absence to join us in August 2001.  Gerald F. Chew, a member of our Board ofDirectors, is the cousin of Mr. Koe.

 

AtDecember 31, 2004, we had $9.0 million in cash. We believe that our existingcash balances combined with our cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements for theremainder of the fiscal year ending March 31, 2005 and through theforeseeable future. We are committed to research and development efforts thatare intended to allow us to penetrate new markets and generate new sources ofrevenue and improve operating results. However, our research and developmentefforts have required, and will continue to require, cash outlays without theimmediate or short-term receipt of related revenue. Our ability to service ourlong-term debt and meet our expenditure requirements is dependent upon ourfuture financial 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.

 

OnFebruary 11, 2004, we entered into a credit facility with Silicon ValleyBank which provides us with the ability to borrow up to $1.5 million at anannual interest rate of Prime plus 1.0%, provided that the annual interest rateshall never be less than 5%.  The creditfacility is collateralized by our assets and expires in February 2006.  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 outstanding borrowings at December 31,2004.

 

OnNovember 9, 2004, we entered into a lease agreement with The IrvineCompany whereby we leased one building in Irvine, California, comprisingapproximately 29,000 square feet, to replace our current headquartersfacility.  The lease is expected to commence in November 2005and has a five-year term.  If certain conditions are met, wehave the option to extend the term of the lease for an additionalthirty-six months.  The total basic rent over the five-year term isapproximately $2.6 million, which represents a lower per square foot cost thanour current property lease.  The annual basic rent duringthe five-year term ranges from approximately $475,000 during thefirst year to approximately $545,000 during the fifth year.  Weexpect to incur move-in costs in future periods; however, these costs are notexpected to be material in the periods in which they are incurred.

 

Wehad no material commitments for capital expenditures at December 31, 2004.

 

Netcash provided by operating activities was $1.1 million and $0.4 million for thenine months ended December 31, 2004 and 2003, respectively.

 

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Ourearnings before interest, taxes, depreciation and amortization (EBITDA) was$0.5 million, or 8% of total net revenue, and $1.6 million, or 10% oftotal net revenue, for the three and nine-month periods ended December 31,2004, and $0.9 million, or 15% of total net revenue, and $2.0 million, or12% of total net revenue, for the three and nine-month periods ended December 31,2003.  EBITDA is defined as net loss withan add-back for depreciation and amortization, non-cash stock-basedcompensation expense, interest expense and other income.  The following table reconciles EBITDA to thereported net loss:

 

**RECONCILIATIONOF EBITDA TO NET LOSS**

 
| ** **                     | ** ** | **Three months   ended December 31,** | ** ** | **Nine months   ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**             | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                           |       |                                       |       |                                      |       |   |   |   |   |
| Reported net  loss             |       | $                                          | (265       | )                                         | $          | (203 | ) | $ | (1,235 | ) | $ | (1,238 | ) |
| Depreciation  and amortization |       | 498                                        |       | 734                                       |       | 1,948 |   | 2,213 |   |
| Stock-based  compensation      |       | 8                                          |       | 48                                        |       | 58 |   | 171 |   |
| Interest  expense-net          |       | 292                                        |       | 307                                       |       | 900 |   | 908 |   |
| Other  income-net              |       | (67                                        | )          | (10                                       | )          | (61 | ) | (21 | ) |
|                           |       |                                       |       |                                      |       |   |   |   |   |
| EBITDA                         |       | $                                          | 466        |                                      | $          | 876 |   | $ | 1,610 |   | $ | 2,033 |   |

 

EBITDAdoes not represent funds available for management’s discretionary use and isnot intended to represent cash flow from operations. EBITDA should not beconstrued as a substitute for net loss or as a better measure of liquidity thancash flow from operating activities, which are determined in accordance withgenerally 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 used by management to evaluate, assess and benchmark our operationalresults and we believe that EBITDA is relevant and useful information, which isoften reported and widely used by analysts, investors and other interestedparties in our industry. Accordingly, we are disclosing this information topermit a more comprehensive analysis of our operating performance, to providean additional measure of performance and liquidity and to provide additionalinformation with respect to our ability to meet future debt service, capitalexpenditure and working capital requirements.

