Rainmaker Systems (VCTL) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2008

COMMISSION FILE NUMBER 000-28009

RAINMAKER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0442860
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

900 East Hamilton Ave., Suite 400

Campbell, California 95008

(address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (408) 626-3800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1)  Yes  x    No  ¨

(2)  Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Non-accelerated filer	¨
Accelerated filer	x	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

As of October 31, 2008, the registrant had 20,184,579 shares of Common Stock outstanding.

RAINMAKER SYSTEMS, INC.

FORM 10-Q

AS OF SEPTEMBER 30, 2008

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Default Upon Senior Securities	42
Item 4.	Submission of Matters to a Vote of Security Holders	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

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PART I.—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	23,183		$	37,407
Restricted cash		427			157
Accounts receivable, less allowance for doubtful accounts of $521 at September 30, 2008 and $285 at December 31, 2007		12,678			20,625
Prepaid expenses and other current assets		3,593			3,622
Total current assets		39,881			61,811
Property and equipment, net		11,152			9,447
Intangible assets, net		4,525			7,049
Goodwill		15,346			14,539
Other non-current assets		2,007			2,706
Total assets	$	72,911		$	95,552
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,812		$	25,466
Accrued compensation and benefits		1,771			2,062
Other accrued liabilities		2,195			3,447
Deferred revenue		4,036			3,541
Current portion of capital lease obligations		226			—
Current portion of notes payable		2,666			1,083
Total current liabilities		22,706			35,599
Deferred tax liability		262			167
Long term deferred revenue		740			401
Capital lease obligations, less current portion		240			—
Notes payable, less current portion		667			1,333
Total liabilities		24,615			37,500
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value; 50,000,000 shares authorized, 20,525,166 shares issued and 20,355,132 shares outstanding at September 30, 2008 and 20,359,560 shares issued and 20,325,960 shares outstanding at December 31, 2007		19			19
Additional paid-in capital		118,042			116,391
Accumulated deficit		(68,385	)		(58,074	)
Accumulated other comprehensive loss		(746	)		(51	)
Treasury stock, at cost, 170,034 shares at September 30, 2008 and 33,600 shares at December 31, 2007		(634	)		(233	)
Total stockholders’ equity		48,296			58,052
Total liabilities and stockholders’ equity	$	72,911		$	95,552

See accompanying notes.

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RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net revenue	$	14,461		$	19,081		$	52,880		$	53,388
Cost of services		9,509			9,998			30,538			27,666
Gross margin		4,952			9,083			22,342			25,722
Operating expenses:
Sales and marketing		1,832			1,578			6,089			5,006
Technology and development		4,364			2,856			11,259			8,004
General and administrative		2,927			3,166			9,969			8,026
Depreciation and amortization		2,040			1,614			5,742			3,951
Total operating expenses		11,163			9,214			33,059			24,987
Operating (loss) income		(6,211	)		(131	)		(10,717	)		735
Interest and other income (expense), net		207			448			737			968
(Loss) income before income tax expense		(6,004	)		317			(9,980	)		1,703
Income tax expense		107			159			331			420
Net (loss) income	$	(6,111	)	$	158		$	(10,311	)	$	1,283
Basic (loss) income per share	$	(0.32	)	$	0.01		$	(0.53	)	$	0.08
Diluted (loss) income per share	$	(0.32	)	$	0.01		$	(0.53	)	$	0.07
Weighted average common shares:
Basic		19,394			18,849			19,362			16,976
Diluted		19,394			20,592			19,362			18,719

See accompanying notes.

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RAINMAKER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Operating activities:
Net (loss) income	$	(10,311	)	$	1,283
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization of property and equipment		3,218			1,799
Amortization of intangible assets		2,524			2,152
Stock-based compensation expense		1,609			1,200
Provision for allowances for doubtful accounts		573			259
Amortization of discount on notes receivable		180			—
Loss on disposal of fixed assets		76			—
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable		7,373			(6,099	)
Prepaid expenses and other assets		540			(823	)
Accounts payable		(13,650	)		3,205
Accrued compensation and benefits		(282	)		225
Other accrued liabilities		(1,175	)		(422	)
Deferred tax liability		17			354
Deferred revenue		833			(493	)
Net cash (used in) provided by operating activities		(8,475	)		2,640
Investing activities:
Purchases of property and equipment		(4,674	)		(2,770	)
Restricted cash, net		(270	)		62
Acquisition of business, net of cash acquired		(1,000	)		(9,092	)
Net cash used in investing activities		(5,944	)		(11,800	)
Financing activities:
Proceeds from issuance of common stock from option exercises		32			754
Proceeds from issuance of common stock from ESPP		10			46
Proceeds from issuance of common stock from warrant exercises		—			54
Net proceeds from follow-on offering of common stock		—			27,243
Principal payment of notes payable		(1,062	)		(1,125	)
Principal payment of capital lease obligations		(253	)		(2	)
Net borrowings under revolving line of credit		2,000			—
Tax payments in connection with treasury stock surrendered		(161	)		—
Purchases of treasury stock		(240	)		—
Net cash provided by financing activities		326			26,970
Effect of exchange rate changes on cash:		(131	)		(299	)
Net (decrease) increase in cash and cash equivalents		(14,224	)		17,511
Cash and cash equivalents at beginning of period		37,407			21,996
Cash and cash equivalents at end of period	$	23,183		$	39,507
Supplement disclosures of cash flow information:
Cash paid for interest	$	70		$	167
Cash paid for taxes	$	284		$	82
Supplemental non-cash investing and financing activities:
Acquisition of assets under capital lease	$	719		$	—
Issuance of notes payable for acquisition of assets	$	—		$	2,000
Issuance of common stock in business acquisitions	$	—			559

See accompanying notes.

5

RAINMAKER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

— UNAUDITED —

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries (“Rainmaker”, “we”, “our” or “the Company”). The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the results of these periods.

The results of our operations for the three and nine months ended September 30, 2008 are not necessarily indicative of results to be expected for the year ending December 31, 2008, or any other period. These condensed consolidated financial statements should be read in conjunction with Rainmaker’s financial statements and notes thereto included in Rainmaker’s Annual Report on Form 10-K for the year ended December 31, 2007 and Quarterly Reports on Form 10-Q for the periods ended March 31, 2008, and June 30, 2008. Balance sheet information as of December 31, 2007 has been derived from the audited financial statements for the year then ended.

Certain amounts reported in the accompanying financial statements for 2007 have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on previously reported results of operations, total assets or accumulated deficit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

We are a leading provider of sales and marketing solutions, combining hosted application software and execution services designed to drive more revenue for our clients. Our core services include the following: service contract sales and renewals, software license sales, subscription renewals and warranty extension sales (“service sales”); lead generation, qualification and management (“lead development”); and hosted application software for training sales (“training sales”).

We operate in one business segment as determined by revenue generated from sales and marketing solutions. We have operations within the United States of America, Canada and the Philippines where we perform services on behalf of our clients to customers who are primarily located in North America. We have contracted with third parties on behalf of our clients to perform marketing services in Europe.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the company, and other relevant facts and circumstances. Actual results could differ from those estimates. Accounting policies that include particularly significant estimates are revenue recognition and presentation policies, valuation of accounts receivable, measurement of our deferred tax asset and the corresponding valuation allowance, allocation of purchase price in business combinations, fair value estimates for the expense of employee stock options and the assessment of recoverability and measuring impairment of goodwill, intangible assets, fixed assets and commitments and contingencies.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents generally consist of money market funds and certificates of deposit. The fair market value of cash equivalents represents the quoted market prices at the balance sheet dates and approximates their carrying value.

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Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our clients’ customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At September 30, 2008 and December 31, 2007, our allowance for potentially uncollectible accounts was $521,000 and $285,000, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is recorded using the straight-line method over the assets’ estimated useful lives. Computer equipment and capitalized software are depreciated over two to five years and furniture and fixtures are depreciated over five years. Amortization of leasehold improvements is recorded using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Amortization of fixed assets under capital leases is included in depreciation expense.

Costs of internal use software are accounted for in accordance with Statement of Position 98-1 (SOP 98-1),Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and Emerging Issue Task Force Issue No. 00-02 (EITF 00-02),Accounting for Website Development Costs. SOP 98-1 and EITF 00-02 require that we expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of SOP 98-1 and EITF 00-02 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development, the payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal use computer software and associated interest costs are capitalized. Capitalized costs are amortized using the straight-line method over the shorter of the term of related client agreement, if such development relates to a specific outsource client, or the software’s estimated useful life, ranging from two to five years. Capitalized internal use software and website development costs are included in property and equipment in the accompanying balance sheets.

Goodwill and Other Intangible Assets

We apply the guidance of the Financial Accounting Standards Board (FASB) Statement No. 141,Business Combinations in accounting for the assets related to our acquisitions. Goodwill represents the excess of the acquisition purchase price over the estimated fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but instead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. In our analysis of goodwill and other intangible assets we apply the guidance of FASB Statement No. 142,Goodwill and Other Intangible Assets in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various technologies, customer relationships and trade names of the businesses we have acquired. To date, no circumstances or indicators have arisen to indicate that the carrying value has been impaired.

Long-Lived Assets

Long-lived assets including our purchased intangible assets are amortized over their estimated useful lives. In accordance with FASB No. 144,Accounting for the Impairment or Disposal of Long Lived Assets, long-lived assets, such as property, equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Revenue Recognition and Presentation

Substantially all of our revenue is generated from the sale of service contracts and maintenance renewals, lead development services and software subscriptions for hosted Internet sales of web based training. We recognize revenue from the sale of our clients’ service contracts and maintenance renewals under the provisions of Staff Accounting Bulletin (SAB) 104,Revenue Recognition and on the “net basis” in accordance with EITF Issue No. 99-19,Reporting Revenue Gross as a

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Principal versus Net as an Agent.Revenue from the sale of service contracts and maintenance renewals is recognized when a purchase order from a client’s customer is received; the service contract or maintenance agreement is delivered; the fee is fixed or determinable; the collection of the receivable is reasonably assured; and no significant post-delivery obligations remain unfulfilled. Revenue from lead development services we perform is recognized as the services are accepted and is generally earned ratably over the service contract period. Some of our lead development service revenue is earned when we achieve certain attainment levels and is recognized upon customer acceptance of the service. We earn revenue from our software application subscriptions of hosted online sales of web based training ratably over each contract period, having considered EITF 00-03:Application of AICPA SOP 97-2, Software Revenue Recognition, to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware, which distinguishes hosting services that might fall under the scope of SOP 97-2:Software Revenue Recognition. Since these software subscriptions are usually paid in advance, we have recorded a deferred revenue liability on our balance sheet that represents the prepaid portions of subscriptions that will be earned over the next one to two years.

We also evaluate our agreements for multiple element arrangements, taking into consideration the guidance from both EITF 00-21:Revenue Arrangements with Multiple Deliverables,and TPA 5100.39:Software Revenue Recognition for Multiple-Element Arrangements.Our agreements typically do not contain multiple deliverables. However, in the few instances where our agreements have contained multiple deliverables, they do not have value to our customers on a standalone basis, and therefore the deliverables are considered together as one unit of accounting. Revenue is then recorded using the proportional performance model, where revenue is recognized as performance occurs, based on the relative value of the performance that has occurred at that point in time compared to that of the total contract.

Our revenue recognition policy involves significant judgments and estimates regarding collectibility. We assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of our clients’ customers, which is based on current published credit ratings, current events and circumstances regarding the business of our clients’ customers and other factors that we believe are relevant. If we determine that collection is not reasonably assured, we defer revenue recognition until such time as collection becomes reasonably assured, which is generally upon receipt of cash payment.

In addition, we provide an allowance in accrued liabilities for the cancellation of service contracts that occurs within a specified time after the sale, which is typically less than 30 days. This amount is calculated based on historical results and constitutes a reduction of the net revenue we record for the commission we earn on the sale.

Costs of Services

Costs of services consist of costs associated with promoting and selling our clients’ products and services, including compensation costs of sales personnel, sales commissions and bonuses, costs of designing, producing and delivering marketing services, and salaries and other personnel expenses related to fee-based activities. Costs of services also include the cost of allocated facility and telephone usage for our telesales representatives as well as other direct costs associated with the delivery of our services. Most of the costs are personnel related and are relatively fixed. Bonuses and sales commissions will typically change in proportion to revenue or profitability.

Advertising

We expense advertising costs as incurred. These costs were not material and are included in sales and marketing expense.

Income Taxes

We account for income taxes using the liability method in accordance with Financial Accounting Standards Board Statement No. 109,Accounting for Income Taxes (SFAS 109). SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. At September 30, 2008 and December 31, 2007, we had gross deferred tax assets of $21.3 million and $17.9 million, respectively. In 2007 and 2008, the deferred tax asset was subject to a 100% valuation allowance and therefore is not recorded on our balance sheet as an asset. Realization of our deferred tax assets is limited and we may not be able to fully utilize these deferred tax assets to reduce our tax rates.

8

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, (SFAS 123(R)) which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions.

The Company adopted SFAS 123(R) using the modified-prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Consolidated Financial Statements as of and for the years ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R). In accordance with the modified-prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Consolidated Statements of Operations, other than option grants to employees and directors below the fair market value of the underlying stock at the date of grant. See Note 9 for further discussion of this statement and its effects on the financial statements presented herein.

Concentrations of Credit Risk and Credit Evaluations

Our financial instruments that expose us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable.

We place our cash and cash equivalents in a variety of financial institutions and limit the amount of credit exposure through diversification and by investing the funds in money market accounts and certificates of deposit which are insured by the FDIC. At times, the balance of cash deposits is in excess of the FDIC insurance limits.

