**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-QSB**

| **(Mark One)**                                                                                                                                                                          |   | ** **                                                                                  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                   |   | **Quarterly Report under Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                                              |   | ** **                                                                                  |
| **For the  quarterly period ended June 30, 2007**                                                                                                                                       |
| ** **                                                                                                                                                                              |   | ** **                                                                                  |
| **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**

(Exactname of small business issuer as specified in its charter)

| **Delaware**                                |   | **94-3046892**                     |
|---------------------------------------------|--------|------------------------------------|
| (State of  Incorporation)                   |   | (IRS Employer  Identification No.) |
|                                        |   |                               |
| **25A  Technology Drive  Irvine, CA 92618** |
| (Address of  principal executive offices)   |
|                                        |
| **(949)  442-4400**                         |
| (Issuer’s  telephone number)           |

 

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

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

As of June 30, 2007, therewere 21,186,747 shares of issuer’s Common Stock, $.10 par value, outstanding.

Transitional Small BusinessDisclosure Format (Check one): Yes o  No x

 

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**RAINING DATACORPORATIONINDEX**
| PART I.  | FINANCIAL  INFORMATION                                                                                      |   |
|----------|-------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.  | FINANCIAL STATEMENTS                                                                                        |   |
|     | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS — JUNE  30, 2007 AND MARCH 31, 2007               |   |
|     | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS — THREE MONTHS ENDED JUNE 30, 2007 AND 2006 |   |
|     | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS — THREE MONTHS ENDED JUNE 30, 2007 AND 2006 |   |
|     | NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS                                         |   |
| ITEM 2.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF  OPERATION                                             |   |
| ITEM 3.  | CONTROLS AND  PROCEDURES                                                                                    |   |
| PART II. | OTHER INFORMATION                                                                                           |   |
| ITEM 1.  | LEGAL PROCEEDINGS                                                                                           |   |
| ITEM  6. | EXHIBITS                                                                                                    |   |

                                                                                                                                                                                                                          

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**PART I.  FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS

**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                       | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                                       | ** ** | **(In thousands)** | ** ** |
| ASSETS                                                                                           |       |                    |       |                     |       |
|                                                                                             |       |                    |       |                     |       |
| Current assets                                                                                   |       |                    |       |                     |       |
| Cash  and cash equivalents                                                                       |       | $                       | 11,290     |                     | $          | 11,654 |   |
| Trade  accounts receivable, less allowance for doubtful  accounts of $204 and $200, respectively |       | 1,940                   |       | 1,609                    |       |
| Other  current assets                                                                            |       | 474                     |       | 461                      |       |
| Total  current assets                                                                            |       | 13,704                  |       | 13,724                   |       |
|                                                                                             |       |                    |       |                     |       |
| Property, furniture and  equipment-net                                                           |       | 922                     |       | 949                      |       |
| Goodwill                                                                                         |       | 26,732                  |       | 26,751                   |       |
| Other assets                                                                                     |       | 97                      |       | 112                      |       |
| Total  assets                                                                                    |       | $                       | 41,455     |                     | $          | 41,536 |   |
|                                                                                             |       |                    |       |                     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                        |       |                    |       |                     |       |
|                                                                                             |       |                    |       |                     |       |
| Current liabilities                                                                              |       |                    |       |                     |       |
| Accounts  payable                                                                                |       | $                       | 250        |                     | $          | 130 |   |
| Accrued  liabilities                                                                             |       | 1,987                   |       | 2,536                    |       |
| Deferred  revenue                                                                                |       | 4,943                   |       | 4,801                    |       |
| Debt-net  of discount                                                                            |       | 24,473                  |       | —                   |       |
| Total  current liabilities                                                                       |       | 31,653                  |       | 7,467                    |       |
| Long-term debt-net of  discount                                                                  |       | —                  |       | 24,150                   |       |
| Total  liabilities                                                                               |       | 31,653                  |       | 31,617                   |       |
|                                                                                             |       |                    |       |                     |       |
| Commitments and  contingencies                                                                   |       |                    |       |                     |       |
|                                                                                             |       |                    |       |                     |       |
| Stockholders’ equity                                                                        |       |                    |       |                     |       |
| Preferred  stock                                                                                 |       | —                  |       | —                   |       |
| Common  stock                                                                                    |       | 2,119                   |       | 2,118                    |       |
| Additional  paid-in-capital                                                                      |       | 101,644                 |       | 101,385                  |       |
| Accumulated  other comprehensive income                                                          |       | 1,423                   |       | 1,612                    |       |
| Accumulated  deficit                                                                             |       | (95,384                 | )          | (95,196                  | )          |
| Total  stockholders’ equity                                                                 |       | 9,802                   |       | 9,919                    |       |
|                                                                                             |       |                    |       |                     |       |
| Total  liabilities and stockholders’ equity                                                 |       | $                       | 41,455     |                     | $          | 41,536 |   |

 

See accompanying notes to theunaudited condensed consolidated financial statements.

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**RAINING DATACORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                     | ** ** | **Three Months Ended June 30,**            | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per  share data)** | ** ** |
| Net revenues                                                   |       |                                                           |       |   |   |
| Licenses                                                       |       | $                                                              | 2,002      |   | $ | 1,654 |   |
| Services                                                       |       | 2,971                                                          |       | 3,018 |   |
| Total net revenues                                             |       | 4,973                                                          |       | 4,672 |   |
| Operating expenses                                             |       |                                                           |       |   |   |
| Cost of license revenues                                       |       | 9                                                              |       | 21 |   |
| Cost of service revenues                                       |       | 485                                                            |       | 653 |   |
| Selling and marketing                                          |       | 1,304                                                          |       | 1,456 |   |
| Research and development                                       |       | 1,997                                                          |       | 2,646 |   |
| General and administrative                                     |       | 1,323                                                          |       | 1,007 |   |
| Total operating expenses                                       |       | 5,118                                                          |       | 5,783 |   |
| Operating loss                                                 |       | (145                                                           | )          | (1,111 | ) |
| Other expense-net                                              |       |                                                           |       |   |   |
| Interest expense-net                                           |       | (202                                                           | )          | (223 | ) |
| Other income-net                                               |       | 178                                                            |       | 10 |   |
| Total other expense                                            |       | (24                                                            | )          | (213 | ) |
| Loss before income taxes                                       |       | (169                                                           | )          | (1,324 | ) |
| Provision for (benefit from) income taxes                      |       | 19                                                             |       | (19 | ) |
| Net loss                                                       |       | $                                                              | (188       | ) | $ | (1,305 | ) |
|                                                           |       |                                                           |       |   |   |
| Basic and diluted net loss per share                           |       | $                                                              | (0.01      | ) | $ | (0.06 | ) |
|                                                           |       |                                                           |       |   |   |
| Shares used in computing basic and diluted net loss  per share |       | 21,186                                                         |       | 20,649 |   |

 

See accompanying notes to the unaudited condensed consolidated financialstatements.

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(In thousands)**                             | ** ** |
| Cash flows from operating activities:                                                  |       |                                                |       |   |   |
| Net loss                                                                               |       | $                                                   | (188       | ) | $ | (1,305 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:           |       |                                                |       |   |   |
| Depreciation and amortization of long-lived assets                                     |       | 65                                                  |       | 75 |   |
| Provision for bad debt                                                                 |       | 2                                                   |       | — |   |
| Debt discount amortization                                                             |       | 21                                                  |       | 21 |   |
| Stock-based compensation expense                                                       |       | 255                                                 |       | 211 |   |
| Income tax expense (benefit)                                                           |       | 19                                                  |       | (19 | ) |
| Change in assets and liabilities:                                                      |       |                                                |       |   |   |
| Trade accounts receivable                                                              |       | (369                                                | )          | 217 |   |
| Other current and non-current assets                                                   |       | (31                                                 | )          | (112 | ) |
| Accounts payable                                                                       |       | 120                                                 |       | (111 | ) |
| Accrued liabilities                                                                    |       | (360                                                | )          | (140 | ) |
| Deferred revenue                                                                       |       | 105                                                 |       | 351 |   |
| Net cash used in operating activities                                                  |       | (361                                                | )          | (812 | ) |
|                                                                                   |       |                                                |       |   |   |
| Cash flows used in investing activities-purchase of  property, furniture and equipment |       | (27                                                 | )          | (133 | ) |
|                                                                                   |       |                                                |       |   |   |
| Cash flows from financing activities-proceeds from  exercise of stock options          |       | 5                                                   |       | 86 |   |
|                                                                                   |       |                                                |       |   |   |
| Effect of exchange rate changes on cash                                                |       | 19                                                  |       | 44 |   |
|                                                                                   |       |                                                |       |   |   |
| Net decrease in cash and equivalents                                                   |       | (364                                                | )          | (815 | ) |
| Cash and equivalents at beginning of period                                            |       | 11,654                                              |       | 10,789 |   |
| Cash and equivalents at end of period                                                  |       | $                                                   | 11,290     |   | $ | 9,974 |   |
|                                                                                   |       |                                                |       |   |   |
| Non-cash financing activities:                                                         |       |                                                |       |   |   |
|                                                                                   |       |                                                |       |   |   |
| Accrued interest added to debt                                                         |       | $                                                   | 302        |   | $ | 288 |   |

 

See accompanying notes to theunaudited condensed consolidated financial statements.