 

OurEBITDA financial information is also comparable to net cash provided byoperating activities.  The table belowreconciles EBITDA to the GAAP disclosure of net cash provided by operatingactivities:

 

**RECONCILIATION OF EBITDA TO NETCASH PROVIDED BY OPERATING ACTIVITIES**

 
| ** **                                          | ** ** | **Nine months   ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| **In $000’s**                                  | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
|                                                |       |                                      |       |   |   |
| Net cash  provided by operating activities          |       | $                                         | 1,098      |   | $ | 446 |   |
|                                                |       |                                      |       |   |   |
| Interest  expense-net                               |       | 900                                       |       | 908 |   |
| Other  income-net                                   |       | (61                                       | )          | (21 | ) |
| Change in  accounts receivable                      |       | 336                                       |       | (164 | ) |
| Change in  other assets                             |       | 194                                       |       | 234 |   |
| Change in  accounts payable and accrued liabilities |       | (895                                      | )          | 85 |   |
| Change in  deferred revenue                         |       | 100                                       |       | 607 |   |
| Note payable  discount amortization                 |       | (62                                       | )          | (62 | ) |
|                                                |       |                                      |       |   |   |
| EBITDA                                              |       | $                                         | 1,610      |   | $ | 2,033 |   |

 

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**RISK FACTORS**

 

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

 

**IF WE DO NOT DEVELOP NEW PRODUCTS AND ENHANCE EXISTINGPRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND INDUSTRY STANDARDS,OUR REVENUE MAY DECLINE.**

 

Wehave devoted significant resources to the research and development of productsand technology. We believe that our future success will depend in large part ona strong 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 system for the emerging XML market. Thissignificant investment of time and resources resulted in the TigerLogic XDMSproduct line. We have also introduced the PDP product line, which is designedto support the Microsoft.NET Framework and Microsoft Reporting Services.  While we intend for these efforts to improveour future operating results and increase cash flow, such efforts may notresult in new products or revenue, and any new products that do result may notbe successful. The development of new or enhanced software products is acomplex and uncertain process requiring high levels of innovation, as well asaccurate anticipation of customer and technical trends. In developing newproducts and services, we may fail to develop and market products that respondto technological changes or evolving industry standards in a timely orcost-effective manner, or experience difficulties that could delay or preventthe successful development, introduction and marketing of these new products.The development and introduction of new or enhanced products also requires usto manage the transition from older products in order to minimize disruptionsin customer ordering patterns and to ensure that adequate supplies of newproducts can be delivered to meet customer demand. Failure to develop andintroduce new products, or enhancements to existing products, in a timelymanner in response to changing market conditions or customer requirements, orlack of customer acceptance of our products, will materially and adverselyaffect our business, results of operations and financial condition.

 

**OUR FAILURE TO COMPETE EFFECTIVELY MAY HAVE AN ADVERSEIMPACT ON OUR OPERATING RESULTS.**

 

Themarket for our products is highly competitive, diverse and subject to rapidchange. Our products and services compete on the basis of the following keycharacteristics: performance; inter-operability; scalability; functionality;reliability; pricing; post sale customer support; quality; compliance withindustry standards; and overall total cost of ownership.

 

Wecurrently face competition from a number of sources, including several largevendors that develop and market databases, development tools, and decisionsupport products and consulting services. Our MDMS products compete withproducts developed by companies such as Oracle, Microsoft and IBM. Our Omnisline of RAD developer products currently encounters competition from severaldirect competitors, including Microsoft and competing development environmentssuch as JAVA.  Competition is developingand evolving in the XML market for which our XDMS products are intended.  Companies who do or are expected to competein this market include Oracle, IBM and Microsoft, as well as a number ofsmaller companies with products that directly and indirectly compete with ourXDMS products. Our new initiatives in the .NET area are subject to significantcompetition, primarily from Microsoft and Oracle. Additionally, as we expandour business, we expect to compete with a different group of companies,including smaller, highly focused companies offering single products.