We sell our clients’ products and services primarily to business end users and, in most transactions, assume full credit risk on the sale. Credit is extended based on an evaluation of the financial condition of our client’s customer, and collateral is generally not required. Credit losses have traditionally been immaterial, and such losses have been within management’s expectations.

We have generated a significant portion of our revenue from sales to customers of a limited number of clients. In the three months ended September 30, 2008, one client, Hewlett-Packard, accounted for more than 10% of our net revenue and represented approximately 22% of our net revenue. In the nine months ended September 30, 2008, two clients accounted for more than 10% of our net revenue with Hewlett-Packard representing approximately 20% and Dell representing approximately 11% of our net revenue. In February 2008, we received written notification from Dell, our largest customer, that they would be terminating our service agreement. Under Dell’s transition plan set forth in the notice, Dell moved approximately half of the services being provided by us under the agreement internally effective February 4, 2008, and moved the remainder over the subsequent three months. We are not performing any services for Dell subsequent to May 2, 2008. In the three and nine months ended September 30, 2007, Dell accounted for 28% and 31%, respectively, of our net revenue and Hewlett-Packard represented 14% and 13% of our net revenue in the respective periods.

No individual client’s end-user customer accounted for 10% or more of our revenues in any period presented.

We have outsourced services agreements with our clients that expire at various dates ranging through August 2011. Many of our client agreements contain automatic renewal clauses. These clients may, however, terminate their contracts for cause or convenience in accordance with the provisions of each contract. In most cases, a client must provide us with advance written notice of its intention to terminate. Any loss of a single significant client may have a material adverse effect on the Company’s consolidated financial position, cash flows and results of operations.

Fair Value of Financial Instruments

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.

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The fair value of short-term and long-term capital lease and debt obligations is estimated based on current interest rates available to us for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations, as of each period presented, approximate their respective fair values.

Segment Reporting

We report segment results in accordance with SFAS No. 131,Segment Reporting (SFAS 131). The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by detailed information listing revenues by customer, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company has concluded that we have one reportable segment. We have call centers within the United States of America, Canada and the Philippines where we perform services on behalf of our clients to customers who are almost entirely located in North America.

The following is a breakdown of net revenue by product line for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Contract sales	$	5,230	$	8,773	$	21,157	$	25,070
Lead development		8,151		9,326		28,451		25,365
Training sales		1,080		982		3,272		2,953
Total	$	14,461	$	19,081	$	52,880	$	53,388

Foreign revenues are attributed to the country of the business entity that executed the contract. The Company utilizes our call centers in the United States, Canada and the Philippines to fulfill these contracts. Property and equipment information is based on the physical location of the assets and goodwill and intangible information is based on the country of the business entity to which these are allocated. The following is a geographic breakdown of net revenue for the three and nine months ended September 30, 2008 and 2007 and net long-lived assets as of September 30, 2008 and December 31, 2007 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
Net Revenue	2008		2007		2008		2007
United States	$	12,711	$	17,271	$	46,240	$	51,577
Cayman Islands		1,311		1,390		5,129		1,391
Philippines		439		420		1,511		420
Total	$	14,461	$	19,081	$	52,880	$	53,388

	September 30, 2008		December 31, 2007
Property & Equipment, net
United States	$	6,892	$	5,893
Philippines		4,014		3,343
Canada		246		211
Total	$	11,152	$	9,447

	September 30, 2008		December 31, 2007
Goodwill
United States	$	8,734	$	7,734
Philippines		5,504		5,633
Canada		1,108		1,172
Total	$	15,346	$	14,539

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	September 30, 2008		December 31, 2007
Intangible Assets, net
United States	$	2,570	$	4,264
Cayman Islands		1,955		2,785
Total	$	4,525	$	7,049

Foreign Currency Translation

During January 2007, we established a Canadian foreign subsidiary and subsequently purchased the Canadian based assets of CAS Systems. Additionally, in July 2007, we purchased Qinteraction Limited and its Philippine-based subsidiary. The functional currency of our Canadian and Philippine subsidiaries was determined to be their respective local currencies (Canadian Dollar and Philippine Peso), in accordance with FAS 52,Foreign Currency Translation. Foreign currency assets and liabilities are translated at the current exchange rates at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates in effect during the year. The related unrealized gains and losses from foreign currency translation are recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity in the consolidated balance sheets and consolidated statements of stockholders’ equity and comprehensive income (loss). Net gains and losses resulting from foreign exchange transactions are included in Interest and other income (expense), net in the consolidated statements of operations.

Related Party Transactions

We have made purchases of computer equipment and services from several vendors including Dell and Hewlett-Packard, our two largest clients for the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008, we purchased equipment from Dell totaling $2,000 and $99,000, respectively, and from Hewlett-Packard totaling $115,000 and $175,000, respectively. For the three and nine months ended September 30, 2007, we purchased equipment from Dell totaling $151,000 and $262,000, respectively, and Hewlett-Packard totaling $0 and $22,000, respectively.

The Chairman of our board of directors also serves on the board of Saama Technologies, a technology services firm. During the three and nine months ended September 30, 2008, we paid Saama Technologies $139,000 and $206,000, respectively, for technology services. During the three and nine months ended September 30, 2007, we paid Saama Technologies $35,000 and $242,000, respectively. We may continue to utilize their services and may expand the scope of Saama Technologies’ engagement in the future.

In October 2007, we closed an OEM licensing agreement with Market2Lead, Inc. (“Market2Lead”), a software-as-a-service provider of business-to-business automated marketing solutions, to further enhance LeadWorks, Rainmaker’s on-demand marketing automation application. In connection with this agreement, Rainmaker provided Market2Lead with growth financing of $2.5 million in secured convertible and term debt. During the three and nine months ended September 30, 2008, we paid Market2Lead approximately $19,000 and $249,000, respectively, for marketing services. During the three and nine months ended September 30, 2007, we paid Market2Lead approximately $29,000 and $50,000. We may continue to utilize their services and may expand the scope of the services that they provide to us in the future.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 replaces the different definitions of fair value in the accounting literature with a single definition. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for us for financial instruments beginning in January 2008 and non-financial instruments beginning in January 2009. The adoption of SFAS 157 for financial instruments in the first quarter of 2008 did not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,the Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 gives entities the option to measure eligible financial assets and liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in the fair value must be recorded in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. SFAS 159 was effective as of the beginning of our 2008 fiscal year and had no impact on our results of operations and financial position.

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In December 2007, the FASB issued SFAS No. 141R,Business Combinations (“SFAS 141R”). SFAS 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction at fair value as of the acquisition date. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are required to adopt SFAS 141R in the first quarter of 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial Statements(“SFAS 160”), an amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as equity in our Consolidated Financial Statements. Among other requirements, this statement requires that the consolidated net income attributable the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period beginning on or after December 15, 2008. We are required to adopt SFAS 160 in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our Consolidated Financial Statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States (“US GAAP”). This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company is currently evaluating the effect that the adoption of SFAS 162 will have on its consolidated financial statements. However, the adoption of SFAS 162 is not expected to have an impact on the Company’s consolidated financial statements.

3. NET (LOSS) INCOME PER SHARE

Basic net (loss) income per common share is computed using the weighted-average number of shares of common stock outstanding during the year which excludes approximately 1.0 million shares of unvested restricted share awards at September 30, 2008. Diluted earnings per common share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options and warrants, using the treasury stock method, unvested restricted share awards, and convertible securities, using the if converted method, as of the beginning of the period presented or the original issuance date, if later.

The following table presents the calculation of basic and diluted net (loss) income per common share (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net (loss) income	$	(6,111	)	$	158		$	(10,311	)	$	1,283
Weighted-average shares of common stock outstanding – basic		19,394			18,849			19,362			16,976
Plus: Outstanding dilutive options and warrants outstanding		—			2,863			—			2,893
Less: weighted-average shares subject to repurchase		—			(1,120	)		—			(1,150	)
Weighted-average shares used to compute diluted net (loss) income per share		19,394			20,592			19,362			18,719
Basic net (loss) income per share	$	(0.32	)	$	0.01		$	(0.53	)	$	0.08
Diluted net (loss) income per share	$	(0.32	)	$	0.01		$	(0.53	)	$	0.07

In the three and nine months ended September 30, 2008, the Company excluded certain unvested restricted share awards, options and warrants from the calculation of diluted earnings per share because these securities were anti-dilutive. For the three and nine months ended September 30, 2008, the Company excluded the dilutive effect of all 3.8 million unvested restricted share awards, outstanding stock options and warrants because these securities were anti-dilutive.

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4. ACQUISITIONS

Qinteraction Limited

On July 19, 2007, we entered into and closed a Stock Purchase Agreement (the “Purchase Agreement”) with the shareholders of Qinteraction Limited (“Qinteraction”), a Cayman Islands company, and James F. Bere, Jr. as representative of the shareholders. Qinteraction operated an offshore call center located in Manila, Philippines that provides a variety of business solutions including inbound sales and order-taking, inbound customer care, outbound telemarketing and lead generation, logistics support, and back-office processing. Additionally, Qinteraction is an established provider of business solutions that help businesses grow their revenue and has clients that range from start-up companies to Fortune 500 companies in logistics, telecommunications, technology and manufacturing. The acquisition provided the Company entry into an important geographic area and the opportunity to leverage a lower cost structure to further expand our business internationally. The results of Qinteraction’s operations have been included in our consolidated financial statements since the acquisition date. Under the terms of the Purchase Agreement, in exchange for all the outstanding shares of Qinteraction, Rainmaker paid at closing a total of $11.8 million, consisting of $7.0 million in cash and $4.8 million in Rainmaker common stock representing 559,284 shares based on the average closing stock price for the 5 days surrounding the announcement of the closing. The agreement also provided for a potential additional payment at the end of twelve months following the closing, based on the achievement of certain financial milestones for the 12-month period ending June 30, 2008, ranging from no additional payment up to a maximum of $4.5 million in cash and $3.5 million in Rainmaker common stock, subject to potential offset and post-closing conditions. Based upon the financial milestone measurement, the Company believes that no contingent payment has been earned. Accordingly, no additional purchase price has been recorded.

Our acquisition of Qinteraction has been accounted for as a business combination. Assets acquired and liabilities assumed from Qinteraction were recorded at their estimated fair values as of July 19, 2007. The total purchase price was approximately $12.5 million as follows:

Issuance of 559,284 shares of Rainmaker common stock	$	4,817
Cash payment for acquisition of Qinteraction		7,000
Acquisition related transaction costs		726
Total purchase price	$	12,543

Using the purchase method of accounting, the total purchase price was allocated to Qinteraction’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill, which is not deductible for tax purposes in a stock purchase transaction. Using the estimated future discounted cash flows from the assets acquired, management performed a valuation and the total purchase price was allocated as follows (in thousands):

Cash	$	203
Identified tangible assets		4,414
Customer relationships		3,310
Goodwill		5,751
Liabilities assumed		(1,135	)
Total purchase price allocation	$	12,543

Amortization of the customer relationships intangible asset is calculated using an accelerated method that is based on the estimated future cash flows for the relationships. The estimated useful life of the customer relationships acquired is five years. We estimated the cash flows associated with the excess earnings the customers would generate and allocated the present value of those earnings to the asset. We used a discount rate of 22.0%.

On October 17, 2007, Rainmaker filed a registration statement with the Securities and Exchange Commission with respect to the shares issued to Qinteraction’s shareholders that became effective November 7, 2007. Such shares are initially subject to a contractual prohibition of sale with shares available for sale from closing as follows: 241,890 shares were initially not available for public sale for 6 months from the acquisition date and became available for public sale in January 2008, 241,891 shares were initially not available for public sale for one year from the acquisition date and became available for sale in July 2008. In addition, 75,503 of the shares of the common stock consideration have been placed in escrow to secure certain customary indemnity obligations under the Purchase Agreement. Two-thirds of the escrow was scheduled to be released after 12 months from closing and the remaining one-third was scheduled for release after 15 months from closing. The release of such shares from escrow is subject to post-closing conditions, potential adjustments and offsets. No shares have been released from escrow as of yet as the Company has filed a claim against the escrow.

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CAS Systems Asset Purchase

On January 25, 2007, we and our wholly-owned subsidiary, Rainmaker Systems (Canada) Inc., a Canadian federal corporation, simultaneously entered into and closed two Asset Purchase Agreements (the “Purchase Agreements”) with CAS Systems, Inc., a California corporation, 3079028 Nova Scotia Company, its wholly-owned Canadian subsidiary (collectively “CAS”) and Barry Hanson, as representative of the shareholders of CAS. The results of CAS’s operations have been included in our consolidated financial statements since that date. CAS increases the scale of our growing lead development operations by adding management strength, multiple locations, and an established international presence in Canada. Under the terms of the Purchase Agreements, in exchange for substantially all of the assets of CAS and its Canadian subsidiary, Rainmaker paid a total of $2 million at closing, and will pay an additional $2 million over three years plus interest at a fixed rate of 5.36% per annum. The first annual installment was paid in January 2008 and the remaining outstanding principal balance is approximately $1.3 million. The Purchase Agreements also provided for a potential additional payment of $1 million contingent on attaining certain performance metrics at the end of the 12 months following the acquisition, subject to adjustment. The performance metrics were achieved, therefore the payment of $1 million was made by the Company in January 2008 and is included as additional purchase price and an addition to goodwill in the first fiscal quarter of 2008.