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**NOTES TO THEUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2007**

**1.   INTERIM FINANCIAL STATEMENTS**

The unaudited interim condensed consolidatedfinancial information furnished herein reflects all adjustments, consistingonly of normal recurring items, which in the opinion of management arenecessary to fairly state Raining Data Corporation and its subsidiaries’(collectively, “Company” or “we,” “us” or “our”) results of the operations and cashflows for the dates and periods presented and to make such informationpresented not misleading. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omittedpursuant to SEC rules and regulations; nevertheless, management of the Companybelieves that the disclosures herein are adequate to make the informationpresented not misleading. These condensed consolidated financial statements shouldbe read in conjunction with the Company’s audited financial statements for theyear ended March 31, 2007, contained in the Company’s Annual Report onForm 10-KSB.Theresults of operations for the three months ended June 30, 2007, are notnecessarily indicative of results to be expected for any other interim periodor the fiscal year ending March 31, 2008.

**2.  RECENTLY ADOPTED ACCOUNTING STANDARDS**

*SAB No. 108*

In September 2006, the Securities andExchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, *“Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.” * We adopted SAB No. 108 in the fourthquarter of fiscal 2007.  In accordancewith SAB No. 108, we recorded a cumulative effect adjustment to beginningretained earnings as of April 1, 2006, as further described in the Company’saudited financial statements for the year ended March 31, 2007, contained inthe Company’s Annual Report on Form 10-KSB. For comparative purposes, thestatement of operations for the three months ended June 30, 2006 has beenadjusted to reflect the adoption of SAB No. 108 as presented below.  The adoption of SAB No. 108 did not have amaterial impact on cash flows from operating, investing or financing activitiesfor the three months ended June 30, 2006.
| ** **                           | ** ** | **Effect on Statement of Operations for  the three months ended June 30, 2006  Increase (decrease)** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| General and  administrative expense  |       | $                                                                                                                                                                | 201,000    |   |
| Total operating expense              |       | $                                                                                                                                                                | 201,000    |   |
| Other income-net                     |       | $                                                                                                                                                                | (12,000    | ) |
| Total other expense                  |       | $                                                                                                                                                                | 12,000     |   |
| Net loss                             |       | $                                                                                                                                                                | 213,000    |   |
| Basic and diluted net loss per share |       | $                                                                                                                                                                | 0.01       |   |

 

*FIN 48*

In July 2006, the FASB issued FASBInterpretation No. 48, *“Accounting forUncertainty in Income Taxes - an interpretation of FASB Statement No. 109”*(“FIN 48”), which clarifies the accounting and disclosure for uncertainty intax positions by prescribing a minimum probability threshold a tax positionmust meet to be recognized in the financial statements. FIN 48 requires anentity to recognize all or a portion of the financial statement benefit of anuncertain income tax position only if the position, based solely on itstechnical merits and on all relevant information as of the reporting date,would have a greater than 50% probability of being sustained were the relevanttaxing authority to audit the application tax returns. If a tax position meetsthe threshold, then the entity will evaluate the benefits it would recognize atincreasing levels of cumulative probabilities, and will record the largestamount of benefit that would have a greater than 50% probability of beingsustained on audit (including resolution of any related appeals or litigation).An entity will not recognize any benefit of an uncertain income tax positionthat fails to meet the greater than 50% probability threshold.

TheCompany is subject to the provisions of FIN 48 as of April 1, 2007, and hasanalyzed filing positions in the federal and state jurisdictions where it isrequired to file income tax returns, as well as open tax years in thesejurisdictions. As a result of adoption, we have recorded no additional taxliability. As of the date of adoption, the Company’s uncertain tax positionstotaled $57,000. There are no tax positions included in the balance at April 1,2007, from which the disallowance would not affect the annual effective incometax rate.

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

Neither the Company nor its subsidiaries iscurrently under examination by any taxing authorities.

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TheCompany recognizes potential accrued interest and penalties related touncertain tax positions in income tax expense. During the three months ended June 30,2007, the Company did not recognize a significant amount in potential interestand penalties associated with uncertain tax positions. As of June 30, 2007, theCompany has accrued approximately $18,000 in interest and penalties. To theextent interest and penalties are not assessed with respect to uncertain taxpositions, amounts accrued will be reduced and reflected as a reduction of theoverall income tax provision.

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

**3. GOINGCONCERN**

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 6, our Convertible Subordinated Notes issued to AstoriaCapital Partners, L.P. (“Astoria”) and its limited partners are due in May2008.  Without access to additionalworking capital, there is considerable doubt as to whether we will be able tocontinue as a going concern beyond May 2008. Unless the Astoria notes are extended or converted into equity, we donot expect our cash flow from operating activities to be sufficient to enableus to meet our debt obligations when they mature.  

We arecurrently exploring various options to address our going concern.  See further discussion in the Liquidity andCapital Resources section.

Thecarrying value of assets and liabilities in the accompanying financial statementsdoes not include any adjustments that might result from the outcome of thisuncertainty.  

**4. STOCK-BASED COMPENSATION**

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

 

Totalstock-based compensation expense included in the unaudited condensed consolidatedstatements of operations for the three months ended June 30, 2007 and 2006, (inthousands) were as follows:
|                                         | ** ** | **Three months ended June 30, ** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
|                                    |       |                                                      |       |   |   |
| Operating expense:                      |       |                                                      |       |   |   |
| Selling and marketing                   |       | $                                                         | 86         |   | $ | 90 |   |
| Research and development                |       | 79                                                        |       | 66 |   |
| General and administrative              |       | 90                                                        |       | 55 |   |
| Total  stock-based compensation expense |       | 255                                                       |       | 211 |   |
| Income tax benefit                      |       | —                                                    |       | — |   |
| Net stock-based  compensation expense   |       | $                                                         | 255        |   | $ | 211 |   |

 

As of June 30, 2007,there was approximately $2.7 million of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under theplans.  That cost is expected to berecognized over a weighted-average period of 2.8 years.

 

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** **

**5.  RECENTLY ISSUED ACCOUNTINGSTANDARDS**

InSeptember 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS No. 157”). This statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. It also applies under other accounting pronouncements thatrequire or permit fair value measurement as a relevant attribute. SFAS No. 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and all interim periods within that fiscal

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year. Managementof the Company is evaluating the impact of this pronouncement on the Company’sconsolidated results of operations and financial condition.

**6.  DEBT**

Debt includes the Convertible Subordinated Notes duein May 2008 issued to Astoria Capital Partners, L.P. (“Astoria”), the Company’scontrolling stockholder and two of its limited partners.  As of June 30, 2007 and March 31, 2007, theoutstanding amounts under such notes were as follows (in thousands):
|                                                                                  | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Convertible subordinated  note payable to Astoria and its limited  partners |       | $                       | 24,241     |                     | $          | 23,946 |   |
| Plus accrued interest                                                            |       | 302                     |       | 295                      |       |
| Less unamortized discount                                                        |       | (70                     | )          | (91                      | )          |
| Total debt                                                                       |       | $                       | 24,473     |                     | $          | 24,150 |   |

 

Unlessthe Convertible Subordinated Notes are extended or converted into common stock,we do not expect our cash flow from operating activities to be sufficient toenable us to meet our obligations when these Notes mature in May 2008.  See further discussion in Note 3.