 

Mostof our competitors have significantly more financial, technical, marketing andother resources than we do. As a result, these competitors may be able torespond more quickly to new or emerging technologies, evolving markets, changesin customer requirements, and may devote greater resources to the development,promotion and sale of their products. While we currently believe that our products and services competefavorably in the marketplace, our products and services could fall behindmarketplace demands at any time. If we fail to address the competitivechallenges, our business would suffer materially.

 

**BECAUSE THE MARKET FOR OUR MDMS AND RAD PRODUCTS ISRELATIVELY STABLE, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAIN OUR SALES TOEXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

 

Webelieve that the markets for our MDMS and RAD products are relatively stableand consistent from period to period. As a result, to maintain or grow ourrevenue in these markets, we will need to maintain our sales to existingcustomers and to generate sales to new customers, including corporatedevelopment teams, commercial application developers, system integrators,independent software vendors and independent consultants. If we fail to attractnew customers, if we lose our customers to competitors, or if the MDMS or RADmarkets decline, our revenue may be adversely affected. In the longer term, itis expected that the MDMS and RAD markets will eventually contract as customersadopt newer technologies.

 

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**IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT AN ADDITIONALINDEPENDENT DIRECTOR TO SERVE ON THE BOARD OF DIRECTORS AND AS A MEMBER OF THEAUDIT COMMITTEE WITHIN THE ALLOWED CURE PERIOD, OUR STOCK MAY BE DE-LISTED.**

 

OnDecember 16, 2004, we notified Nasdaq that, due to the resignation ofGeoffrey P. Wagner from our Board of Directors on December 15, 2004, wewere no longer in compliance with Nasdaq Marketplace Rule 4350(d)(2)(A) becauseour Audit Committee consists of only two independent directors. We informedNasdaq that our Board of Directors is in the process of beginning its searchfor a replacement independent director to serve on the Board of Directors andAudit Committee. We are relying on Nasdaq Marketplace Rule 4350(d)(4)(B) whichprovides that if an issuer fails to comply with Rule 4350(d)(2)(A) due to onevacancy on the audit committee, it will have a cure period until the earlier ofthe next annual shareholders meeting or one year from the occurrence of theevent that caused the failure to comply with the requirement.

 

OnDecember 20, 2004, we received notice from Nasdaq that we are not incompliance with the audit committee requirements of Nasdaq Marketplace Rule4350, as described above, and we will be provided a cure period until theearlier of our next shareholders’ meeting or December 15, 2005.  Failure to correct the deficiency within theallowed time frame may result in Nasdaq de-listing our stock or taking othercorrective actions.

 

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

 

Webelieve that our cash and cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements at leastthrough the foreseeable future. Our ability to meetour expenditures and service our debt obligations is dependent uponour future financial performance, which will be affected by, among otherthings, prevailing economic conditions, our ability to penetrate new marketsand attract new customers, market acceptance of our new and existing productsand services, the success of research and development efforts and other factorsbeyond our control.  As previously noted, in January 2003, we enteredinto the Exchange Agreement with Astoria to replace the existing SecuredPromissory Note, which was due May 2003, with a Convertible Subordinated Note,which is due and payable in May 2008. The Convertible Subordinated Note bears interest at 5% per annum and isconvertible into common stock by Astoria at any time at a price of $5.00 pershare. If we are unable to penetrate new markets, generate new sources ofrevenue or otherwise improve our operating results, we may be unable to repayour debt to Astoria or to access opportunities in the equity and capitalmarkets to raise additional funds for operating needs.

 

**THE CONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBTOWED TO ASTORIA GIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OURBUSINESS.**

 

Asof December 31, 2004, Astoria beneficially owned approximately 65% of ouroutstanding common stock. As of such date, Astoria also owned all of ouroutstanding preferred stock. In addition, as of December 31, 2004, theConvertible Subordinated Note issued to Astoria had a balance of approximately$21.4 million in principal and accrued interest maturing on May 30,2008.  Richard W. Koe, Chairman of theBoard of Directors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria.  Carlton H. Baab, our President and ChiefExecutive Officer, served as a Managing Principal of Astoria Capital Managementuntil taking a formal leave of absence to join us in August 2001. Thisconcentration of stock ownership, together with the outstanding debt, wouldallow Astoria, acting alone, to block any actions that require approval of ourstockholders, including the election of members to the Board of Directors andthe approval of significant corporate transactions. Moreover, thisconcentration of ownership may delay or prevent a change in control.