Our acquisition of CAS has been accounted for as a business combination. Assets acquired and liabilities assumed from CAS were recorded at their estimated fair values as of January 25, 2007. The total purchase price (including the additional payment for the achieved performance metrics in 2008) was $5.3 million as follows (in thousands):

Cash payment for acquisition of CAS	$	2,000
Additional payment for performance metrics achieved		1,000
Notes Payable for acquisition of CAS		2,000
Acquisition related transaction costs		297
Total purchase price	$	5,297

Using the purchase method of accounting, the total purchase price was allocated to CAS’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill, which will be amortized over 15 years for tax purposes. Using the estimated future discounted cash flows from the assets acquired, management performed a valuation and the total purchase price was allocated as follows (in thousands):

Cash	$	490
Identified tangible assets		1,387
Developed technology		100
Customer relationships		1,100
Goodwill		2,710
Liabilities assumed		(320	)
Deferred revenue assumed (1)		(170	)
Total purchase price allocation	$	5,297

(1) In accordance with EITF 01-03, “Accounting in a Business Combination of Deferred Revenue of an Acquiree”, we have reduced the carrying value of the deferred revenue by 13.6%, which represents the reduction from carrying value to fair value for the legal performance obligation assumed from CAS.

Amortization of the intangible assets is calculated using an accelerated method for customer relationships that is based on the estimated future cash flows for the relationship, and the straight-line method for the developed technology. The estimated useful life of the amortizable intangible assets acquired is four years for customer relationships and two years for the developed technology. For developed technology and customer relations, we estimated the cash flows associated with the excess earnings the technology and contacts would generate and allocated the present value of those earnings to the asset. We used a discount rate of 23.5%.

The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the purchases of assets from CAS Systems and shares of Qinteraction Limited had occurred at the beginning of the

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period ended September 30, 2007 and assumes the amortization of intangible assets, the effect of compensation expense for the restricted stock awards granted to employees of the acquired companies, the reduction of revenue for the estimated fair value of the legal performance obligation in accordance with the guidance of EITF 01-03, and the tax effect of the aforementioned adjustments (in thousands, except per share amounts):

	Three months ended September 30, 2007		Nine months ended September 30, 2007
	(Unaudited)		(Unaudited)
Pro forma net revenue	$	19,496	$	58,554
Pro forma net income	$	112	$	660
Pro forma – basic net income per share	$	0.01	$	0.04
Pro forma – diluted net income per share	$	0.01	$	0.03
Pro forma weighted average shares outstanding – basic		19,001		17,395
Pro forma weighted average shares outstanding – diluted		20,782		19,201

5. PROPERTY AND EQUIPMENT

	Estimated Useful Life	September 30, 2008			December 31, 2007
Property and equipment:
Computer equipment	3 years	$	8,779		$	6,223
Capitalized software and development	2-5 years		14,616			12,685
Furniture and fixtures	5 years		1,069			1,833
Leasehold improvements	Lease term		1,447			1,085
			25,911			21 826
Accumulated depreciation and amortization			(16,016	)		(12,988	)
Construction in process (1)			1,257			609
Property and equipment, net		$	11,152		$	9,447

(1) Construction in process at September 30, 2008, consists primarily of costs incurred to develop our new phone system. At this time, we estimate costs to complete this project will be in the range of $100,000, subject to potential future revisions.

6. INTANGIBLE ASSETS

	Estimated Useful Life	September 30, 2008			December 31, 2007
Intangible assets:
Developed technology	3-5 years	$	1,980		$	1,980
Customer relations	2-5 years		8,270			8,270
Database	5 years		1,100			1,100
Trade name	10 years		1,100			1,100
			12,450			12,450
Accumulated amortization			(7,925	)		(5,401	)
Intangibles assets, net		$	4,525		$	7,049

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Future amortization of intangible assets at September 30, 2008 is as follows:

Remainder of 2008	$	711
Fiscal: 2009		2,121
2010		997
2011		445
2012		133
Thereafter		118
Total future amortization	$	4,525

7. LONG-TERM DEBT and CAPITAL LEASE OBLIGATIONS

Long-term debt consists of the following (in thousands):

	September 30, 2008			December 31, 2007
February 2005 Term Loan	$	—		$	166
June 2005 Term Loan		—			250
Notes Payable – CAS		1,333			2,000
Revolving Credit Facility		2,000			—
		3,333			2,416
Less: Current Portion		(2,666	)		(1,083	)
Total Long-Term Debt	$	667		$	1,333

February 2005 Term Loan

In February 2005, concurrent with the closing of the acquisition of Sunset Direct, we entered into a business loan agreement and commercial security agreement with Bridge Bank. The Term Loan was to be repaid in 36 monthly installments of approximately $83,000 plus interest at a variable rate of prime per annum. The balance of the loan was paid off in February 2008 in accordance with the loan agreement.

June 2005 Term Loan

In June 2005, we entered into a business loan agreement with Bridge Bank, pursuant to which we obtained a $1.5 million term loan that was utilized to fund the implementation of the Company’s new client management system. The June 2005 Term Loan was to be repaid in 36 monthly installments of approximately $42,000 plus interest at a variable rate of prime per annum. The balance of the loan was paid off in June 2008 in accordance with the loan agreement.

Notes Payable – CAS

In connection with our acquisition of the assets of CAS and its Canadian subsidiary, Rainmaker and its Canadian subsidiary, Rainmaker Systems (Canada) Inc., issued notes payable in the amounts of $1.4 million and $600,000, respectively. The two notes are payable in three consecutive annual installments of approximately $467,000 and $200,000, respectively, each, commencing on January 25, 2008, with subsequent installments payable on the anniversary date in 2009 and 2010. The notes bear interest at a fixed rate of 5.36% per annum on the outstanding principal amount which is payable at the end of each calendar quarter. The first annual installment of these notes in the aggregate amount of $667,000 was paid in January 2008.

Revolving Credit Facility

In April 2004, we entered into a business loan agreement and a commercial security agreement with Bridge Bank. The Revolving Credit Facility originally matured in May 2005, and provided borrowing availability up to a maximum of $3.0 million through a secured revolving line of credit that included a $1.0 million letter of credit facility. In December 2005, the total available under the Revolving Credit Facility was increased to $4.0 million and the maturity was extended to December 2006. In July 2006, the maturity date of the Revolving Credit Facility was further extended to October 10, 2007 and in June 2008, the maturity date was extended to October 10, 2008. During October 2008, we executed further amendments to the Revolving Credit Facility. The amendments extend the maturity date of the Revolving Credit Facility from October 10, 2008

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to October 10, 2009 and increase the maximum amount of revolving credit available from $4,000,000 to $6,000,000, with a $1,000,000 sub-facility for standby letters of credit and a new $3,000,000 sub-facility for the purpose of purchasing new equipment until December 31, 2008. The interest rate per annum for revolving advances under the Revolving Credit Facility remains at the prime lending rate, which was 4.5% as of September 30, 2008. The interest rate per annum for advances under the equipment finance sub-facility shall be equal to the prime rate plus 0.50%, subject to a minimum interest rate of 6.00%. Bridge Bank, at its option, may increase the interest rate payable on advances under the Revolving Credit Facility by 1.25% per annum if Rainmaker does not maintain minimum deposits of $2,000,000 in demand deposit accounts and $4,000,000 in money market accounts with Bridge Bank. Advances under the equipment finance sub-facility shall be repaid in equal monthly installments commencing in January 2009 through October 2011. The amended Revolving Credit Facility is collateralized by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including not incurring a year-to-date loss exceeding by 10% the amount of loss recited in the Company’s operating plan approved by Bridge Bank and maintaining unrestricted cash of $3.0 million plus the principal amount of the indebtedness from time to time outstanding with Bridge Bank. As of September 30, 2008, the company had $2,000,000 outstanding under the Revolving Credit Facility and had one undrawn letter of credit outstanding under the Revolving Credit Facility in the aggregate face amount of $100,000.

Future debt maturities at September 30, 2008 are as follows (in thousands):

Three months ending December 31, 2008	$	—
Fiscal year ending December 31, 2009		2,666
Fiscal year ending December 31, 2010		667
Total	$	3,333

Capital Lease Obligation

In March 2008, we entered into a 3-year software licensing agreement with Microsoft GP. In accordance with the terms of the agreement, we will pay three annual installments of approximately $254,000 beginning in April 2008 for the licensing rights to use certain Microsoft software. The present value of the future lease payments is included as a liability on the balance sheet as both a current and long term lease obligation as of September 30, 2008. The effective annual interest rate on the capital lease obligation is estimated to be 6.25%.

8. COMMON STOCK

On April 25, 2007, we announced that we had closed a public offering of an aggregate of 4,165,690 shares of our common stock at a public offering price of $8.50 per share (the “Offering”). Pursuant to the Offering, 3,500,000 shares were sold by us and 665,690 shares were sold by the selling stockholders named in the prospectus supplement, generating gross proceeds to the Company, after underwriting discounts and commissions, of $28.1 million. Net proceeds to the Company from the offering were approximately $27.2 million after payment of all expenses relating to the offering. We expect to continue to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. We also used a portion of the net proceeds to acquire Qinteraction, to make debt payments related to the CAS Systems acquisition, to pay the $1 million in additional consideration in the quarter ended March 31, 2008 related to the CAS acquisition and we may use a portion of the net proceeds to acquire complementary technologies or businesses in the future when the opportunity arises.

In July 2008, the Company’s Board of Directors approved a Stock Repurchase Program (the “Program”) authorizing the repurchase of up to $3 million of its common stock. Under the Program, shares may be repurchased from time to time in open market transactions at prevailing market prices. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, and market conditions. Repurchases under the Program will be made using the Company’s available cash or borrowings. The Program will have a one-year term and may be commenced, suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice. In the three months ended September 30, 2008, we purchased 88,338 shares at a cost of approximately $240,000 or an average cost of $2.72 per share. Additionally as of September 30, 2008, approximately $2,760,000 was available for future repurchases under the Program.

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9. STOCK-BASED COMPENSATION EXPENSE

We expense stock-based compensation to the same operating expense categories that the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Stock based compensation expense included:
Cost of services	$	86	$	106	$	98	$	264
Sales and marketing		82		89		163		239
Technology		19		61		186		145
General and administrative		398		231		1,162		552
	$	585	$	487	$	1,609	$	1,200

At September 30, 2008, approximately $6.4 million of stock-based compensation relating to unvested awards had not been amortized and will be expensed in future periods through 2012. Under current grants that are unvested and outstanding, approximately $613,000 will be expensed in the remainder of 2008 as stock-based compensation subject to true-up adjustments for forfeitures and vestings during the year.

We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for the risk-free interest rate on a monthly basis and volatility on a quarterly basis and apply these to the new grants each quarter that option grants are awarded. Annually, we prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants and possible ranges of estimated forfeiture. During the nine months ended September 30, 2008 and 2007, the weighted average valuation assumptions for stock option awards were as follows:

	Nine Months Ended September 30,
	2008		2007
Expected life in years	5.15		4.32
Volatility	86.2	%	73.2	%
Risk-free interest rate	2.8	%	4.7	%
Forfeiture Rate:
Four year vesting schedule	21.07	%	5.9	%
One to two year vesting schedule	—		6.1	%

Expected life of our option grants is estimated based on our analysis of our actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We do not expect to pay dividends in the near term and therefore do not incorporate the dividend yield as part of our assumptions. Stock-based compensation expense is adjusted periodically for actual vestings and forfeitures that occur during the period.

In the quarter ended June 30, 2008, our stockholders approved a one-time increase of 950,000 shares in the number of shares available for grant under our 2003 Stock Incentive Plan. Additionally, we filed a registration statement on March 12, 2008 for an additional 600,000 shares representing the annual automatic share increase provision of this plan. Options granted are issued from the 2003 Stock Incentive Plan and any issuances will reduce the shares available for grant as indicated in the table below. Options cancelled are returned to the 2003 Stock Incentive Plan and are available for future grant. Options cancelled from any of the Company’s previous plans are not returned to the 2003 Stock Incentive Plan and are not available for future grant. During the nine months ended September 30, 2008, 363 shares granted under the Company’s previous plans were cancelled. A summary of activity under our Stock Incentive Plans for the nine months ended September 30, 2008, is as follows:

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			Options Outstanding
	Available for Grant		Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2007	131,981		1,377,248		$	5.03
Authorized	1,550,000		—			—
Options granted	(526,500	)	526,500			3.19
Restricted stock awards granted	(320,000	)	—			—
Options exercised	—		(18,665	)		1.70
Options cancelled	181,596		(181,959	)		5.67
Restricted stock awards forfeited	175,938		—			—
Balance at September 30, 2008	1,193,015		1,703,124		$	4.43

The following table summarizes the activity with regard to restricted stock awards during the nine months ended September 30, 2008. Restricted stock awards are issued from the 2003 Stock Incentive Plan and any issuances will reduce the shares available for grant as indicated in the previous table. Restricted stock awards forfeited are returned to the 2003 Stock Incentive Plan and are available for future grant. We calculate the value of our restricted stock awards when they are granted and they are valued at the closing market price on the date of the grant. Additionally, we apply an expected forfeiture rate to the grants when we are calculating our stock-based compensation expense and we evaluate the historical activity of our restricted stock awards annually to determine the possible ranges of expected forfeitures. The weighted average forfeiture rate used during the 9 months ended September 30, 2008 was 9.68%.

	Number of Shares		Weighted Average Grant Price
Balance at December 31, 2007	1,023,282		$	7.08
Granted	320,000			3.45
Vested	(164,530	)		7.16
Forfeited	(175,938	)		7.33
Balance of non-vested restricted stock awards at September 30, 2008	1,002,814		$	5.87

The total fair value of the non-vested restricted stock awards at grant date was $5.9 million as of September 30, 2008.