**7.  STOCKHOLDERS’EQUITY**

Basic loss per share iscomputed using the net loss and the weighted average number of common sharesoutstanding during the period. Diluted loss per share is computed using the netloss and the weighted average number of common shares and dilutive potentialcommon shares outstanding during the period when the potential common sharesare not anti-dilutive. Potential dilutive common shares include outstandingstock options and convertible debt. There were outstanding options to purchase4,326,554 shares of the Company’s common stock with exercise prices rangingfrom $0.75 to $17.00 per share as of June 30, 2007.  There were outstanding options to purchase4,714,835 shares of the Company’s common stock with exercise prices rangingfrom $0.75 to $17.00 per share as of June 30, 2006.  There was convertibledebt outstanding at June 30, 2007 and 2006, which was convertible into4,894,656 and 4,613,200 shares of common stock, respectively.  The effectsof these items were not included in the computation of diluted earnings pershare because their effect would have been anti-dilutive.

The change in accumulated other comprehensive incomeduring the three month periods ended June 30, 2007 and 2006, is the result ofthe effect of foreign exchange rate changes. The following table reconciles netloss as reported with total comprehensive loss (in thousands):
|                                  | ** ** | **Three Months ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Net loss reported                |       | $                                               | (188       | ) | $ | (1,305 | ) |
| Translation adjustments—net |       | (189                                            | )          | 161 |   |
| Total comprehensive loss         |       | $                                               | (377       | ) | $ | (1,144 | ) |

 

**8.  BUSINESSSEGMENT**

The Company operates in one reportable segment.International operations consist primarily of foreign sales offices sellingsoftware developed in the United States of America combined with localmaintenance revenue. The following table summarizes consolidated financialinformation of the Company’s operations by geographic location (in thousands):

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|                                         | ** **   | **North  America** | ** **   | **Europe/Africa** | ** **   | **Total**    | ** **   |
|-----------------------------------------|--------------|--------------------|--------------|-------------------|--------------|--------------|--------------|
| ***Three Months Ended June 30,  2007*** | *** *** | *** ***       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Net revenues                            |         | $                  | 3,389        |              | $            | 1,584        |         | $ | 4,973 |   |
| ***At June 30, 2007***                  | *** *** | *** ***       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Long lived assets                       |         | $                  | 27,123       |              | $            | 628          |         | $ | 27,751 |   |
| ***Three Months Ended June 30,  2006*** | *** *** | *** ***       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Net revenues                            |         | $                  | 3,251        |              | $            | 1,421        |         | $ | 4,672 |   |
| ***At June 30, 2006***                  | *** *** | *** ***       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Long lived assets                       |         | $                  | 27,209       |              | $            | 871          |         | $ | 28,080 |   |

 

The Company operates inone reportable segment and is engaged in the design, development, sale, andsupport of three software product lines: 1) XML data management servers (“XDMS”),2) Multidimensional Database Management Systems (“MDMS”), and3) Rapid Application Development (“RAD”) software tools. The followingtable represents the net revenue from the Company’s segment by product line (inthousands):
|            | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** ** | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Databases  |       | $                                               | 4,056      |   | $ | 3,325 |   |
| RAD Tools  |       | 917                                             |       | 1,347 |   |
| Total      |       | $                                               | 4,973      |   | $ | 4,672 |   |

 

**9.  COMMITMENTSAND CONTINGENCIES**

The Company is subject fromtime to time to litigation, claims and suits arising in the ordinary course ofbusiness.  As of June 30, 2007, theCompany was a party to the following legal proceedings:

*RainingData v. Intrametrics*.  On or about January 19, 2007, theCompany filed a complaint in Orange County Superior Court that sets forthallegations that Intrametrics threatens to and has misappropriated the Company’strade secrets.  The Company’s allegations in the complaint include thatIntrametrics has obtained the Company’s source code in violation of the Parties’OEM (Original Equipment Manufacturer) Distribution Agreement and in violationof California’s laws prohibiting the misappropriation of trade secrets. The Company seeks injunctive relief from Intrametrics, including, but notlimited to, compelling Intrametrics to fully comply with all of the terminationprovisions set forth in the OEM Agreement; enjoining Intrametrics and itsemployees and agents from using or disclosing the Company’s trade secrets;prohibiting Intrametrics from soliciting the Company’s current or potentialcustomers for 3 years, and from soliciting or employing certain of the Company’sformer employees for 3 years.  Intrametrics filed a motion to quash theComplaint, which the Company opposed, but on the morning of the hearing,Intrametrics fist notified the Company that it filed Chapter 11 bankruptcy,effectively staying the litigation in Orange County Superior Court.  TheCompany will pursue further discovery and litigation in the bankruptcy court inHouston, TX.

*RainingData v. Soheil Raissi (formerly the Company’s Vice President, ProductDevelopment and Professional Services), Mario Barrenechea (formerly the Company’sSenior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),and Adevnet*.  On or about December 8, 2006, the Companyfiled a complaint in Orange County Superior Court that sets forth allegationsthat the defendants threaten to and have misappropriated the Company’s tradesecrets.  The Company’s allegations in the complaint include that theindividual defendants have used and/or disclosed the Company’s trade secrets(in the form of source code and licenses and other trade secret information) inviolation of their agreements with the Company to maintain the confidentialityof such trade secret information, and in violation of California lawsprohibiting the misappropriation of trade secrets. The Company seeks injunctiverelief from the defendants, including, but not limited to, compelling thedefendants to immediately return all of the Company’s trade secrets andproperty; enjoining the defendants and their employees and agents from using ordisclosing the Company’s trade secrets, including the Company’s source code;ordering the defendants to disclose all gains and profits they have derivedfrom the misappropriation of the Company’s trade secrets; enjoining thedefendants from directly or indirectly supplying, selling or promoting anyproduct that incorporates the Company’s trade secrets.

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*Cross-Complaintby Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.*  On or about January 10, 2007, the defendantsin the case above filed a cross-complaint, alleging several claims against theCompany and Carlton Baab, the Company’s President and Chief Executive Officer,unfair business practices, violation of civil rights, intentional interferencewith prospective economic advantage, negligent interference with prospectiveeconomic advantage, malicious prosecution, abuse of process, negligence, and civilconspiracy.  Cross-complainants allege general, compensatory, special, andpunitive and exemplary damages in amounts “according to proof”, and seek toenjoin the Company from engaging in improper and unlawful conduct.  TheCompany and Carlton Baab assert that all of the claims are baseless, and fileda special motion to strike all the allegations in the cross-complaint. The Company’s special motion to strike is scheduled to be heard on September14, 2007.  The Company and Carlton Baab will continue to vigorously defendtheir rights in this litigation.  We are unable to estimate any lossor range of loss at this time. Management believes that the ultimatedisposition of this matter will not have a material adverse effect on theCompany’s consolidated financial statements, results of operations, cash flowsor liquidity.

*Indemnification*

The Company’sstandard customer license and software agreements contain indemnification andwarranty provisions which are generally consistent with practice in the Company’sindustry. The duration of the Company’s service warranties generally does notexceed 30 days following completion of its services. The Company has notincurred significant obligations under customer indemnification or warrantyprovisions historically and does not expect to incur significant obligations inthe future. Accordingly, the Company does not maintain accruals for potentialcustomer indemnification or warranty-related obligations. The maximum potentialamount of future payments that the Company could be required to make isgenerally limited under the indemnification provisions in its customer licenseand service agreements.

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

This Form 10-QSB contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). These statements maygenerally be identified by the use of such words as “expect,” “anticipate,” “believe,”“intend,” “plan,” “will,” or “shall,” or the negative of those terms. We havebased these forward-looking statements on our current expectations andprojections about future events. Forward-looking statements involve certainrisks and uncertainties and actual results may differ materially from thosediscussed in any such statement. Factors that could cause actual results todiffer materially from such forward-looking statements include the risksdescribed under the heading “Risk Factors” in Item 2 of this Form 10-QSBand elsewhere in this Form 10-QSB. The forward-looking statementscontained in this Form 10-QSB include, but are not limited tostatements about the following: (1) our future success, (2) ourresearch and development efforts, (3) our future operating results andcash flow, (4) our competitive ability and position, (5) the marketsin which we operate, (6) our revenue, (7) cost of license revenue andcost of service revenue, (8) our selling and marketing costs, (9) ourbacklog, (10) the adoption of certain critical accounting policies and therelated judgments and estimates , (11) the possibility that we may seek totake advantage of opportunities in the equity and capital markets and the possibilitythat we may raise additional funds through public or private equity financingor bank lines of credit or from other sources, (12) our belief that ourexisting cash balances combined with our cash flow from operating activitieswill be sufficient to meet our operating and capital expenditure requirementsfor the remainder of the fiscal year ending March 31, 2008, (13) thepossibility that the maturity date of the Subordinated Convertible Notes may beextended or that such notes may be converted into common stock, (14) ourliquidity, (15) the possibility that we may explore a sale of the Company orits assets or a corporate reorganization, and (16) our focus on the continueddevelopment and enhancement of the TigerLogic XDMS product line, identificationof new and emerging application areas and discussions with channel partners forthe sale and distribution of the TigerLogic product line. All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and we assume no obligationto update any forward-looking statement.