 

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

 

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

 

**•**              the size and timing of customer orders;

**•**              changes in pricing policies by us or ourcompetitors;

**•****             **our ability to develop, introduce, and marketnew and enhanced versions of our products;

**•****             **the number, timing, and significance ofproduct enhancements and new product announcements by our competitors;

**•****             **the demand for our products;

**•****             **non-renewal of customer support agreements;

**•**              software defects and other product qualityproblems; and

**•**              personnel changes.

 

17

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Weoperate without a significant backlog of orders. As a result, the quarterlysales and operating results in any given quarter are dependent, in large part,upon the volume and timing of orders booked and products shipped during thatquarter. Accordingly, we may be unable to adjust spending in a timely manner tocompensate for any unanticipated decrease in orders, sales or shipments.Therefore, any decline in demand for our products and services, in relation tothe forecast for any given quarter, could materially and negatively impact theresults of our operations. As a result, our quarterly operating results mayfluctuate, which may cause our stock price to be volatile. In addition, webelieve that period-to-period comparisons of our operating results should notbe relied upon as indications of future performance.

 

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

 

Themajority of our executive officers joined us subsequent to the acquisition ofPickAx, including our President and Chief Executive Officer, Carlton Baab, whojoined us in August 2001. Additional changes in management have occurredfollowing Mr. Baab’s appointment, including the hiring of Brian Bezdek,Chief Financial Officer and Soheil Raissi, Vice President, Product Developmentand Professional Services.  The loss ofone or more of these or other executives could adversely affect our business. Inaddition, we believe that our future success will depend to a significantextent on our ability to recruit, hire and retain highly skilled management andemployees with experience in engineering, product management, businessdevelopment, sales, marketing and customer service. Competition for suchpersonnel in the software industry can be intense, and there can be noassurance that we will be successful in attracting and retaining suchpersonnel. If we are unable to do so, we may experience inadequate levels ofstaffing to develop and license our products and perform services for ourcustomers, which could adversely affect our business.

 

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

 

Ourability to compete successfully will depend, in part, on our ability to protectour proprietary technology and operations without infringing upon the rights ofothers. We may fail to do so. In addition, the laws of certain countries inwhich our products are, or may be, licensed may not protect our proprietaryrights to the same extent as the laws of the United States. We rely primarilyon a combination of trade secret, copyright and trademark laws and contractualprovisions to protect our intellectual property and proprietary rights. Ourtrademarks include Raining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise,mvBase, mvDesigner and TigerLogic, among others.  We also have a pending U.S. patentapplication as of December 31, 2004. In addition to trademark and copyright protections, we license ourproducts to 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 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 protectionswill be adequate, or that our competitors will not independently developtechnologies that are substantially equivalent or superior to our technology.

 

**OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS WHICH COULDHARM OUR BUSINESS.**

 

Ourenterprise applications software may contain undetected errors or failures.This includes our XDMS and PDP products, which are

athigher risk given these products are in the earliest stages of the product lifecycle. This may result in loss of, or delay in, customer acceptance of ourproducts and could harm our reputation and our business. Undetected errors orfailures in computer software programs are not uncommon. While we make everyeffort to thoroughly test our software, in the event that we experiencesignificant software errors, we could experience delays in release, customerdissatisfaction and lost revenue. Any of these errors or defects could harm ourbusiness.

 

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

 

Asof December 31, 2004, we had 19,615,190 outstanding shares of commonstock, of which approximately 10,700,000 shares were restricted securities heldby Astoria and other holders. Restricted securities may be sold in the publicmarket only if they are registered or if they qualify for an exemption fromregistration promulgated under the Securities Act of 1933, as amended. Atpresent, all of our outstanding restricted securities are either entitled toregistration rights or eligible for public sale under Rule 144, subject tovolume limitations and other requirements of Rule 144.  If Astoria or other holders decide toexercise their demand registration rights, we would incur costs and expensesassociated with the registration of securities.