The following table summarizes information about stock options outstanding as of September 30, 2008:

	Options Outstanding						Options Vested
Range of Exercise Prices	Number Outstanding	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value Closing Price at 9/30/08 of $2.25		Number Exercisable	Weighted Average Exercise Price		Aggregate Intrinsic Value Closing Price at 9/30/08 of $2.25
$ 1.10 - $ 1.35	103,875	1.82	$	1.15	$	114,266	103,875	$	1.15	$	114,266
$ 1.36 - $ 2.29	90,400	4.02		1.57		61,840	90,400		1.57		61,840
$ 2.30 - $ 2.55	133,844	6.35		2.51		—	133,844		2.51		—
$ 2.56 - $ 2.80	291,395	7.40		2.58		—	254,395		2.57		—
$ 2.81 - $ 3.90	461,741	9.12		3.15		—	105,457		3.02		—
$ 3.91 - $ 7.70	364,835	7.78		6.55		—	199,519		6.42		—
$ 7.71 - $13.28	254,234	6.39		9.06		—	196,282		9.03		—
$13.29 - $20.32	2,800	3.03		18.45		—	2,800		18.45		—
$ 1.10 - $20.32	1,703,124	7.19	$	4.43	$	176,106	1,086,572	$	4.30	$	176,106

The aggregate intrinsic value in the preceding table represents the total intrinsic value based on our closing stock price of $2.25 as of September 30, 2008, which would have been received by the option holders had all option holders exercised their in-the-money options as of that date.

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10. OTHER COMPREHENSIVE INCOME (LOSS)

With the establishment of our Canadian foreign subsidiary and the subsequent purchase of Canadian based assets from CAS on January 25, 2007, we accordingly recorded a foreign currency translation adjustment within other comprehensive income during the three and nine months ended September 30, 2008 and 2007, since the functional currency of this foreign location was determined to be the Canadian dollar. Additionally, on July 19, 2007, we purchased Qinteraction Limited and its Philippine-based subsidiary. The functional currency of the Philippine-based subsidiary is the Philippine peso and we have recorded a foreign currency translation adjustment within other comprehensive income (loss) during the three and nine months ended September 30, 2008. The components of comprehensive income (loss) were as follows for the periods presented (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Net income (loss)	$	(6,111	)	$	158	$	(10,311	)	$	1,283
Foreign currency translation adjustments		(580	)		64		(695	)		(65	)
Comprehensive income (loss)	$	(6,691	)	$	222	$	(11,006	)	$	1,218

The components of the balance sheet caption accumulated other comprehensive loss are as follows (in thousands):

	September 30, 2008			December 31, 2007
Foreign currency translation adjustments	$	(746	)	$	(51	)

11. SUBSEQUENT EVENTS

Under SFAS No. 142,Goodwill and Other Intangible Assets,Companies are allowed to change the date of the annual goodwill impairment test date. Such a change can be made if doing so better aligns with the Company’s annual planning and budgeting process. In the fourth fiscal quarter, the Company decided to change the annual impairment evaluation date from January 31 to October 31. The Company believes performing the goodwill impairment test in the fourth quarter better aligns with its planning and budgeting process.

In October 2007, we closed an OEM licensing agreement with Market2Lead, Inc. (“Market2Lead”). In connection with this agreement, Rainmaker provided Market2Lead with growth financing of $2.5 million in secured convertible and term debt. The debt was structured as a $1,250,000 Senior Secured Convertible Promissory Note and a $1,250,000 Senior Secured Promissory Note. In accordance with the Senior Secured Convertible Promissory Note, the $1,250,000 note receivable plus accrued interest converted to equity in Market2Lead automatically on October 1, 2008. As a result, the Company received approximately 619,000 shares of Series A Preferred Stock of Market2Lead.

As mentioned in Note 7 above, during October 2008 we executed amendments to the Company’s Revolving Credit Facility. The amendments extend the maturity date of the Revolving Credit Facility from October 10, 2008 to October 10, 2009 and increase the maximum amount of revolving credit available from $4,000,000 to $6,000,000, with a $1,000,000 sub-facility for standby letters of credit and a new $3,000,000 sub-facility for the purpose of purchasing new equipment until December 31, 2008. The interest rate per annum for revolving advances under the Revolving Credit Facility remains at the prime lending rate, which was 4.5% as of September 30, 2008. The interest rate per annum for advances under the equipment finance sub-facility shall be equal to the prime rate plus 0.50%, subject to a minimum interest rate of 6.00%. Bridge Bank, at its option, may increase the interest rate payable on advances under the Revolving Credit Facility by 1.25% per annum if Rainmaker does not maintain minimum deposits of $2,000,000 in demand deposit accounts and $4,000,000 in money market accounts with Bridge Bank. Advances under the equipment finance sub-facility shall be repaid in equal monthly installments commencing in January 2009 through October 2011.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors”, that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements.

Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are general market conditions, unfavorable economic conditions, our ability to integrate acquisitions and expand our call center without disruption to our business, our ability to execute our business strategy, the effectiveness of our sales team and approach, our ability to target, analyze and forecast the revenue to be derived from a client and the costs associated with providing services to that client, the date during the course of a calendar year that a new client is acquired, the length of the integration cycle for new clients and the timing of revenues and costs associated therewith, our client concentration given that the Company is currently dependent on a few large client relationships, potential competition in the marketplace, the ability to retain and attract employees, market acceptance of our service programs and pricing options, our ability to maintain our existing technology platform and to deploy new technology, our ability to sign new clients and control expenses, the possibility of the discontinuation or realignment of some client relationships, the financial condition of our clients’ business, our ability to raise additional equity or debt financing and other factors detailed in Part II Item 1A – “Risk Factors” of this Form 10-Q.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We assume no obligation to update such forward-looking statements publicly for any reason even if new information becomes available in the future.

Overview

We are a leading provider of sales and marketing solutions, combining hosted application software and execution services designed to drive more revenue for our clients. We have three primary product lines as follows: contract sales, lead development and training sales. We have developed an integrated solution, the Rainmaker Revenue Delivery Platform^SM, that combines proprietary, on-demand application software and advanced analytics with specialized sales and marketing execution services, which can include marketing strategy development, websites, e-commerce portal creation and hosting, both inbound and outbound e-mail, chat, direct mail and telesales services.

We use the Rainmaker Revenue Delivery Platform to drive more revenue for our clients in a variety of ways to:

• provide a hosted technology portal for our clients and their resellers to assist in selling renewals;

• sell, on behalf of our clients, the renewal of service contracts, software licenses and subscriptions, and warranties;

• generate, qualify and develop corporate leads, turning these prospects into qualified appointments for our clients’ field sales forces or leads for their channel partners; and

• provide a hosted application software platform that enables our clients to more effectively generate additional revenue from sales of Internet-based and in-person training.

We operate as an extension of our clients, in that all of our interactions with our clients’ customers, utilizing our multi-channel communications platform, incorporate our clients’ brands and trademarks, complementing and enhancing our clients’ sales and marketing efforts. Thus, our clients entrust us with some of their most valuable assets—their brand and reputation. In the course of delivering these services, we utilize our proprietary databases to access the appropriate technology buyers and key decision makers.

We currently have over 80 clients, primarily in the computer hardware and software, telecommunications and financial services industries.

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We have acquired several businesses that have expanded our client base and geographic presence to include international operations in Canada and the Philippines and enhanced the functionality of our Revenue Delivery Platform. These acquisitions have extended our technology capabilities and added new services which we offer across our expanding client base.

In February 2008, we received written notification from our largest client, Dell, that they would be terminating our service agreement. Under Dell’s transition plan set forth in the notice, Dell moved approximately half of the services provided by us under the agreement internally effective February 4, 2008, and moved the remainder over the subsequent three months. We have not performed any services for Dell subsequent to May 2, 2008. Dell represented approximately 29% of our net revenue for the 2007 fiscal year and approximately 38% of our net revenue in 2006. For the nine months ended September 30, 2008, Dell represented approximately 11% of our net revenue.

Critical Accounting Policies/Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, asset impairments, income taxes, stock-based compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management has discussed the development of our critical accounting policies with the audit committee of the board of directors and they have reviewed the disclosures of such policies and management’s estimates in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On January 1, 2007 we adopted Financial Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Financial Accounting Standards Statement No. 109, “Accounting for Income Taxes.” Accordingly, we have disclosed that our policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. Penalties, interest paid and interest received are recorded in interest and other income (expense), net, in the statement of operations. Interest and penalties are immaterial at the date of adoption of FIN 48. The adoption of FIN 48 did not have a material impact on our financial statements at January 1, 2007.

With the establishment of our Canadian foreign subsidiary and the subsequent purchase of Canadian based assets from CAS Systems on January 25, 2007, we adopted a policy for recording foreign currency transactions and translation in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation” (SFAS No. 52). For our Canadian subsidiary, the functional currency has been determined to be the local currency, and, therefore, assets and liabilities are translated at period-end exchange rates, and statement of operations items are translated at an average exchange rate prevailing during the period. Such translation adjustments are recorded in accumulated comprehensive income (loss), a component of stockholders’ equity. In July 2007, we acquired Qinteraction Limited and its Philippine-based subsidiary. As a result of this acquisition, we also adopted the policy mentioned above for recording foreign currency transactions and translations for this subsidiary as the functional currency has been determined to be the local currency for the Philippine-based subsidiary. Gains and losses from foreign currency denominated transactions are included in interest and other income (expense), net in the consolidated statements of operations. Gains from foreign currency denominated transactions amounted to $46,000 and $55,000 for the three and nine months ended September 30, 2008, and gains from foreign currency denominated transactions amounted to $64,000 and $106,000 for the three and nine months ended September 30, 2007.

Management believes there have been no significant changes during the three and nine months ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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Results of Operations

The following table sets forth for the periods given selected financial data as a percentage of our revenue. The table and discussion below should be read in conjunction with the financial statements and the notes thereto which appear elsewhere in this report as well as with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, and with our financial statements and notes thereto included in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2008, and June 30, 2008.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs of services	65.8		52.4		57.7		51.8
Gross margin	34.2		47.6		42.3		48.2
Operating expenses:
Sales and marketing	12.7		8.3		11.5		9.4
Technology and development	30.2		15.0		21.3		15.0
General and administrative	20.2		16.6		18.9		15.0
Depreciation and amortization	14.1		8.4		10.9		7.4
Total operating expenses	77.2		48.3		62.6		46.8
Operating (loss) income	(43.0	)	(0.7	)	(20.3	)	1.4
Interest and other income (expense), net	1.4		2.3		1.4		1.8
Income (loss) before income tax expense	(41.6	)	1.6		(18.9	)	3.2
Income tax expense	0.7		0.8		0.6		0.8
Net income (loss)	(42.3	)%	0.8	%	(19.5	)%	2.4	%

Comparison of Three Months Ended September 30, 2008 and 2007

Net Revenue. Net revenue decreased $4.6 million, or 24%, to $14.5 million in the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. Revenue from our contract sales product line was $5.2 million and decreased approximately $3.5 million as compared to the prior year as a result of a $5.4 million reduction in Dell revenue partially offset by increased revenue from other new and existing clients. Our lead development product line revenue was $8.2 million and decreased approximately $1.2 million as compared to the prior year resulting primarily from a number of customer programs that were not continued or whose term expired and were not renewed. Revenue from our training sales product line was $1.1 million and increased approximately $98,000 as compared to the prior year as a result of increased revenue from new and existing clients.

Costs of Services and Gross Margin. Costs of services decreased $489,000, or 5%, to $9.5 million in the three months ended September 30, 2008, as compared to the 2007 comparative period. The decrease is primarily attributable to reductions in telesales costs primarily from Dell and our lead development product line. Our gross margin percentage decreased to 34% from 48% in the three months ended September 30, 2008 as compared to the prior year due primarily to the termination of the Dell services agreement, which caused a shift in the mix of business from contract sales to the lower margin lead development product line, as well as absorption of fixed costs over a lower revenue base. Our lead development product line has increased to 56% of total net revenue for the quarter ended September 30, 2008, as compared to 49% of total net revenue in the 2007 comparable period.

Sales and Marketing Expenses. Sales and marketing expenses increased $254,000, or 16%, to $1.8 million in the three months ended September 30, 2008, as compared to the 2007 comparative period. The increase is primarily due to increases in personnel costs, corporate web site and other marketing initiatives. We expect sales and marketing expenses to decrease steadily as the Company has reduced costs due to the challenging macroeconomic environment which has caused a slowdown in marketing spending by our customers.

Technology and Development Expenses. Technology and development expenses increased $1.5 million, or 53%, to $4.4 million during the three months ended September 30, 2008, as compared to the 2007 comparative period. The increase is primarily attributable to increases in expenses relating to supporting initiatives for launching client programs and our

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development efforts, including an increase in project management staff and data resources. Additionally, the increase was also attributable to an investment in help desk support, and additional staffing of leadership roles and development staff in the Philippines. We expect technology and development expenses to decrease steadily during the remainder of 2008 as we reduce spending due to the challenging macroeconomic environment.

General and Administrative Expenses. General and administrative expenses decreased $239,000, or 8%, to $2.9 million during the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. The decrease was primarily due to decreases in recruiting costs and Sarbanes-Oxley related audit expenses during the quarter. The Company expects Sarbanes-Oxley related audit expenses to decrease as compared to the 2007 comparable period as we will not be required to have to have an audit of the Company’s internal controls for the 2008 fiscal year as required under Sarbanes-Oxley section 404(b) as our“non-affiliated market cap” fell below the $50 million level as of June 30, 2008 and, accordingly, we anticipate exiting the accelerated filer status as of year-end. The Company has also reduced general and administrative expenses due to the challenging macroeconomic environment.

Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $426,000, or 26%, to $2.0 million for the three months ended September 30, 2008, as compared to the 2007 period. The increase is due to increased depreciation of property and equipment as a result of our capital expenditures over the last year. Because of our acquisitions and the investments being made in our infrastructure, we expect depreciation and amortization expense to continue to increase for the foreseeable future.

Interest and Other Income (Expense), Net. The components of interest and other income (expense), net are as follows (in thousands):

	Three Months Ended September 30,						Change
	2008			2007
Interest income	$	184		$	432		$	(248	)
Interest expense		(23	)		(48	)		25
Currency translation gain		46			64			(18	)
Other		—			—			—
	$	207		$	448		$	(241	)

The decrease in interest income is attributable to the reduction in net cash balances resulting primarily from the termination of the Dell services agreement along with a decline in interest rates earned as money market rates have decreased during 2008. Interest expense has decreased due to the maturities during the 2008 fiscal year of the $3.0 million Term Loan obtained in February 2005, and the $1.5 million Term loan obtained in June 2005.

The change in the currency translation gain is primarily due to the fluctuation of currency exchange rates on a note payable to a third party denominated in United States dollars that is owed by our Canadian subsidiary in connection with our acquisition of CAS Systems. Fluctuations of currency exchange rates may have a negative effect in future periods on our financial results.

Income Tax Expense. Income tax expense decreased $52,000, or 33%, to $107,000 for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. Our income tax expense for the three month period ended September 30, 2008, primarily consists of estimates of foreign taxes and certain state minimum and franchise taxes. These estimates may change throughout the year.

Comparison of Nine Months Ended September 30, 2008 and 2007

Net Revenue. Net revenue decreased $508,000, or 1%, to $52.9 million in the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. Our lead development product line revenue was $28.5 million and increased $3.1 million over the prior year primarily resulting from the acquisition of Qinteraction in July 2007. Revenue from our contract sales product line was $21.2 million and decreased approximately $3.9 million as compared to the prior year as a result of a $10.5 million reduction in Dell revenue partially offset by increased revenue from other new and existing clients. Revenue from our training sales product line was $3.3 million and increased approximately $319,000 as compared to the prior year as a result of increased revenue from new and existing clients.

Costs of Services and Gross Margin. Costs of services increased $2.9 million, or 10%, to $30.5 million in the nine months ended September 30, 2008, as compared to the 2007 comparative period. The increase is primarily attributable to the acquisition of Qinteraction in July 2007. This increase was partially offset by decreases in commissions and bonuses of approximately $732,000, decreases in credit card fees of $569,000 due to the loss of the Dell business, and decreases in

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marketing costs of $347,000. Our gross margin percentage decreased to 42% from 48% in the nine months ended September 30, 2008 as compared to the 2007 comparative period due primarily to the termination of the Dell services agreement which caused a shift in the mix of business from contract sales to the lower margin lead development product line. Our lead development product line has increased to 54% of total net revenue for the nine months ended September 30, 2008, as compared to 48% of total net revenue in the 2007 comparable period.

Sales and Marketing Expenses. Sales and marketing expenses increased $1.1 million, or 22%, to $6.1 million in the nine months ended September 30, 2008, as compared to the 2007 comparative period. The increase is primarily due to approximately $424,000 in increased sales commission expenses, $383,000 in increased personnel costs which include salaries & benefits, severance, recruiting & relocation due to employee turnover, and $147,000 in consulting fees for corporate marketing and other marketing initiatives. We expect sales and marketing expenses to decrease steadily as the Company has reduced costs due to the challenging macroeconomic environment which has caused a slowdown in marketing spending by our customers.

Technology and Development Expenses. Technology and development expenses increased $3.3 million, or 41%, to $11.3 million during the nine months ended September 30, 2008, as compared to the 2007 comparative period. The increase is primarily attributable to increases in expenses relating to supporting client driven initiatives including an increase in project management staff and data resources. Additionally, the increase was also attributable to an investment in help desk support, and additional staffing of leadership roles and development staff in the Philippines. We expect technology and development expenses to decrease steadily during the remainder of 2008 as we reduce spending due to the challenging macroeconomic environment.

General and Administrative Expenses. General and administrative expenses increased $1.9 million, or 24%, to $10.0 million during the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. The increase was primarily due to approximately $1.2 million in increased compensation costs related to additional staff added to support the new and existing business of the Company. Included in the $1.2 million in compensation increases was approximately $600,000 related to increased stock-based compensation charges during the 2008 period. Legal fees increased approximately $333,000 and were associated with new contract activity and the termination of the Dell services agreement. The Company expects Sarbanes-Oxley related audit expenses to decrease as compared to the prior year as we will not be required to have to have an audit of the Company’s internal controls for the 2008 fiscal year as required under Sarbanes-Oxley section 404(b) as our“non-affiliated market cap” fell below the $50 million level as of June 30, 2008 and, accordingly, we anticipate exiting the accelerated filer status as of year-end. The Company has also reduced general and administrative expenses due to the challenging macroeconomic environment.

Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $1.8 million, or 45%, to $5.7 million for the nine months ended September 30, 2008, as compared to the 2007 period. The increase is primarily due to our acquisition of Qinteraction in July 2007 which accounts for approximately $1.1 million of the increase in depreciation and amortization expense in 2008. The remaining increase is due to increased depreciation of property and equipment as a result of our capital expenditures over the last year. Because of our acquisitions and the investments being made in our infrastructure, we expect depreciation and amortization expense to continue to increase for the foreseeable future.

Interest and Other Income (Expense), Net. The components of interest and other income (expense), net are as follows (in thousands):

	Nine Months Ended September 30,						Change
	2008			2007
Interest income	$	746		$	1,013		$	(267	)
Interest expense		(64	)		(153	)		89
Currency translation gain		55			106			(51	)
Other		—			2			(2	)
	$	737		$	968		$	(231	)

Interest income is attributable to the investing of our cash balances in short-term interest bearing deposit accounts. Interest rate decreases during the second half of 2007 and all of 2008 offset our higher weighted average cash balance during 2008. Interest expense is the result of the $3.0 million Term Loan obtained in February 2005 in connection with the acquisition of Sunset Direct, interest on the $1.5 million June 2005 Term Loan to fund the purchase and implementation of our new client management system and interest incurred with notes payable issued with the purchase of the assets of CAS Systems. We have paid off the Term Loan and the June 2005 Term Loan during 2008 and have made the first of three principal payments on the CAS Systems loan during 2008 resulting in reduced interest expense in the 2008 period.

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The change in currency translation gain is primarily due to the fluctuation of currency exchange rates on a note payable to a third party denominated in United States dollars that is owed by our Canadian subsidiary in connection with our acquisition of CAS Systems. Fluctuations of currency exchange rates may have a negative effect in future periods on our financial results.

Income Tax Expense. Income tax expense decreased $89,000, or 21%, to $331,000 for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. Our income tax expense for the nine month period ended September 30, 2008, primarily consists of estimates of foreign taxes and certain state minimum and franchise taxes. These estimates may change throughout the year.

Liquidity and Sources of Capital

Cash used in operating activities for the nine months ended September 30, 2008 was $8.5 million as compared to cash provided by operating activities of $2.6 million in the nine months ended September 30, 2007. Cash used in operating activities for the nine months ended September 30, 2008 was primarily the result of a net loss totaling $10.3 million, and changes in operating assets and liabilities, net of assets acquired and liabilities assumed, that used $6.3 million in cash for the year. These uses were partially offset by non-cash expenditures of depreciation and amortization of property and intangibles of $5.7 million, stock-based compensation charges of $1.6 million, the provision for allowance for doubtful accounts of $573,000, amortization of discount on notes receivable of $180,000, and loss on disposal of fixed assets of $76,000. The net loss and decrease in accounts payable was mainly due to the termination of our agreement with Dell, which in the prior period resulted in an increase in cash and corresponding increase in accounts payable, as the Company would collect from the customers of Dell and then remit to Dell 30 to 60 days later.

The two largest components of our changes in operating assets and liabilities are accounts payable and accounts receivable. When we sell a service or maintenance contract for a client, we record the sales price of the contract to the client’s customer as our receivable and also record our payable to the client for our cost of the contract, which is effectively the same amount less our compensation for obtaining the contract for our client. For this reason, our accounts payable is composed primarily of amounts due to our clients for service and maintenance contracts we sold on their behalf. Accounts payable therefore decreases in relation to our decreased sales of service contracts on behalf of our clients. However, because we report as revenue only the net difference between our account receivable from the customer of our client and our account payable to our client in accordance with EITF Issue No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, any decrease in net revenue from service contract sales results in a much larger decrease in our accounts payable, which is treated as negative cash flow from operating activities. The reduction in accounts receivable and payable in 2008 are a direct impact of the termination of the Dell services agreement, which are the main reasons for the decrease in operating cash.

Accounts receivable decreased at September 30, 2008 as compared to September 30, 2007 as a result of the termination of the Dell contract. Our days sales outstanding, or DSO, increased to 38 days at September 30, 2008 as compared to 34 days at September 30, 2007. Since we record the gross billing to the end customer of our clients in our accounts receivable, we calculate DSO based on our ability to collect those gross billings from the end customers. We expect DSO to increase in the future due to the loss of the Dell business and as lead development becomes a higher percentage of our net revenues since these contracts have longer payment terms.

Cash provided by operating activities in the nine months ended September 30, 2007 was primarily the result of net income totaling $1.3 million, non-cash expenditures of depreciation and amortization of property and intangibles of $4.0 million, stock-based compensation charges of $1.2 million, the provision for allowance for doubtful accounts of $259,000, and changes in operating assets and liabilities, net of assets acquired and liabilities assumed, that used $4.1 million.

Cash used in investing activities was $5.9 million and $11.8 million in the nine months ended September 30, 2008 and 2007, respectively. The decrease in cash used in investing activities was primarily due to the acquisition of Qinteraction that used approximately $9.1 million in the nine months ended September 30, 2007. The purchase agreement for our acquisition of CAS Systems provided for a potential additional payment of $1 million contingent on attaining certain performance metrics at the end of the 12 months following the acquisition. The performance metrics were achieved and the payment of $1 million was made by the Company in January 2008. Purchases of property and equipment were $4.7 million in the nine months ended September 30, 2008 as compared to $2.8 million in the prior year comparable period. Restricted cash represents the reserve for the refund due for non-service payments inadvertently paid to the Company by our clients’ customers instead of paid directly to the Company’s clients. At the time of cash receipt, the Company records a current liability for the amount of non-service payments received. The decrease in restricted cash represents the reduction of our balance of refunds due to customers.

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Cash provided by financing activities was $326,000 in the nine months ended September 30, 2008 as compared to cash provided of $27.0 million in the 2007 period. Cash provided by financing activities for the nine months ended September 30, 2008 was primarily a result of borrowings under the Company’s revolving line of credit of $2.0 million, which was partially offset by principal payments of $1.1 million on our term loans and CAS notes, purchases of treasury stock under the Company’s publicly announced share repurchase plan of $240,000, purchases of $161,000 of treasury stock from employees and directors for shares withheld for income taxes payable on restricted stock awards vested, and principal payments on our capital lease obligations of $253,000. Additionally, we received approximately $32,000 from the exercise of stock options during the period and $10,000 from the purchase of shares in our ESPP. In the 2007 period, we had net proceeds from a follow-on offering of our common stock of $27.2 million. Additionally, we received approximately $808,000 from the exercise of stock options and warrants and $46,000 from the purchase of shares in our ESPP. These funds received were partially offset by $1.1 million in principal payments on our term loans.

In connection with our acquisitions of CAS Systems in January 2007 and Qinteraction Limited in July 2007, the purchase agreements provided for a potential additional payment at the end of twelve months following each acquisition, based on the achievement of certain financial milestones specific to each individual acquisition. In January 2008, the Company paid $1 million relating to the CAS Systems acquisition. Based upon Qinteraction not meeting the financial milestones subsequent to the acquisition as specified in the purchase agreement, the Company believes that no additional payment is owed for the Qinteraction Limited acquisition.

Our principal source of liquidity as of September 30, 2008 consisted of $23.2 million of cash and cash equivalents and available borrowings under the Company’s revolving line of credit of approximately $1.9 million. We anticipate that our existing capital resources and cash flow expected to be generated from future operations will enable us to maintain our current level of operations, our planned operations and our planned capital expenditures for at least the next twelve months. Our longer term liquidity is dependent upon our ability to generate positive cash flow from operations and /or obtain additional equity or debt financing. Any additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and interest expenses that will affect our financial results. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay or reduce the scope of our operations.

In February 2008, we received written notification from Dell that they would be terminating our service agreement. Under Dell’s transition plan set forth in the notice, Dell moved approximately half of the services provided by us under the agreement internally effective February 4, 2008, and moved the remainder over the subsequent three months. We have not performed any services for Dell subsequent to May 2, 2008. Dell represented approximately 29% of our net revenue for the 2007 fiscal year and approximately 38% of our net revenue in 2006. For the nine months ended September 30, 2008, Dell represented approximately 11% of our net revenue.

In July 2008, the Company’s Board of Directors approved a Stock Repurchase Program (the “Program”) authorizing the repurchase of up to $3 million of its common stock. Under the Program, shares may be repurchased from time to time in open market transactions at prevailing market prices. The timing and actual number of shares repurchased will depend on a variety of factors, such as price, corporate and regulatory requirements, and market conditions. Repurchases under the Program will be made using the Company’s available cash or borrowings. The Program will have a one-year term and may be commenced, suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice. In the three months ended September 30, 2008, we repurchased approximately 88,000 shares at a cost of approximately $240,000 or an average cost of $2.72 per share. Subsequent to September 30, 2008 through the date of this report, the Company has repurchased 135,240 shares at a cost of approximately $220,000 or an average cost of approximately $1.63 per share.