**Overview**

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

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**Products**

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

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

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

***TigerLogic XDMS***

TigerLogicXML Data Management Server provideshigh-performance management and query of XML data by leveraging the time-provenPick UDM. TigerLogic also enables the ability to query external data sources asif they were one logical database and maintains referential integrity acrossdata sources. TigerLogic’s patent-pending XML Indexing and Profiling technologyenables it to access XML data via XQuery between 10x to 150x faster in internaltests than relational databases, XML repositories or XML Index and Searchengines. TigerLogic provides XML, Java, .NET, WSDL and SOAP compatibility forsimplified plug-in and integration with development environments of choice.

TigerLogic provides an extensible and flexibledevelopment and deployment environment. Unlike other XML data managementalternatives, TigerLogic XDMS does not need to know the schema or structure ofdata before processing and storing it. We believe the ability to make XMLschemas optional is a vital innovation because the structures of operationalsystems frequently change, and mapping schemas for the purpose of linking to anew data source is both difficult and time-consuming. The system also enablessupport for schema versioning, which is critical when addressing evolving standardsand XML schemas. The General Availability Release of TigerLogic XDMS version2.6, which included support for enhanced XQuery features, including XQuerystored procedures and full-text search and support for High Availabilityclustering, was released in July 2006, and Version 3.0, which is the thirdgeneration release of the product and includes compliance with the XML Query1.0 specification, released in January 2007, cache management of data sources,in-memory cache, support for Geospatial data, enhanced APIs and datareplication was released for beta testing in June 2007.

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

The MDMS product line consists principally of the D3Data Base Management System (“D3”), which runs on many operating systems suchas IBM AIX, Linux and Windows NT. D3 allows application programmers to createnew business solution software in less time than it normally takes in manyother environments. This can translate into lower costs for the developer,lower software prices for the customer and reduced costs of ownership for boththe developer and end user. Our MDMS products also include mvEnterprise, ascalable multi-dimensional database solution that allows the user to leveragethe capabilities of the UNIX operating system, and mvBase, a multi-dimensionaldatabase solution that runs on all Windows platforms.

MDMS components include the Pick Data Provider for..Net (“PDP”) and our Pick Reporting Services Connector. The PDP component forthe Microsoft .NET Framework is tightly integrated with Microsoft Visual Studio..NET. It allows software developers using IBM’s Universe and Unidata databasesand our D3 database platform to build client/server applications, Webapplications or Web services using any of the languages and technologies thatrun on the Microsoft .NET Framework, such as Microsoft ASP.NET, Visual Basic..NET, Visual C# .NET and Visual J# .NET. Our Pick Reporting Services Connectorenables a data connection that allows Pick database users to unlock thebenefits of Microsoft 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. This solution also allowsaccess to IBM UniVerse, IBM UniData and Pick D3 data.

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***Rapid ApplicationDevelopment (RAD) Tools***

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

**Technical Support**

Our products are used by our customers to build anddeploy applications that may become a critical component of their businessoperations. As a result, continuing to provide customer technical supportservices is an important element of our business strategy. Customers whoparticipate in our support programs receive periodic maintenance releases on awhen-and-if available basis and direct technical support when required.

**Sales and Distribution**

In the United States, we sellour products through established distribution channels consisting of OEMs,system integrators, specialized vertical application software developers andconsulting organizations. We also sell our products directly through our salespersonnel to end user organizations. Outside the United States, we maintaindirect sales offices in the United Kingdom, France and Germany. Approximately32% and 30% of our revenue came from sales through our offices located outsidethe United States for the three months ended June 30, 2007 and 2006,respectively.

We sell our products in U.S. Dollars in North America,British Pounds Sterling in the United Kingdom and Euros in France and Germany.Because we recognize revenue and expense in these various currencies but reportour financial results in U.S. Dollars, changes in exchange rates may causevariances in our period-to-period revenue and results of operations in futureperiods.

We license our software on a per-CPU, per-server,per-port or per-user basis. Therefore, the addition of CPU’s, servers, ports orusers to existing systems increases our revenue from our installed base oflicenses. In addition to software products, we provide continuing maintenanceand other services to our customers, including professional services, technicalsupport and training to help plan, analyze, implement and maintain applicationsoftware based on our products.

**Customers**

Our customers maybe classified into two general categories:

·       Independent SoftwareVendors and Software Developers. The majority of our revenue is derived fromindependent software vendors, which typically write their own verticalapplication software that they sell as a complete package to end usercustomers. This category includes value added resellers (“VARs”) andsoftware-consulting companies that provide contract programming services totheir customers.

·       Corporate InformationTechnology (“IT”) Departments.

For each of the three monthsended June 30, 2007 and 2006, no single customer accounted for more than 10% ofour revenue.

**Research and Development**

We have devoted significantresources to the research and development of our products and technology. Webelieve that our future success will depend largely on a strong developmenteffort with respect to both our existing and new products. These developmentefforts have resulted in updates and upgrades to existing MDMS and RAD productsand the launch of new products including the XDMS product line. New productreleases in all of our product lines are currently in progress. We expect tocontinue our research and development efforts in all product lines for theforeseeable future. We intend for these efforts to improve our future operatingresults and increase cash flow. However, such efforts may not result inadditional new products or revenue, and we can make no assurances that therecently announced products or future products 

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willbe successful. We spent $2.0 million and $2.6 million on research anddevelopment for the three months ended June 30, 2007 and 2006, respectively.

**Competition**

The application development tools software market israpidly changing and intensely competitive. Our MDMS products compete withproducts developed by companies such as Oracle, Microsoft and IBM. Our RADproducts currently encounter competition from several direct competitors,including Microsoft, and competing development environments, including JAVA.Competition is developing and evolving in the XML market for which our XDMSproducts are intended. Companies that do or are expected to compete in thismarket include Oracle, IBM, Microsoft and Sybase, as well as a number ofsmaller companies with products that directly and indirectly compete with ourXDMS products. Most of our competitors have significantly more financial,technical, marketing and other resources than we do. As a result, thesecompetitors may be able to respond more quickly to new or emergingtechnologies, evolving markets and changes in customer requirements, and maydevote greater resources to the development, promotion and sale of theirproducts.

We believe that our ability to compete in the variousMDMS, RAD, and XDMS markets depends on factors both within and outside ourcontrol, including the timing of release, performance and price of new productsdeveloped by both us and our competitors. Although we believe that we currentlycompete favorably with respect to most of these factors, we may not be able to maintainour competitive position against current and potential competitors, especiallythose with greater resources.

**Intellectual Property andOther Proprietary Rights**

We rely primarily on a combination of trade secret,copyright and trademark laws and contractual provisions to protect ourintellectual property and proprietary rights. Our trademarks include RainingData, Pick, TigerLogic, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, andmvDesigner, among others. We also have one pending U.S. patent application asof June 30, 2007.

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

**Backlog**

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

**Employees**

At June 30, 2007, we had 110 employees worldwide of which 80 were in theUnited States and 30 were in our international offices. Of the 110 employees,103 are full-time and approximately 51% are in research and development, 15% intechnical support, 13% in sales and marketing and 21% in general andadministrative functions.

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

The discussion and analysis of our financial conditionand results of operations is based on our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenue and expenses and disclosure ofcontingent liabilities.

On an on-going basis, we evaluate our estimates,including those related to revenue recognition and accounting for goodwill. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions.

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We have identified the accounting policies below asthe policies critical to our business operations and the understanding of ourresults of operations. We believe the following critical accounting policiesand the related judgments and estimates affect the preparation of ourconsolidated financial statements:

REVENUE RECOGNITION.   We recognize revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2,“Software Revenue Recognition” (“SOP 97-2”), as amended. Under theresidual method, revenue is recognizedin a multiple element arrangement when company-specific objective evidence offair value exists for all of the undelivered elements in the arrangement, butdoes not exist for one or more of the delivered elements in the arrangement. Atthe outset of the arrangement with the customer, we defer revenue for the fairvalue of our undelivered elements (e.g., maintenance) based on company-specificobjective evidence of the amount such items are sold individually to ourcustomers and recognize revenue for the remainder of the arrangement feeattributable to the elements initially delivered in the arrangement (e.g.,software license) when the basic criteria in SOP 97-2 have been met.