 

Furthermore,sales of a substantial number of shares by Astoria 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.

 

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**OUR PRODUCTS HAVE A LONG SALES CYCLE WHICH COULDRESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

 

Thesales cycle for our MDMS and RAD products typically ranges from three to ninemonths or longer and the sales cycle for our XDMS and PDP products isanticipated to be significantly longer since these markets are emerging and theproducts are still in the process of being 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. Becausethe purchases of our products are often part of an end user’s larger businessprocess, re-engineering initiative, or implementation of client/server orweb-based computing, the end users frequently view the purchase of our productsas part of 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 aresult, a significant period of time may elapse between our research anddevelopment efforts and recognition of revenue, if any.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKSAND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.**

 

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, India and Europe. Approximately 32% and 30% of ourrevenue for the three and nine-month periods ended December 31, 2004,respectively, was generated from our international offices. We face severalrisks inherent in conducting business internationally, including but notlimited to the following:

 

**•**              fluctuations in interest rates or currencyexchange rates;

**•**              language and cultural differences;

**•**              local and governmental requirements;

**•**              difficulties and costs of staffing andmanaging international operations;

**•**              differences in intellectual propertyprotections;

**•**              difficulties in collecting accountsreceivable and longer collection periods;

**•**              seasonal business activities in certain partsof the world; and

**•**              trade policies.

 

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

 

**THE FAILURE OF OUR PRODUCTS TO CONTINUE TO CONFORM TOINDUSTRY STANDARDS MAY HARM OUR OPERATING RESULTS.**

 

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

 

**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.**

 

Therehas been a substantial 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.

 

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**ITEM3.  CONTROLS AND PROCEDURES**

 

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

 

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

 

Ourprincipal executive officer and principal financial officer have concluded thatour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) are effective, as of the end of the periodcovered by this report, to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and accumulated and communicated tothe Company’s management, including its principal executive officer andprincipal financial officer, to allow timely decisions regarding requireddisclosure.

 

However,a control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Management necessarily applied its judgment in assessing the benefitsof controls relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within Raining Data Corporation have been detected.

 

**Changes in Internal Controls**

 

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

 

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**PART II. OTHER INFORMATION**

 

ITEM1.  LEGAL PROCEEDINGS

 

Weare subject from time to time to claims and suits arising in the ordinarycourse of business.  As of December 31,2004, we were not a party to any material litigation, claim or suit.

 

ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the 2004 Annual Meeting of the Company’sStockholders held on December 15, 2004 (the “Meeting”), two proposals weresubmitted. No other proposals were put before the meeting. The proposals andvoting results were as follows:

 

1.             To elect Carlton H. Baab and Gerald F. Chewas the two Class III directors to serve until the 2007 Annual Meeting ofthe Stockholders or until their successors are duly elected and qualified:

 
| Carlton H. Baab | FOR: 16,791,106 | WITHHELD: 65,205 |
|-----------------|----------------------|-----------------------|
|            |
| Gerald F. Chew  | FOR: 16,790,909 | WITHHELD: 65,405 |

 

2.             To ratify the appointment of KPMG LLP as theindependent auditors of the Company for the fiscal year ending March 31,2005:

 

FOR: 16,852,171    WITHHELD: 2,353    ABSTAIN: 1,790

 

Allnominees were elected to the Board and the appointment of KPMG LLP wasratified.

 

 

ITEM 6.  EXHIBITS

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

 

**SIGNATURES**

 

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

 
| Date:  February 9, 2005 | **RAINING DATA CORPORATION**                          |
|----------------------------------------|-------------------------------------------------------|
| ** **                             | ** **                                            |
| * *                               | */s/  Brian C. Bezdek*                                | * * |
|                                   | Brian C. Bezdek                                       |
| * *                               | *Chief Financial Officer and Duly Authorized Officer* |

 

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**EXHIBITINDEX**

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

 

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