Credit Arrangements

During October 2008, we executed further amendments to the Revolving Credit Facility. The amendments extend the maturity date of the Revolving Credit Facility from October 10, 2008 to October 10, 2009 and increase the maximum amount of revolving credit available from $4,000,000 to $6,000,000, with a $1,000,000 sub-facility for standby letters of credit and a new $3,000,000 sub-facility for the purpose of purchasing new equipment until December 31, 2008. The interest rate per annum for revolving advances under the Revolving Credit Facility remains at the prime lending rate, which was 4.5% as of September 30, 2008. The interest rate per annum for advances under the equipment finance sub-facility shall be equal to the prime rate plus 0.50%, subject to a minimum interest rate of 6.00%. Bridge Bank, at its option, may increase the interest rate payable on advances under the Revolving Credit Facility by 1.25% per annum if Rainmaker does not maintain minimum deposits of $2,000,000 in demand deposit accounts and $4,000,000 in money market accounts with Bridge Bank. Advances under the equipment finance sub-facility shall be repaid in equal monthly installments commencing in January 2009 through October 2011. The amended Revolving Credit Facility is collateralized by substantially all of Rainmaker’s

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consolidated assets. Rainmaker must comply with certain financial covenants, including not incurring a year-to-date loss exceeding by 10% the amount of loss recited in the Company’s operating plan approved by Bridge Bank and maintaining unrestricted cash of $3.0 million plus the principal amount of the indebtedness from time to time outstanding with Bridge Bank. As of September 30, 2008, the company had $2,000,000 outstanding under the Revolving Credit Facility and had one undrawn letter of credit outstanding under the Revolving Credit Facility in the aggregate face amount of $100,000. We originally entered into this Revolving Credit Facility with our lender in April 2004.

In July 2005, we issued an irrevocable standby letter of credit in the amount of $100,000 to our landlord for a security deposit for our new corporate headquarters located in Campbell, California. In 2004, we issued an irrevocable standby letter of credit to one of our clients. The letter of credit was issued in the amount of $325,000 as a guarantee for service contracts sold by us on behalf of our client and expired in September 2007. The letters of credit were issued under the Revolving Credit Facility described above. As of September 30, 2008, no amounts have been drawn against the letters of credit.

In June 2005, we entered into a business loan agreement with Bridge Bank, pursuant to which we obtained a $1.5 million term loan, or the June 2005 Term Loan, that was utilized to fund the purchase and implementation of our new client management system. The June 2005 Term Loan was to be repaid in 36 monthly installments of $42,000 plus interest at a variable rate of prime per annum. This loan matured and was paid off in June 2008.

Concurrently with the closing of the merger transaction with Sunset Direct in February 2005, we entered into a Business Loan Agreement and Commercial Security Agreement with Bridge Bank, and obtained a $3.0 million term loan, or the Term Loan, that we used to retire certain indebtedness and certain other liabilities of Sunset Direct. The Term Loan was repayable in 36 monthly installments of $83,000 plus interest at a variable rate of prime per annum. This loan matured and was paid off in February 2008.

The Revolving Credit Facility is secured by substantially all of our consolidated assets, including intellectual property. We are subject to certain financial covenants related to this credit facility. We are obligated to maintain a specified minimum net income and minimum debt service coverage ratio. The Revolving Credit Facility contains customary covenants that will, subject to limited exceptions, limit our ability to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Revolving Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, payment defaults of other indebtedness, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Revolving Credit Facility. At September 30, 2008, we were in compliance with all loan covenants under the Revolving Credit Facility.

Off-Balance Sheet Arrangements

Leases

As of September 30, 2008, our off-balance sheet arrangements include operating leases for our facilities and certain property and equipment that expire at various dates through 2014. These arrangements allow us to obtain the use of the equipment and facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets.

On November 13, 2006, we executed an amendment to the operating lease for our corporate headquarters in Campbell, California. Under the lease and its amendment, we have a total of 23,149 square feet of usable office space. The lease term originally began on November 1, 2005 and will end on January 31, 2010. Beginning January 1, 2007 and through the expiration of the lease term, base rent has periodically escalated and will escalate from approximately $418,000 in 2008 to $441,000 in the final full year of the lease which expires in January 2010. In addition, we must pay our proportionate share of operating costs and taxes. In connection with the execution of the lease, we have issued a letter of credit to the landlord in the amount of $100,000 as a security deposit.

In Austin, Texas we have rented a total 59,466 square feet of office space under a lease and its amendments that expire at various dates through June 2009. In August 2005, we renewed the existing lease for 46,366 square feet of space and then in March 2006 we further amended the lease for an additional 7,623 square feet of space. On April 16, 2007, we entered into a sublease agreement for an additional 5,477 feet in the same building that expired on July 31, 2008. The rent on the sublease space is fixed at $2,700 per month. Under the lease and its amendments, our base rent will approximate $450,000 in the final full year of the lease that ends in June 2009. In November 2007, we signed a sublease agreement to lease approximately 7,259 square feet of our net rentable area to a third party through the expiration of our lease term in June 2009. In accordance with the sublease agreement, we will receive approximately $60,000 in rental income plus a proportionate share of common area maintenance costs during the final year of our lease which will offset our rent expense during that period.

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In both the California and the Texas facilities, we pay rent and maintenance on some of the common areas in each of our leased facilities.

As a result of our acquisition of CAS Systems in January 2007, we now have facilities near Montreal, Canada, where we have approximately 18,426 square feet of space covered by leases that expire on December 31, 2009, and in Oakland, California where we have approximately 10,039 square feet of space covered by a lease that expires on May 19, 2011. We have renewed the Canada leases as of January 1, 2008 for a 2-year term with options for subsequent continuance. The provisions of the lease renewals in Canada specify that either party can terminate the lease for any reason by giving the other party at least 120 days prior written notice. Based on the exchange rate as of September 30, 2008, our monthly base rent under our Canada leases approximates $25,000 per month in 2008. The Company has decided to terminate the current lease in Canada and has provided the landlord the specified 120 day notice as of October 1, 2008 in accordance with the lease agreement. On September 24, 2008 we entered into a new agreement to lease approximately 20,000 square feet of space and will move our current Canadian operations to this new location which is closer to Montreal and provides more access to employees allowing for more growth. The lease will have a minimum term of 3 years commencing on or about January 1, 2009, subject to finish-out of the Leased Premises. Annual gross rent will be $400,000 Canadian dollars for the initial 3 year term. Based on the exchange rate at September 30, 2008, annual rent will approximate $385,000 in US dollars. Additionally, Rainmaker will be responsible for its proportionate share of utilities, taxes and other common area maintenance charges during the lease term. Annual base rent under our Oakland lease will escalate from approximately $234,000 in 2008 to $251,000 in the final full year of the lease that ends in May 2011. In the quarter ended June 30, 2008, we decided to close our Oakland facility and vacated the premises. In accordance with FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, and FAS 144,Accounting for the Impairment or Disposal of Long-lived Assets, we recorded a liability for the fair value of the remaining lease payments, less the estimated sub-lease rentals, of approximately $227,000 and wrote-off the net book value of the remaining furniture, fixtures and equipment at this location of approximately $76,000. For the purposes of the contractual obligations table below, we have left the remaining minimum lease payments in this table through the May 2011 expiration date. In accordance with the lease agreement, we have the right of early termination of the Oakland lease in May 2009. We will be required to pay approximately $130,000 to exercise this early termination.

With our acquisition of Qinteraction, we assumed existing lease obligations at their Manila, Philippines offices. We have assumed 2 office space leases and a parking lease. We occupy approximately 40,280 square feet on 3 floors in the BPI building in Manila. We have signed a new lease for this space that commenced on April 1, 2008, has a 5 year term and terminates on March 31, 2014. Based on the exchange rate as of September 30, 2008, our annual base rent will escalate from approximately $529,000 in the 12 months ending September 30, 2009 to $699,000 in the final year of the lease that ends in March 2014. We also occupy approximately 15,460 square feet in the Pacific Star building in Manila. This lease commenced on October 1, 2007, has a 5 year term and terminates on September 30, 2012. Based on the exchange rate as of September 30, 2008, our annual base rent will escalate from approximately $221,000 in the twelve months ending September 30, 2009, to $256,000 in the final full year of the lease that expires in September 2012. Our parking lease began in March 2006, has a 5 year term and terminates in February 2011. Based on the exchange rate as of September 30, 2008, our annual base rent on this lease is approximately $13,000. In June 2008, we entered into a new lease for approximately 4,664 additional square feet in the Pacific Star building in Manila. The lease commences on June 1, 2008, has a 4 year and 4 month term and terminates on September 30, 2012. Based on the exchange rate as of June 30, 2008, our annual base rent will escalate from approximately $67,000 in 2008/2009 to approximately $75,000 in the final year of the lease.

Rent expense under operating lease agreements during the nine months ended September 30, 2008 and 2007 was $1.9 million and $1.5 million, respectively. The 2008 rent expense was net of approximately $93,000 in sublease revenue from our Austin property. Additionally, the 2008 rent expense included approximately $227,000 as a result of the recording of the estimated rent expense related to the Oakland office closure.

Guarantees

In July 2005, we issued an irrevocable standby letter of credit in the amount of $100,000 to our landlord for a security deposit for our new corporate headquarters located in Campbell, California. In 2004, we issued an irrevocable standby letter of credit to one of our clients. The letter of credit was issued in the amount of $325,000 as a guarantee for service contracts sold by us on behalf of our client and expired in September 2007. The letters of credit were issued under the Revolving Credit Facility described above. As of September 30, 2008, no amounts had been drawn against the remaining letter of credit.

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From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third party claims. These obligations primarily relate to certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of their employment relationship. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not had to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of September 30, 2008 and December 31, 2007.

Contractual Obligations

Capital Leases

In March 2008, we entered into a 3-year software licensing agreement with Microsoft GP. In accordance with the terms of the agreement, we will pay three annual installments of approximately $254,000 each beginning in April 2008 for the licensing rights to use certain Microsoft software. The present value of the future lease payments is included as a liability on the balance sheet as both a current and long term lease obligation as of September 30, 2008.

Term Loans

In June 2005, we entered into a business loan agreement with Bridge Bank, pursuant to which we obtained a $1.5 million term loan that was utilized to fund the implementation of the Company’s new client management system. The June 2005 Term Loan was to be repaid in 36 monthly installments of $42,000 plus interest at a variable rate of prime per annum. This loan matured and was paid off in June 2008.

In February 2005, concurrent with the closing of the acquisition of Sunset Direct, we entered into a business loan agreement and commercial security agreement with Bridge Bank. The Term Loan was to be repaid in 36 monthly installments of $83,000 plus interest at a variable rate of prime per annum. This loan matured and was paid off in February 2008.

Revolving Credit Facility

In April 2004, we entered into a business loan agreement and a commercial security agreement with Bridge Bank. The Revolving Credit Facility originally matured in May 2005, and provided borrowing availability up to a maximum of $3.0 million through a secured revolving line of credit that included a $1.0 million letter of credit facility. In December 2005, the total available under the Revolving Credit Facility was increased to $4.0 million and the maturity was extended to December 2006. In July 2006, the maturity date of the Revolving Credit Facility was further extended to October 2007 and in June 2008, the maturity date was extended to October 2008. During October 2008, we executed further amendments to the Revolving Credit Facility. The amendments extend the maturity date of the Revolving Credit Facility from October 10, 2008 to October 10, 2009 and increase the maximum amount of revolving credit available from $4,000,000 to $6,000,000, with a $1,000,000 sub-facility for standby letters of credit and a new $3,000,000 sub-facility for the purpose of purchasing new equipment until December 31, 2008. The interest rate per annum for revolving advances under the Revolving Credit Facility remains at the prime lending rate, which was 4.5% as of September 30, 2008. The interest rate per annum for advances under the equipment finance sub-facility shall be equal to the prime rate plus 0.50%, subject to a minimum interest rate of 6.00%. Advances under the equipment finance sub-facility shall be repaid in equal monthly installments commencing in January 2009 through October 2011. As of September 30, 2008, the company had $2,000,000 outstanding under the Revolving Credit Facility.

Future payments under our contracts and obligations at September 30, 2008 are as follows (dollars in thousands):

Contractual obligations	Total		Less than 1 year		1 –3 years		3 –5 years		More than 5 years
Long-Term Debt Obligations (1)	$	3,333	$	2,666	$	667	$	—	$	—
Capital Lease Obligations (1)		466		226		240		—		—
Operating Lease Obligations		7,340		2,182		3,084		1,724		350
Total	$	11,139	$	5,074	$	3,991	$	1,724	$	350

(1) Excludes interest payments.

Included in future minimum operating lease payments is our obligation relating to our facilities, including the lease for our corporate headquarters in Campbell, California, and our operations in Austin, Texas, Vaudreuil and Montreal, Canada and Manila, Philippines. The operating lease for our Austin, Texas facility expires in June 2009.

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Potential Impact of Inflation

To date, inflation has not had a material impact on our business.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 replaces the different definitions of fair value in the accounting literature with a single definition. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for us for financial instruments beginning in January 2008 and non-financial instruments beginning in January 2009. The adoption of SFAS 157 in the first quarter of 2008 did not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,the Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 gives entities the option to measure eligible financial assets and liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in the fair value must be recorded in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. SFAS 159 was effective as of the beginning of our 2008 fiscal year and had no impact on our results of operations and financial position.