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

Service revenue relates primarily to consultingservices, maintenance and training. Maintenance revenue is initially deferredand then recognized ratably over the term of the maintenance contract,typically 12 months. Consulting and training revenue is recognized as theservices are performed and is usually calculated on a time and materials basis.Such services primarily consist of implementation services related to theinstallation of our products and do not include significant customization to ordevelopment of the underlying software code. We do not have price protectionprograms, conditional acceptance agreements, and sales of our products are madewithout right of return.

For contracts that require significant modification orcustomization to the software in accordance with customers’ specifications, werecognize revenue using the completed-contract method pursuant to therequirements of Statement of Position No. 81-1, “*Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.*”  Under this method, revenue andexpenses are deferred until customer acceptance of the finished product occurs.

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

·                                          Significantunderperformance relative to expected historical or projected future operatingresults;

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

·                                          Significantnegative industry or economic trends;

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

·                                          Ourmarket capitalization relative to net book value.

In accordance with Statement of Financial AccountingStandards No. 142, “*Goodwill and OtherIntangible Assets*” (“SFAS No. 142”), we do not amortizegoodwill, but test for goodwill impairment following a two-step process. Thefirst step is used to identify potential impairment by comparing the fair valueof a reporting unit with its net book value (or carrying amount), includinggoodwill. If the fair value exceeds the carrying amount, goodwill of thereporting unit is considered not impaired and the second step of the impairmenttest is unnecessary. If the carrying amount of a reporting unit exceeds itsfair value, the second step of the goodwill impairment test is performed tomeasure the amount of impairment loss, if any. The second step of the goodwillimpairment test compares the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. If the carrying amount ofthe reporting unit’s goodwill exceeds the implied fair value of that goodwill,an impairment loss is recognized in an amount equal to that excess. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination. That is, the fair value of thereporting unit is allocated to all of the assets and liabilities of that unit(including any unrecognized intangible assets) as if the reporting unit hadbeen acquired in a business combination and the fair value of the reportingunit was the purchase price paid to acquire the reporting unit. Currently, wehave one reporting unit for goodwill impairment testing.

Determining the fair value of a reporting unit underthe first step of the goodwill impairment test and determining the fair valueof individual assets and liabilities of a reporting unit (includingunrecognized intangible assets) under the second step of the goodwillimpairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand the magnitude of any such charge. Estimates of fair value are currentlybased on our stock price as reported by Nasdaq.

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EMPLOYEESTOCK-BASED COMPENSATION.  We account forstock-based compensation in accordance with SFAS No. 123(R). Under thefair value recognition provisions of this statement, share-based compensationcost is measured at the grant date based on the value of the award and isrecognized as expense over the requisite service period. We estimate the fairvalue of stock-based awards using a Black-Scholes valuation model. Determiningthe fair value of share-based awards at the grant date requires judgment,including estimating volatility, expected terms, and forfeitures. If actualresults differ significantly from these estimates, stock-based compensationexpense and our results of operations could be materially impacted.  See note 4 in Item 1, “Stock-BasedCompensation,” for additional information.

**Results of Operations**

The following table sets forth certain Condensed Consolidated Statementof Operations data in total dollars, as a percentage of total net revenues andas a percentage change from the same period in the prior year.  Cost of license revenues and cost of servicerevenues are expressed as a percentage of the related revenues. Thisinformation should be read in conjunction with the Condensed ConsolidatedFinancial Statements included elsewhere in this Form 10-QSB.

|                                                        | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** |
| ** **                                             | ** ** | **Results**                      | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| ** **                                             | ** ** | **(In thousands)**          | ** ** | ** **                       | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Net revenues                                           |       |                             |       |                             |       |   |   |   |   |   |   |
| Licenses                                               |       | $                                | 2,002      |                             | 40         | % | 21 | % | $ | 1,654 |   | 35 | % |
| Services                                               |       | 2,971                            |       | 60                               | %          | (2 | )% | 3,018 |   | 65 | % |
| Total net revenues                                     |       | 4,973                            |       | 100                              | %          | 6 | % | 4,672 |   | 100 | % |
| Operating  expense                                     |       |                             |       |                             |       |   |   |   |   |   |   |
| Cost of  revenues:                                     |       |                             |       |                             |       |   |   |   |   |   |   |
| Cost of license revenues (as a % of license  revenues) |       | 9                                |       | 0                                | %          | (57 | )% | 21 |   | 1 | % |
| Cost of service revenues (as a % of service  revenues) |       | 485                              |       | 16                               | %          | (26 | )% | 653 |   | 22 | % |
| Selling and  marketing                                 |       | 1,304                            |       | 26                               | %          | (10 | )% | 1,456 |   | 31 | % |
| Research and  development                              |       | 1,997                            |       | 40                               | %          | (25 | )% | 2,646 |   | 57 | % |
| General and  administrative                            |       | 1,323                            |       | 27                               | %          | 31 | % | 1,007 |   | 22 | % |
| Total operating expenses                               |       | 5,118                            |       | 103                              | %          | (11 | )% | 5,783 |   | 124 | % |
| Operating loss                                         |       | (145                             | )          | (3                               | )%         | (87 | )% | (1,111 | ) | (24 | )% |
| Other expense-net                                      |       | (24                              | )          | (0                               | )%         | (89 | )% | (213 | ) | (5 | )% |
| Loss before  income taxes                              |       | (169                             | )          | (3                               | )%         | (87 | )% | (1,324 | ) | (28 | )% |
| Provision for  income taxes                            |       | 19                               |       | 0                                | %          | 200 | % | (19 | ) | 0 | % |
| Net loss                                               |       | $                                | (188       | )                                | (4         | )% | (86 | )% | $ | (1,305 | ) | (28 | )% |

 

**REVENUE**

NETREVENUE. Our revenue is derived principally from two sources: fees fromsoftware licensing and fees for post contract technical support. We license oursoftware on a per-CPU, per-server, per-port or per-user basis. Therefore, theaddition of CPU’s, servers, ports or users to existing systems increases ourrevenue from our installed base of licenses. The increase in revenue for thethree months ended June 30, 2007, as compared to the same period in the prioryear is due an increase in license revenue from additional users on certain existingaccounts. In the longer term, we expect that the MDMS and RAD markets willeventually contract as customers adopt newer technologies, and, therefore, therevenue generated from sales of our MDMS and RAD products is expected todecrease.

We have been actively developing and marketing ourXDMS product line. Should our development efforts and the adoption of theseproduct lines be successful, we anticipate additional revenues in futureperiods related to the sale of these products. However, we can give noassurances as to customer acceptance of any new products or services, or theability of 

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the current or any newproducts and services to generate revenue. While we are committed to researchand development efforts that are intended to allow us to penetrate new marketsand generate new sources of revenue, such efforts may not result in additionalproducts, services or revenue.

**OPERATINGEXPENSES**

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costs associatedwith software license sales including software packaging, documentation,physical media costs and royalties. Cost of license revenue decreased in thethree month period ended June 30, 2007, as compared to the same period in theprior year due to reduced headcount.  Weanticipate that the cost of license revenue, as a percentage of license revenueand in absolute dollars, will be relatively stable in future periods.

COSTOF SERVICE REVENUE. Cost of service revenue includes primarily personnel costsrelating to providing consulting, technical support and training services.  Cost of service revenue decreased for threemonth period ended June 30, 2007, as compared to the same period in the prioryear due to reduced headcount.  Weanticipate that the cost of service revenue, as a percentage of service revenueand in absolute dollars, will be relatively stable in future periods.

SELLINGAND MARKETING. Selling and marketing expense consists primarily of salaries,benefits, advertising, tradeshows, travel and overhead costs for our sales andmarketing personnel.  The decrease inselling and marketing expense in the three month period ended June 30, 2007, ascompared to the same period in the prior year was due to reducedheadcount.  We anticipate that sellingand marketing costs related to XDMS products may increase as we further developthe sales channel for these products and if customer acceptance of theseproducts increases. In addition, if our continued research and developmentefforts are successful, including with respect to our XDMS products, and newproducts or services are created, we may incur increased sales and marketingexpense to promote those new products in future periods.

RESEARCHAND DEVELOPMENT. Research and development expense consists primarily ofsalaries and other personnel-related expenses and overhead costs forengineering personnel including employees in the US and the UK and contractorsin the US and India. The decrease in research and development expense in the threemonth period ended June 30, 2007, as compared to the same period in the prioryear was mainly due to reduced headcount and termination of contractedprofessional technical services in India. We are committed to our research and development efforts and expectresearch and development expense will remain at the current level in futureperiods or increase if we believe that additional spending is warranted. Suchefforts may not result in additional new products and any new products,including the XDMS products, may not generate sufficient revenue, if any, tooffset the research and development expense.

GENERALAND ADMINISTRATIVE. General and administrative expense consists primarily ofcosts associated with our finance, human resources, legal and other administrativefunctions. These costs consist principally of salaries and otherpersonnel-related expenses, professional fees, depreciation and overhead costs.The increase in general and administrative expense in the three month periodended June 30, 2007, as compared to the same period in prior year was mainlydue to costs incurred in legal services related to pending litigation mattersand personnel-related expenses.

OTHEREXPENSE. Other expense consists primarily of net interest expense and gains andlosses on foreign currency transactions. The decrease in other expense duringthe three month period ended June 30, 2007, as compared to the same period inthe prior year was mainly due to foreign currency exchange gains.  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.

PROVISIONFOR INCOME TAXES.   Our effective tax rate was 11.2% and 1.4%, for thethree months ended June 30, 2007 and 2006, respectively. The provisionfor income taxes reflects the tax on earnings from foreign subsidiaries. We areable to reduce the current tax liability of foreign subsidiaries with netoperating loss carryforwards. However, certain carryforwards were acquired inour acquisition in December 2000. Therefore, the benefit realized fromutilizing those net operating loss carryforwards reduced goodwill instead ofincome tax expense. Due to uncertainties surrounding the timing of realizingthe benefits of the net operating loss carryforwards in the future, we haveestablished a full valuation allowance against the related net deferred taxassets.

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**LIQUIDITYAND CAPITAL RESOURCES**

In connection with the acquisition of PickAx, weassumed a Secured Promissory Note issued to Astoria Capital Partners, L.P. (“Astoria”)dated November 30, 2000, in the amount of $18.5 million. InJanuary 2003, we entered into a Note Exchange Agreement (the “ExchangeAgreement”) with Astoria to replace the existing Secured Promissory Note, asamended, with a Convertible Subordinated Note. Under the terms of the ExchangeAgreement, the Secured Promissory Note was exchanged and replaced with a ConvertibleSubordinated Note having a principal amount of $22.1 million, which principalamount was equal to the outstanding principal and accrued interest payable onthe Secured Promissory Note as of the date of the Exchange Agreement. InOctober 2005, Astoria assigned a portion of its common stock holdingstotaling 870,536 shares and a portion of the Subordinated Convertible Note,totaling $1,751,832, to two of its limited partners. As such, we issued anAmended and Restated Note to Astoria for $20,749,581 and corresponding notesdirectly to the limited partners for $862,979 and $888,853, respectively. TheConvertible Subordinated Notes are convertible into common stock at any time,at the option of the holder, at a price of $5.00 per share. The Convertible SubordinatedNotes mature on May 30, 2008.  Theinterest rate of the Convertible Subordinated Notes is 5% per annum as comparedto an interest rate of 10% per annum under the Secured Promissory Note. Theinterest is payable quarterly at our option in cash or through increases to theoutstanding principal of the Convertible Subordinated Notes.

On December 14, 2004, we entered into anAgreement Regarding Amended and Restated Common Stock Purchase Warrant and 5%Convertible Subordinated Note Due 2008 with Astoria whereby we could redeem, inpart, the Convertible Subordinated Note in advance of January 30, 2005. OnDecember 14, 2004, Astoria exercised its warrant in the amount of$2,670,904. In lieu of a cash payment, we used the proceeds of the exercise topay down a portion of the indebtedness to Astoria. The pay down consisted of$247,129 for accrued and unpaid interest, and $2,423,775 as a reduction ofprincipal of the Convertible Subordinated Note. For the foreseeable future, weexpect to increase the principal of the Convertible Subordinated Notes in lieuof cash payments for the interest. If the Convertible Subordinated Notes areconverted into common stock, our stockholders may experience substantialdilution. Unlike the Secured Promissory Note, the Convertible SubordinatedNotes are not secured by our assets.

In addition to holding the majority of the ConvertibleSubordinated Notes, Astoria is a major stockholder of ours, holding a majorityof our outstanding common stock. Richard W. Koe, Chairman of the Board ofDirectors, serves as the Managing General Partner for Astoria. CarltonH. Baab, our President and Chief Executive Officer and a member of theBoard of Directors, served as a Managing Principal of ACM, which is a generalpartner of Astoria, until taking a formal leave of absence to join us inAugust 2001. Gerald F. Chew, a member of our Board of Directors, is thecousin of Mr. Koe.

As of June 30, 2007, we had $11.3 million incash. We believe that our existing cash balances combined with our cash flow fromoperating activities will be sufficient to meet our operating and capitalexpenditure requirements for the remainder of the fiscal year endingMarch 31, 2008. 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 ourdebt and meet our expenditure requirements is dependent upon our futurefinancial performance, which will be affected by, among other things,prevailing economic conditions, our ability to penetrate new markets andattract new customers, market acceptance of our new and existing products andservices, the success of research and development efforts and other factorsbeyond our control.  Unless our futurefinancial performance improves, we hope to take advantage of opportunities inthe equity and capital markets to raise additional funds to pay down our debtunder the Convertible Subordinated Notes and to fund our operating needs, orthe holders of the Convertible Subordinated Notes may elect to convert suchnotes into common stock.  There can be noassurances that such opportunities will arise or that such holders will convertthe Convertible Subordinated Notes into common stock.  If the Convertible Subordinated Notes wereconverted into common stock, the stockholders of the Company would experiencesignificant dilution.  Based on ourfinancial performance we believe we may need to negotiate with the holders ofthe Convertible Subordinated Notes to further extend the maturity date of thenotes.  There can be no assurances thatsuch holders would agree to extend the maturity date of the notes.  We may also seek to raise additional fundsthrough public or private equity financing or bank lines of credit or fromother sources.  Given our recentfinancial performance, it is unlikely that we would be in a position to obtaina line of credit in the amount necessary to repay in full the ConvertibleSubordinated Notes.  No assurances can begiven that additional financing will be available or that, if available, suchfinancing will be on terms favorable to the Company.  If the holders of the ConvertibleSubordinated Notes decline to extend the maturity date of such notes or toconvert such notes into common stock, and the Company was unable to obtainsufficient, additional funds through the issuance of equity, by securing a bankline of credit, or otherwise by the maturity date of the ConvertibleSubordinated Notes, the Company would be in default under such notes and theCompany may not be able to continue its operations.  To address our liquidity concerns, we mayexplore other options including a sale of the Company or its assets or acorporate reorganization.

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On February 11, 2004, we entered into a two yearcredit facility with Silicon Valley Bank which provided us with the ability toborrow up to $1.5 million at an annual interest rate of Prime plus 1.0%,provided that the annual interest rate shall never be less than 5%. We renewed this credit facility onFebruary 11, 2006. The credit facility is collateralized by our assets andexpires in February 2008. The credit facility contains financial andreporting covenants that require us to maintain certain financial ratios onlywhen we have outstanding borrowings on the line. There were no outstandingborrowings at June 30, 2007. Upon expiration of the term of this facility wewill assess our credit and liquidity needs in relation to market factors.

On November 9, 2004, we entered into a leaseagreement with The Irvine Company whereby we leased one building inIrvine, California, comprising approximately 29,000 square feet, toreplace our then headquarters facility. The lease commenced inNovember 2005 and has a five-year term. If certain conditions aremet, we have the option to extend the term of the lease for an additional thirty-sixmonths. The total basic rent over the five-year term is approximately $2.6million, which represents a lower per square foot cost than our prior propertylease. The annual basic rent during the five-year term rangesfrom approximately $475,000 during the first year to approximately$545,000 during the fifth year. The rent expense is being recognized on astraight line basis over the lease term.

We had no material commitments for capitalexpenditures as of June 30, 2007.

Net cash used in operating activities was $0.4 millionand $0.8 million for the three month period ended June 30, 2007 and 2006,respectively.