In December 2007, the FASB issued SFAS No. 141R,Business Combinations (“SFAS 141R”). SFAS 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction at fair value as of the acquisition date. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are required to adopt SFAS 141R in the first quarter of 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial Statements(“SFAS 160”), an amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as equity in our Consolidated Financial Statements. Among other requirements, this statement requires that the consolidated net income attributable the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period beginning on or after December 15, 2008. We are required to adopt SFAS 160 in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our Consolidated Financial Statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States (“US GAAP”). This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company is currently evaluating the effect that the adoption of SFAS 162 will have on its consolidated financial statements. However, the adoption of SFAS 162 is not expected to have an impact on the Company’s consolidated financial statements.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. We currently do not and do not plan to use derivative financial instruments in our investment portfolio. We plan to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and investment risk. We mitigate default risk by investing in low-risk securities. To minimize our risks, we maintain our portfolio of cash equivalents and short-term investments in a variety of short-term and liquid securities including money market funds, commercial paper, U.S. government and agency securities and municipal bonds. As of September 30, 2008, 100% of our portfolio was invested in instruments that mature in less than 90 days. See Note 1 of our consolidated financial statements.

Due to the short duration and conservative nature of our investment portfolio at September 30, 2008, we do not believe we have a material exposure to interest rate risk. However, based upon the balance in our interest-bearing accounts at September 30, 2008 of approximately $21.5 million, a 1% change in interest rates would have an approximate annual impact of $215,000 on our income before income taxes.

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As of September 30, 2008, we had $2 million outstanding under our Revolving Credit Facility. The interest rate per annum for advances under the Revolving Credit Facility is the prime lending rate, currently at 4.5%. Based upon the balance outstanding at September 30, 2008, a 1% change in interest rates would have an approximate annual impact of $200,000 on our income before income taxes.

We do not use derivative financial instruments in our operations.

Foreign Currency Risk

Prior to 2007, our business has typically been transacted in the U.S. dollar and, as such, has not been subject to material foreign currency exchange rate risk. However, with our acquisitions of operations in Canada and the Philippines during 2007, we now have exposure to foreign currency fluctuations as well as other risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

Foreign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currencies result in gains and losses that are reflected in our consolidated statement of income. To the extent that the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased net revenues and operating expenses. Conversely, our net revenues and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies.

During 2007, international revenues accounted for approximately 6% of total net revenue and during the nine months ended September 30, 2008, international revenues accounted for approximately 12% of our net revenue. The majority of the international revenue was generated by our Cayman Islands entity and is U.S. dollar based. We are expanding our services to address our clients’ international operations and expect to conduct transactions on behalf of our clients in a number of geographies and currencies.

We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into US dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of accumulated other comprehensive income which is a component of shareholders’ equity. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. For the nine months ended September 30, 2008, we recorded a net foreign currency translation gain of approximately $55,000, which is recorded in interest and other income (expense), net in the consolidated statements of operations.

We may enter into hedges in the future to manage foreign currency risk; however, no hedges were in place as of September 30, 2008.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

As of September 30, 2008, our management, including our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

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(b) Change in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the third quarter of our 2008 fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We currently are not a party to any material legal proceedings and are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

Because we depend on a small number of clients for a significant portion of our revenue, the loss of a single client or any significant reduction in the volume of services we provide to any of our significant clients could result in a substantial decrease in our revenue, and have a material adverse impact on our financial position.

During the quarter ended September 30, 2008, one client, Hewlett-Packard, accounted for more than 10% of our net revenue and represented approximately 22% of our net revenue for the three months ended September 30, 2008. During the nine months ended September 30, 2008, two clients, Hewlett-Packard and Dell, accounted for more than 10% of our net revenue with HP representing 20% and Dell representing 11%. In the quarter and nine months ended September 30, 2007, these two clients collectively represented 43% and 44% of our net revenue, respectively, with the largest individual client, Dell, accounting for 28% and 31% of our net revenue.

In February 2008, we received written notification from Dell that they would be terminating our service agreement. Under Dell’s transition plan set forth in the notice, Dell moved approximately half of the services being provided by us under the agreement internally effective on February 4, 2008, and moved the remainder over the subsequent three months. We are not performing any services for Dell subsequent to May 2, 2008. After giving effect to the termination by Dell, Hewlett-Packard is currently the only client that represents more than 10% of our net revenue.

We expect that a small number of clients will continue to account for a significant portion of our net revenue for the foreseeable future. The loss of any of our significant clients may cause a significant decrease in our net revenue. In addition, our software and technology clients operate in industries that experience consolidation from time to time, which could reduce the number of our existing and potential clients. Any loss of a single significant client may have a material adverse effect on our financial position, cash flows and results of operations.

Our clients may, from time to time, restructure their businesses, which may adversely impact the revenues we generate from those clients. Any restructuring or termination of our services by one of our significant clients could reduce the volume of services we provide and further reduce our expected future revenues, which would likely have a material adverse effect on our financial position, cash flows and results of operations.

We have strong competitors and may not be able to compete effectively against them.

Competition in our industry is intense, and such competition may increase in the future. Our competitors include providers of service contract sales and lead generation services, enterprise application software providers, providers of database marketing services, e-commerce service providers, online marketing services, and companies that offer training management systems. We also face competition from internal marketing departments of current and potential clients. Additionally, for portions of our service offering, we may face competition from outsource providers with substantial offshore facilities which may enable them to compete aggressively with similar service offerings at a substantially lower price. Many of our existing or potential competitors have greater brand recognition, longer operating histories, and significantly greater financial, technical and marketing resources, which could further impact our ability to address competitive pressures. Should competitive factors require us to increase spending for, and investment in, client acquisition and retention or for the development of new services, our expenses could increase disproportionately to our revenues. Competitive pressures may also necessitate price reductions and other actions that would likely affect our business adversely. Additionally, there can be no assurances that we will have the resources to maintain a higher level of spending to address changes in the competitive landscape. Failure to maintain or to produce revenue proportionate to any increase in expenses would have a negative impact on our financial position, cash flows and operating results.

Our agreements with our clients allow for termination with short notice periods.

Our service sales agreements and our lead generation agreements generally allow our clients to terminate such agreements without cause with 90 to 180 days notice and 30 days notice, respectively. Our clients are under no obligation to

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renew their engagements with us when their contracts come up for renewal. In addition, our agreements with our clients are generally not exclusive. Our service sales agreement with Hewlett-Packard, our largest client after giving effect to the termination of Dell’s service agreement, can be terminated without cause upon 90 days notice.

Our revenue will decline if demand for our clients’ products and services decreases.

A significant portion of our business consists of marketing and selling our clients’ services to their customers. In addition, a significant percentage of our revenue is based on a “pay for performance” model in which our revenue is based on the amount of our clients’ services that we sell. Accordingly, if a particular client’s products and services fail to appeal to its customers for reasons beyond our control, such as preference for a competing product or service, our revenue may decline. In addition, revenue from our lead generation service offering could decline if our clients reduce their marketing efforts.

Any efforts we may make in the future to expand our service offerings may not succeed.

To date, we have focused our business on providing our service offerings to enterprises in selected vertical markets that retain our services and/or license our software in an effort to market and sell their offerings to their business customers. We may seek to expand our service offerings in the future to other markets, including other industry verticals or the business-to-consumer market. Any such effort to expand could cause us to incur significant investment costs and expenses and could ultimately not result in significant revenue growth for us. In addition, any efforts to expand could divert management resources from existing operations and require us to commit significant financial and other resources to unproven businesses.

We have signed clients to our new channel contract sales solution to increase revenue from our clients’ resellers. This solution is still under development and may not yield sufficient results. Also, there is no assurance resellers will use this solution.

Any acquisitions or strategic transactions in which we participate could result in dilution, unfavorable accounting charges and difficulties in successfully managing our business.

As part of our business strategy, we review from time to time acquisitions or other strategic transactions that would complement our existing business or enhance our technology capabilities. Future acquisitions or strategic transactions could result in potentially dilutive issuances of equity securities, the use of cash, large and immediate write-offs, the incurrence of debt and contingent liabilities, amortization of intangible assets or impairment of goodwill, any of which could cause our financial performance to suffer. Furthermore, acquisitions or other strategic transactions entail numerous risks and uncertainties, including:

• difficulties assimilating the operations, personnel, technologies, products and information systems of the combined companies;

• diversion of management’s attention;

• risks of entering geographic and business markets in which we have no or limited prior experience; and

• potential loss of key employees of acquired organizations.

We perform valuation analyses on all acquisitions and reassess the valuations and carrying value of goodwill and other intangible assets on our balance sheet at least annually. As of September 30, 2008, we had $15.3 million in goodwill and $4.5 million of unamortized intangibles. This reassessment has in the past resulted in adjustments in amortization schedules, and could in the future result in further adjustments, or in write-downs or write-offs of assets, which would negatively affect our financial position and operating results.

We cannot be certain that we would be able to successfully integrate any operations, personnel, technologies, products and information systems that might be acquired in the future, and our failure to do so could have a material adverse effect on our financial position, cash flows and operating results.

Our business strategy may include further expansion into foreign markets, which would require increased expenditures, and if our international operations are not successfully implemented, they may not result in increased revenue or growth of our business.

On January 25, 2007, we acquired the business of CAS Systems, which has significant operations near Montreal, Canada. On July 19, 2007, we acquired Qinteraction Limited, which operates a call center in Manila, Philippines. Our growth strategy may include further expansion into international markets. Our international expansion may require significant additional financial resources and management attention, and could have a negative effect on our financial position, cash flows and operating results. In addition, we may be exposed to associated risks and challenges, including:

• regional and economic political conditions;

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• foreign currency fluctuations;

• different or lesser protection of intellectual property rights;

• longer accounts receivable collection cycles;

• different pricing environments;

• difficulty in staffing and managing foreign operations;

• laws and business practices favoring local competitors; and

• foreign government regulations.

We cannot assure you that we will be successful in creating international demand for our services and software or that we will be able to effectively sell our clients’ services in international markets.

Our success depends on our ability to successfully manage growth.

Any future growth will place additional demands on our managerial, administrative, operational and financial resources. We will need to improve our operational, financial and managerial controls and information systems and procedures and will need to train and manage our overall work force. If we are unable to manage additional growth effectively, our business will be harmed.

The length and unpredictability of the sales and integration cycles could cause delays in our revenue growth.

Selection of our services and software can entail an extended decision making process on the part of prospective clients. We often must educate our potential clients regarding the use and benefit of our services and software, which may delay the evaluation and acceptance process. For the service contract sales portion of our solution, the selling cycle can extend to approximately 9 to 12 months or longer between initial client contact and signing of an agreement. Once our services and software are selected, integration with our clients’ systems can be a lengthy process, which further impacts the timing of revenue. Because we are unable to control many of the factors that will influence our clients’ buying decisions or the integration process of our services and software, it can be difficult to forecast the growth and timing of our revenue.

We have incurred recent losses and may incur losses in the future.

Although we reported net income in each of the four quarters during 2006 and 2007, we incurred a net loss of $6.1 million in the quarter ended September 30, 2008, and have incurred a net loss of $10.3 million in the nine months ended September 30, 2008. Our accumulated deficit through September 30, 2008 is $68.4 million. We may incur losses in the future. Factors which may cause us to incur losses in the future include:

• the growth of the market for our sales and marketing solutions;

• the demand for and acceptance of our services;

• the demand for our clients’ products and services;

• the length of the sales and integration cycle for our new clients;

• our ability to expand relationships with existing clients;

• our ability to develop and implement additional services, products and technologies;

• the success of our direct sales force;

• our ability to retain existing clients;

• the costs of complying with Section 404 of the Sarbanes-Oxley Act;

• the granting of additional stock options and/or restricted stock awards resulting in additional FAS 123R stock option expense;

• new product and service offerings from our competitors;

• general economic conditions, especially given the very difficult and challenging macroeconomic environment and the difficulty in predicting customer demand during these uncertain times;

• regulatory compliance costs;

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• our ability to integrate acquisitions and the costs and write-downs associated with them, including the amortization of intangibles; and

• our ability to expand our operations, including potential further international expansion.

We may decide to raise additional capital which might not be available to us on acceptable terms, if at all.

We may wish to secure additional capital for the acquisition of businesses, products or technologies that are complementary to ours, or to fund our working capital and capital expenditure requirements. To date, we have raised capital through both equity and debt financings. On April 25, 2007, we completed a follow-on public offering of our stock in which we issued an additional 3.5 million shares and raised $27 million in net proceeds. Any additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and interest expenses that will affect our financial results. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay or reduce the scope of our operations. At September 30, 2008, our cash balance was $23.2 million, and our net working capital was $17.2 million. We expect our cash balance to be sufficient to fund our operations for at least the next 12 months.

Our quarterly operating results may fluctuate, and if we do not meet market expectations, our stock price could decline.

Our future operating results may not follow past trends in every quarter. In any future quarter, our operating results may fall below the expectations of public market analysts and investors.

Factors which may cause our future operating results to be below expectations include:

• the growth of the market for our sales and marketing solutions;

• the demand for and acceptance of our services;

• the demand for our clients’ products and services;

• the length of the sales and integration cycle for our new clients;

• our ability to expand relationships with existing clients;

• our ability to develop and implement additional services, products and technologies;

• the success of our direct sales force;

• our ability to retain existing clients;

• the costs of complying with Section 404 of the Sarbanes-Oxley Act;

• the granting of additional stock options and/or restricted stock awards resulting in additional FAS 123R stock option expense;

• new product and service offerings from our competitors;

• general economic conditions;

• regulatory compliance costs;

• our ability to integrate acquisitions and the costs and write-downs associated with them, including the amortization of intangibles; and

• our ability to expand our operations, including potential further international expansion.

We may experience seasonality in our sales, which could cause our quarterly operating results to fluctuate from quarter to quarter.