Our earnings before interest, taxes, depreciation and amortization(EBITDA) was $0.2 million, or 4% of total net revenue for the three monthsended June 30, 2007, and was ($0.8 million), or (18%) of total net revenuefor the three months ended June 30, 2006. The increase in EBITDA for the threemonths ended June 30, 2007, compared to the same period in prior year was aresult of increased license revenue and reduced personnel costs in the firstquarter of fiscal year 2008. EBITDA is defined as net loss with an add-back fordepreciation and amortization, non-cash stock-based compensation expense,interest expense, other income and income taxes. The following table reconcilesEBITDA to the reported net loss:

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**RECONCILIATION OF EBITDA TO NET LOSS**

**(in thousands)**

|                                            | ** ** | **For the Three Months ended  June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| Reported net  loss                         |       | $                                                                 | (188       | ) | $ | (1,305 | ) |
| Depreciation and  amortization             |       | 65                                                                |       | 75 |   |
| Stock-based  compensation                  |       | 255                                                               |       | 211 |   |
| Interest  expense-net                      |       | 202                                                               |       | 223 |   |
| Other income-net                           |       | (178                                                              | )          | (10 | ) |
| Provision for  (benefit from) income taxes |       | 19                                                                |       | (19 | ) |
| EBITDA                                     |       | $                                                                 | 175        |   | $ | (825 | ) |

 

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

However, EBITDA is used by management to evaluate,assess and benchmark our operational results and we believe that EBITDA isrelevant and useful information, which is often reported and widely used byanalysts, investors and other interested parties in our industry. Accordingly,we are disclosing this information to permit a more comprehensive analysis ofour operating performance, to provide an additional measure of performance andliquidity and to provide additional information with respect to our ability tomeet future debt service, capital expenditure and working capital requirements.

Our EBITDA financial information is also comparable tonet cash used in operating activities. The table below reconciles EBITDA to theGAAP disclosure of net cash used in operating activities:

**RECONCILIATION OF EBITDA TO NET CASH USED INOPERATING ACTIVITIES**

**(in thousands)**

|                                                 | ** ** | **For the Three Months ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
|                                            |       |                                                              |       |   |   |
| Net cash used in  operating activities          |       | $                                                                 | (361       | ) | $ | (812 | ) |
| Interest  expense-net                           |       | 202                                                               |       | 223 |   |
| Other income-net                                |       | (178                                                              | )          | (10 | ) |
| Change in trade  accounts receivable            |       | 369                                                               |       | (217 | ) |
| Change in other  current and non-current assets |       | 31                                                                |       | 112 |   |
| Change in  accounts payable                     |       | (120                                                              | )          | 111 |   |
| Change in  accrued liabilities                  |       | 360                                                               |       | 140 |   |
| Change in  deferred revenue                     |       | (105                                                              | )          | (351 | ) |
| Debt discount  amortization                     |       | (21                                                               | )          | (21 | ) |
| Provision for  bad debt                         |       | (2                                                                | )          | — |   |
| EBITDA                                          |       | $                                                                 | 175        |   | $ | (825 | ) |

 

**RISK FACTORS**

We operate in a rapidly changing environment thatinvolves numerous risks and uncertainties. The following section listssome, but not all, of these risks and uncertainties that may have a materialadverse effect on our business, financial condition or results of operation.

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**IF THE COMPANYFAILS TO ACQUIRE ADDITIONAL FUNDS TO REPAY THE CONVERTIBLE SUBORDINATED NOTESISSUED TO ASTORIA AND OTHERS WHEN DUE, AND SUCH NOTES ARE NOT EXTENDED OR CONVERTEDINTO COMMON STOCK, THE COMPANY MAY NOT BE ABLE TO CONTINUE ITS OPERATIONS.**

As of June 30, 2007, we had $11.3 million incash.  We owe Astoria and othersapproximately $24.5 million as of June 30, 2007, under the ConvertibleSubordinated Notes, which will mature on May 30, 2008.  Unless the Convertible Subordinated Notes areextended or converted into common stock, we do not expect our cash flow fromoperating activities to be sufficient to enable us to meet our obligationsunder the Convertible Subordinated Notes when they mature.

Our ability to serviceour debt and meet our expenditure requirements is dependent upon our futurefinancial performance, which will be affected by, among other things,prevailing economic conditions, our ability to penetrate new markets andattract new customers, market acceptance of our new and existing products andservices, the success of research and development efforts and other factorsbeyond our control.  If our futurefinancial performance improves, we hope to take advantage of opportunities inthe equity and capital markets to raise additional funds to pay down our debtunder the Convertible Subordinated Notes and to fund our operating needs, orthe holders of the Convertible Subordinated Notes may elect to convert suchnotes into common stock.  There can be noassurances that such opportunities will arise or that such holders will convertthe Convertible Subordinated Notes into common stock.  If the Convertible Subordinated Notes wereconverted into common stock, the stockholders of the Company would experiencesignificant dilution.  If our financialperformance does not improve, we will need to negotiate with the holders of theConvertible Subordinated Notes to further extend the maturity date of thenotes.  There can be no assurances thatsuch holders would agree to extend the maturity date of the notes.  We may also seek to raise additional fundsthrough public or private equity financing or bank lines of credit or fromother sources.  Given our recentfinancial performance, it is unlikely that we would be in a position to obtaina line of credit in the amount necessary to repay in full the ConvertibleSubordinated Notes.  No assurances can begiven that additional financing will be available or that, if available, suchfinancing will be on terms favorable to the Company.  If the holders of the ConvertibleSubordinated Notes decline to extend the maturity date of such notes or toconvert such notes into common stock, and the Company was unable to obtainsufficient, additional funds through the issuance of equity, by securing a bankline of credit, or otherwise by the maturity date of the ConvertibleSubordinated Notes, the Company would be in default under such notes and theCompany may not be able to continue its operations.  To address our liquidity concerns, we mayexplore other options including a sale of the Company or its assets or acorporate reorganization.

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

We have devoted significant resources to the researchand development of products and technologies. We believe that our futuresuccess will depend in large part on a strong research and development effortwith respect to both our existing and new products. Beginning in 2001, we beganan extensive effort to leverage our time-proven Pick UDM and core intellectualproperty to create an enterprise class XML database management server for theemerging XML market. This significant investment of time and resources resultedin the TigerLogic XDMS product line. While we intend for these efforts toimprove our future operating results and increase cash flow, such efforts maynot result in new products or revenue, and any new products that do result maynot be 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 TOCOMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

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

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

Most of our competitors have significantly morefinancial, technical, marketing and other resources than we do. As a result,these competitors may be able to respond more quickly to new or emergingtechnologies, evolving markets and changes in customer requirements and maydevote greater resources to the development, promotion and sale of their products.While we currently believe that our products and services compete favorably inthe marketplace, our products and services could fall behind marketplacedemands at any time. If we fail to address the competitive challenges, ourbusiness would suffer materially.

**BECAUSE THE MARKETFOR OUR MDMS MAY BE DECLINING, OUR REVENUE MAY DECLINE IF WE CANNOTMAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

We believe that the markets for our MDMS and RADproducts may be declining as customers adopt other technologies. As a result,to maintain or grow our revenue in these markets, we will need to maintain oursales to existing customers and to generate sales to new customers, includingcorporate development teams, commercial application developers, systemintegrators, independent software vendors and independent consultants. If wefail to attract new customers, if we lose our customers to competitors, or ifthe MDMS or RAD markets further decline, our revenue may be adversely affected.In the longer term, it is expected that the MDMS and RAD markets willeventually decline as customers adopt newer technologies.

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

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

**THE CONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TO ASTORIAGIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OUR BUSINESS.**

As of June 30, 2007, Astoria beneficially ownedapproximately 57% of our outstanding common stock. In addition, as of June 30,2007, the Convertible Subordinated Note issued to Astoria and other relatedparties had a balance of approximately $24.5 million in principal andaccrued interest maturing on May 30, 2008. Richard W. Koe, Chairman of theBoard of Directors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria. Carlton H. Baab, ourPresident, Chief Executive Officer, and Director, served as a ManagingPrincipal of Astoria Capital Management until taking a formal leave of absenceto join us in August 2001. This concentration of stock ownership, togetherwith the outstanding debt, would allow Astoria, acting alone, to block anyactions that require approval of our stockholders, including the election ofmembers to the Board of Directors and the approval of significant corporatetransactions. Moreover, this concentration of ownership may delay or prevent achange in control.

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**WE MAY EXPERIENCEQUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT INVOLATILITY OF OUR STOCK PRICE.**

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

·       the size and timing ofcustomer orders;

·       changes in pricing policiesby us or our competitors;

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

·       the number, timing, and significance of productenhancements and new product announcements by our competitors;

·       the demand for our products;

·       non-renewal of customer support agreements;

·       software defects and otherproduct quality problems; and

·       personnel changes.

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

**THE SUCCESS OF OURBUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEYPERSONNEL AND MANAGEMENT.**

The majority of ourexecutive officers joined us subsequent to the acquisition of PickAx, includingour President, Chief Executive Officer, and Director, Carlton H. Baab, whojoined us in August 2001. The loss of one or more of these or otherexecutives could adversely affect our business. In addition, we believe thatour future success will depend to a significant extent on our ability torecruit, hire and retain highly skilled management and employees withexperience in engineering, product management, business development, sales,marketing and customer service. Competition for such personnel in the softwareindustry can be intense, and there can be no assurance that we will besuccessful in attracting and retaining such personnel. If we are unable to doso, we may experience inadequate levels of staffing to develop and license ourproducts and perform services for our customers, which could adversely affectour business.

**THE INABILITY TO PROTECTOUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TO COMPETE.**

Our ability to competesuccessfully will depend, in part, on our ability to protect our proprietarytechnology and operations without infringing upon the rights of others. We mayfail to do so. In addition, the laws of certain countries in which our productsare, or may be, licensed may not protect our proprietary rights to the sameextent as the laws of the United States. We rely primarily on a combination oftrade secret, copyright and trademark laws and contractual provisions toprotect our intellectual property and proprietary rights. Our trademarks includeRaining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesignerand TigerLogic, among others. We also have one pending U.S. patent applicationas of June 30, 2007. In addition to trademark and copyright protections, welicense our products to end users on a “right to use” basis pursuant to aperpetual license agreement that restricts use of products to a specifiednumber of users.

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

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

**OUR PRODUCTSMAY CONTAIN SOFTWARE DEFECTS WHICH COULD HARM OUR BUSINESS.**

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

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

Asof June 30, 2007, we had 21,186,747 outstanding shares of common stock, ofwhich approximately 9,700,000 shares were restricted securities held by Astoriaand other holders. Restricted securities may be sold in the public market onlyif they are registered or if they qualify for an exemption from registrationpromulgated under the Securities Act.  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 otherholders decide to exercise their demand registration rights, we would incurcosts and expenses associated 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.

**OURGLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITHCONDUCTING 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% of our revenuefor the three months ended June 30, 2007, was generated from our internationaloffices. We face several risks inherent in conducting business internationally,including but not limited 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 accounts receivableand longer collection periods;

·       seasonal business activities in certain partsof the world; and

·       trade policies.

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

**THE FAILURE OF OURPRODUCTS TO CONTINUE TO CONFORM TO INDUSTRY STANDARDS MAY HARM OUROPERATING RESULTS.**

A key factor in ourfuture success will continue to be the ability of our products to operate andperform well with existing and future leading, industry-standard enterprisesoftware applications intended to be used in connection with our MDMS, RAD, andXDMS products. Inter-operability may require third party licenses, which maynot be available to us on favorable terms or at all. Failure to meet existingor future inter-operability and performance requirements of industry standardapplications in a timely manner could adversely affect our business.Uncertainties relating to the timing and nature of new product announcements orintroductions or modifications of third party software applications could delayour product development, increase our product development expense or causecustomers to delay evaluation, purchase, and deployment of our products.

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

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

**ITEM 3.  CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

Our principal executiveofficer and principal financial officer evaluated the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on such evaluation, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) weredesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC rules andaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure; however, it was concluded that such controlswere ineffective, as of the end of the period covered by this report, becauseit recently came to the Company’s attention that Richard Smith, a director,failed to timely file twenty-three Form 4’s with respect to fifty-ninetransactions in the Company’s common stock from September 12, 2005 to June 15,2007. Two Form 4’s were filed on behalf of Mr. Smith on July 20, 2007disclosing all such transactions, and Mr. Smith has paid to the Company eightthousand six hundred seventy six dollars and nine cents ($8,676.09), which isthe aggregate amount of the short-swing profits for his transactions in theCompany’s common stock from September 12, 2005 to June 15, 2007.

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

**Changes in Internal Control over Financial Reporting**

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

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**PART II. OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

We are subject from timeto time to litigation, claims and suits arising in the ordinary course ofbusiness. As of June 30, 2007, we have the following outstanding legalproceedings:

1.  *Raining Data v. Intrametrics*.  On or about January 19,2007, the Company filed a complaint in Orange County Superior Court that setsforth allegations that Intrametrics threatens to and has misappropriated theCompany’s trade secrets.  The Company’s allegations in the complaintinclude that Intrametrics has obtained the Company’s source code in violationof the Parties’ OEM (Original Equipment Manufacturer) Distribution Agreementand in violation of California’s laws prohibiting the misappropriation of tradesecrets.  The Company seeks injunctive relief from Intrametrics,including, but not limited to, compelling Intrametrics to fully comply with allof the termination provisions set forth in the OEM Agreement; enjoiningIntrametrics and its employees and agents from using or disclosing the Company’strade secrets; prohibiting Intrametrics from soliciting the Company’s currentor potential customers for 3 years, and from soliciting or employing certain ofthe Company’s former employees for 3 years.  Intrametrics filed a motionto quash the Complaint, which the Company opposed, but on the morning of thehearing, Intrametrics fist notified the Company that it filed Chapter 11bankruptcy, effectively staying the litigation in Orange County SuperiorCourt.  The Company will pursue further discovery and litigation in thebankruptcy court in Houston, TX.

2.  *Raining Data v. Soheil Raissi (formerly the Company’s Vice President,Product Development and Professional Services), Mario Barrenechea (formerly theCompany’s Senior Vice President, Worldwide Sales and Marketing, Pick and OmnisProducts), and Adevnet*.  On or about December 8, 2006, theCompany filed a complaint in Orange County Superior Court that sets forthallegations that the defendants threaten to and have misappropriated theCompany’s trade secrets.  The Company’s allegations in the complaintinclude that the individual defendants have used and/or disclosed the Company’strade secrets (in the form of source code and licenses and other trade secretinformation) in violation of their agreements with the Company to maintain theconfidentiality of such trade secret information, and in violation ofCalifornia laws prohibiting the misappropriation of trade secrets. The Companyseeks injunctive relief from the defendants, including, but not limited to,compelling the defendants to immediately return all of the Company’s tradesecrets and property; enjoining the defendants and their employees and agentsfrom using or disclosing the Company’s trade secrets, including the Company’ssource code; ordering the defendants to disclose all gains and profits theyhave derived from the misappropriation of the Company’s trade secrets;enjoining the defendants from directly or indirectly supplying, selling orpromoting any product that incorporates the Company’s trade secrets.

3.  *Cross-Complaint by Soheil Raissi, Mario Barrenechea and Adevnet v.Raining Data.*  On or aboutJanuary 10, 2007, the defendants in the case above filed a cross-complaint,alleging several claims against the Company and Carlton Baab, the Company’sPresident and Chief Executive Officer, unfair business practices, violation ofcivil rights, intentional interference with prospective economic advantage,negligent interference with prospective economic advantage, malicious prosecution,abuse of process, negligence, civil conspiracy, and injunctive relief. Cross-complainants allege general, compensatory, special, and punitiveand exemplary damages in amounts “according to proof”, and seek to enjoin theCompany from engaging in improper and unlawful conduct.  The Company andCarlton Baab assert that all of the claims are baseless, and filed a specialmotion to strike all the allegations in the cross-complaint.  The Company’sspecial motion to strike is scheduled to be heard on September 14, 2007. The Company and Carlton Baab will continue to vigorously defend their rights inthis litigation.

Anunfavorable resolution of these legal proceedings could have a material adverseeffect on the Company’s business, results of operations, financial conditionand cash flows.

**ITEM 6.  EXHIBITS**
| Exhibits: | ** ** | ** **                                                                                                                                                                    |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                          |
| 31.1      |       | Certification of Chief Executive Officer.                                                                                                                                     |
| 31.2      |       | Certification of Chief Financial Officer.                                                                                                                                     |
| 32.1      |       | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
| Date:  August 14,  2007 | ** ** | **RAINING DATA CORPORATION**                        |
|-----------------------------------|------------|-----------------------------------------------------|
| ** **                        | ** ** | ** **                                          |
| * *                          |       | /s/ Thomas Lim                                      |
|                              |       | Thomas Lim                                          |
| * *                          |       | 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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