As we continue to grow our lead generation service offerings, we will experience seasonal fluctuations in our revenue as companies’ spending on marketing can be stronger in some quarters than others partially due to our clients’ budget and fiscal schedules. In addition, since our lead generation service offering has lower gross margins than our other service offerings, we may experience quarterly fluctuations in our financial performance as a result of a seasonal shift in the mix of our service offerings.

If we are unable to attract and retain highly qualified management, sales and technical personnel, the quality of our services may decline, and our ability to execute our growth strategies may be harmed.

Our success depends to a significant extent upon the contributions of our executive officers and key sales and technical personnel and our ability to attract and retain highly qualified sales, technical and managerial personnel. Competition for personnel is intense as these personnel are limited in supply. We have at times experienced difficulty in

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recruiting qualified personnel, and there can be no assurance that we will not experience difficulties in the future, which could limit our future growth. The loss of certain key personnel, particularly Michael Silton, our chief executive officer, and Steve Valenzuela, our chief financial officer, could seriously harm our business.

We rely heavily on our communications infrastructure, and the failure to invest in or the loss of these systems could disrupt the operation and growth of our business and result in the loss of clients or our clients’ customers.

Our success is dependent in large part on our continued investment in sophisticated computer, Internet and telecommunications systems. We have invested significantly in technology and anticipate that it will be necessary to continue to do so in the future to remain competitive. These technologies are evolving rapidly and are characterized by short product life cycles, which require us to anticipate technology developments. We may be unsuccessful in anticipating, managing, adopting and integrating technology changes on a timely basis, or we may not have the capital resources available to invest in new technologies.

Our operations could suffer from telecommunications or technology downtime, disruptions or increased costs.

In the event that one of our operations facilities has a lapse of service or damage to such facility, our clients could experience interruptions in our service as well as delays, and we might incur additional expense in arranging new facilities and services. Our disaster recovery computer hardware and systems located at our facilities in California, Texas, Canada, and the Philippines have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at one of our operations facilities. In the event of a disaster in which one of our operations facilities is irreparably damaged or destroyed, we could experience lengthy interruptions in our service. While we have not experienced extended system failures in the past, any interruptions or delays in our service, whether as a result of third party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability, cause us to issue credits or cause clients to fail to renew their contracts, any of which could adversely affect our business, financial condition and results of operations. Temporary or permanent loss of these systems could limit our ability to conduct our business and result in lost revenue.

We have made significant investments in technology systems that operate our business operations. Such assets are subject to reviews for impairment in the event they are not fully utilized.

We have made technology and system improvements and capitalized those costs while the technology was being developed. During the year ended December 31, 2006, we deployed our new customer relationship management, or CRM system, which we had developed over an 18-month period. We invested $3.2 million in this system, which has a carrying value of $1.6 million as of September 30, 2008, and is being amortized over five years. We are using it as a CRM platform for our service sales clients. If unforeseen events or circumstances prohibit us from using this system with all clients, we may be forced to impair some or all of this entire asset, which could result in a charge to our financial results.

Defects or errors in our software could harm our reputation, impair our ability to sell our services and result in significant costs to us.

Our software is complex and may contain undetected defects or errors. We have not suffered significant harm from any defects or errors to date, but we have from time to time found defects in our software and we may discover additional defects in the future. We may not be able to detect and correct defects or errors before releasing software. Consequently, we or our clients may discover defects or errors after our software has been implemented. We have in the past implemented, and may in the future need to implement, corrections to our software to correct defects or errors. The occurrence of any defects or errors could result in:

• our inability to execute our services on behalf of our clients;

• delays in payment to us by customers;

• damage to our reputation;

• diversion of our resources;

• legal claims, including product liability claims, against us;

• increased service and warranty expenses or financial concessions; and

• increased insurance costs.

Our liability insurance may not be adequate to cover all of the costs resulting from these legal claims. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available on acceptable terms or that the

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insurer will not deny coverage as to any future claim. The successful assertion against us of one or more large claims that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business and operating results. Furthermore, even if we succeed in the litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

If we are unable to safeguard our networks and clients’ data, our clients may not use our services and our business may be harmed.

Our networks may be vulnerable to unauthorized access, computer hacking, computer viruses and other security problems. An individual who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused by any breaches. Security measures that we adopt from time to time may be inadequate.

If we fail to adequately protect our intellectual property or face a claim of intellectual property infringement by a third party, we may lose our intellectual property rights and be liable for significant damages.

We cannot guarantee that the steps we have taken to protect our proprietary rights and information will be adequate to deter misappropriation of our intellectual property. In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our trade secrets, copyrights, trademarks, service marks, trade names or other proprietary information, our business could be seriously harmed. In addition, third parties may assert infringement claims against us that we violated their intellectual property rights. These claims, even if not true, could result in significant legal and other costs and may be a distraction to management. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the U.S., so if our business further expands into foreign countries, risks associated with protecting our intellectual property will increase.

Our business may be subject to additional obligations to collect and remit sales tax and any successful action by state, foreign or other authorities to collect additional sales tax could adversely harm our business.

We file sales tax returns in certain states within the U.S. as required by law and certain client contracts for a portion of the sales and marketing services that we provide. We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to the vast majority of the services that we provide. However, one or more states could seek to impose additional sales or use tax collection and record-keeping obligations on us. Any successful action by state, foreign or other authorities to compel us to collect and remit sales tax, either retroactively, prospectively or both, could adversely affect our results of operations and business.

Risks Related to Our Industry and Other Risks

We are subject to government regulation of direct marketing, which could restrict the operation and growth of our business.

The Federal Trade Commission’s, or FTC’s, telesales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation and specifically addresses other perceived telemarketing abuses in the offering of prizes. Additionally, the FTC’s rules limit the hours during which telemarketers may call consumers. The Federal Telephone Consumer Protection Act of 1991 contains other restrictions on facsimile transmissions and on telemarketers, including a prohibition on the use of automated telephone dialing equipment to call certain telephone numbers. The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 contains restrictions on the content and distribution of commercial e-mail. A number of states also regulate telemarketing and some states have enacted restrictions similar to these federal laws. In addition, a number of states regulate e-mail and facsimile transmissions. State regulations of telesales, e-mail and facsimile transmissions may be more restrictive than federal laws. Any failure by us to comply with applicable statutes and regulations could result in penalties. There can be no assurance that additional federal or state legislation, or changes in regulatory implementation or judicial interpretation of existing or future laws, would not limit our activities in the future or significantly increase the cost of regulatory compliance.

The demand for sales and marketing services is highly uncertain.

Demand and acceptance of our sales and marketing services is dependent upon companies’ willingness to allow third parties to provide these services. It is possible that these solutions may never achieve broad market acceptance. If the market for our services does not grow or grows more slowly than we anticipate at any time, our business, financial condition and operating results may be materially adversely affected.

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Increased government regulation of the Internet could decrease the demand for our services and increase our cost of doing business.

The increasing popularity and use of the Internet and online services may lead to the adoption of new laws and regulations in the U.S. or elsewhere covering issues such as online privacy, copyright and trademark, sales taxes and fair business practices or which require qualification to do business as a foreign corporation in certain jurisdictions. Increased government regulation, or the application of existing laws to online activities, could inhibit Internet growth. A number of government authorities are increasingly focusing on online personal data privacy and security issues and the use of personal information. Our business could be adversely affected if new regulations regarding the use of personal information are introduced or if government authorities choose to investigate our privacy practices. In addition, the European Union has adopted directives addressing data privacy that may limit the collection and use of some information regarding Internet users. Such directives may limit our ability to target our clients’ customers or collect and use information. A decline in the growth of the Internet could decrease demand for our services and increase our cost of doing business and otherwise harm our business.

Failure by us to achieve and maintain effective internal control over financial reporting in accordance with the rules of the SEC could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.

We are required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. If we fail to continue to comply with the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements, and our stock price may be adversely affected as a result. If we fail to remedy any material weakness, our consolidated financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

Changes in the accounting treatment of stock options will adversely affect our reported results of operations.

In December 2004, the Financial Accounting Standards Board, or FASB, announced its decision to require companies to expense employee stock options. The pro forma disclosure that the FASB previously permitted is no longer an alternative to the financial statement recognition of the expense. We adopted the new accounting pronouncement, Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, beginning on January 1, 2006. Our stock based compensation charges were approximately $1,609,000 during the nine months ended September 30, 2008, and $1,200,000 during the same period in 2007. This change in accounting practices may adversely affect our future reported results of operations due to future changes to various assumptions used to determine the fair value of awards issued or the amount and type of equity awards granted, but will have no impact on cash flows.

Terrorist acts and acts of war may harm our business and revenue, costs and expenses, and financial position.

Terrorist acts or acts of war may cause damage to our employees, facilities, clients, our clients’ customers, and vendors which could significantly impact our revenues, costs and expenses, financial position and results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot be presently predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

Risks Associated with Our Stock

Our charter documents and Delaware law contain anti-takeover provisions that could deter takeover attempts, even if a transaction would be beneficial to our stockholders.

Our certificate of incorporation and bylaws and certain provisions of Delaware law may make it more difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. For example, our certificate of incorporation provides our board of directors the authority, without stockholder action, to issue up to 5,000,000 shares of preferred stock in one or more series. Our board determines when we will issue preferred stock, and the rights, preferences and privileges of any preferred stock. Our certificate of incorporation also provides for a classified board, with each board member serving a staggered three-year term. When our common stock was listed on the Nasdaq Capital Market, we were subject to various restrictions under California law that prohibited us from having a classified board. Now that our common stock is listed on the Nasdaq Global Market, we are no longer subject to those restrictions. Accordingly, we implemented a

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classified board at our 2007 annual meeting of our stockholders. In addition, our bylaws establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors. Delaware law also contains provisions that can affect the ability of a third party to take over a company. For example, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, unless certain conditions are met. Section 203 may discourage, delay or prevent an acquisition of our company even at a price our stockholders may find attractive.

Our common stock price is volatile.

During the year ended December 31, 2007, the price for our common stock fluctuated between $5.99 per share and $11.21 per share. During the nine months ended September 30, 2008, the price for our common stock fluctuated between $1.59 and $6.80 per share. The trading price of our common stock may continue to fluctuate widely due to:

• quarter to quarter variations in results of operations;

• loss of a major client;

• changes in the economic environment which could reduce our potential;

• announcements of technological innovations by us or our competitors;

• changes in, or our failure to meet, the expectations of securities analysts;

• new products or services offered by us or our competitors;

• changes in market valuations of similar companies;

• announcements of strategic relationships or acquisitions by us or our competitors;

• other events or factors that may be beyond our control; or

• dilution resulting from the raising of additional capital.

In addition, the securities markets in general have experienced extreme price and trading volume volatility in the past. The trading prices of securities of companies in our industry have fluctuated broadly, often for reasons unrelated to the operating performance of the specific companies. These general market and industry factors may adversely affect the trading price of our common stock, regardless of our actual operating performance.

Our stock price is volatile, and we could face securities class action litigation. In the past, following periods of volatility in the market price of their stock, many companies have been the subjects of securities class action litigation. If we were sued in a securities class action, it could result in substantial costs and a diversion of management’s attention and resources and could cause our stock price to fall.

We may have difficulty obtaining director and officer liability insurance in acceptable amounts for acceptable rates.

We cannot assure that we will be able to obtain in the future sufficient director and officer liability insurance coverage at acceptable rates and with acceptable deductibles and other limitations. Failure to obtain such insurance could materially harm our financial condition in the event that we are required to defend against and resolve any future securities class actions or other claims made against us or our management. Further, the inability to obtain such insurance in adequate amounts may impair our future ability to retain and recruit qualified officers and directors.

If we fail to meet the Nasdaq Global Market listing requirements, our common stock will be delisted.

Trading of our common stock moved from the Nasdaq Capital Market to the Nasdaq Global Market on January 8, 2007. The Nasdaq Global Market listing requirements are more onerous than the listing requirements for the Nasdaq Capital Market. If we experience losses from our operations, are unable to raise additional funds or our stock price does not meet minimum standards, we may not be able to maintain the standards for continued listing on the Nasdaq Global Market, which include, among other things, that our common stock maintain a minimum closing bid price of at least $1.00 per share and minimum shareholders’ equity of $10 million (subject to applicable grace and cure periods). If, as a result of the application of such listing requirements, our common stock is delisted from the Nasdaq Global Market, our stock would become harder to buy and sell. Consequently, if we were removed from the Nasdaq Global Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline. As a result, the ability to resell shares of our common stock could be adversely affected.

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Our directors, executive officers and their affiliates own a significant percentage of our common stock and can significantly influence all matters requiring stockholder approval.

As of September 30, 2008, our directors, executive officers and entities affiliated with them together beneficially control approximately 12.0% of our outstanding shares. As a result, these stockholders, acting together, may have the ability to disproportionately influence all matters requiring stockholder approval, including the election of all directors, and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, which, in turn, could depress the market price of our common stock.

Shares eligible for sale in the future could negatively affect our stock price.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. This might also make it more difficult for us to raise funds through the issuance of securities. As of September 30, 2008, we had 20,355,132 outstanding shares of common stock which included 1,002,814 shares issued pursuant to restricted stock awards granted to certain employees. These restricted shares will become available for public sales subject to the respective employees continued employment with the company over vesting periods of not more than four years. In addition, there were an aggregate of 2,796,074 shares of common stock issuable upon exercise of outstanding stock options and warrants, including 1,703,124 shares of common stock issuable upon exercise of options outstanding under our option plan and 1,092,951 shares of common stock issuable upon exercise of the outstanding warrants issued to the investors in our private placement transactions completed on February 7, 2006, June 15, 2005 and February 20, 2004. We may issue and/or register additional shares, options, or warrants in the future in connection with acquisitions, employee compensation or otherwise.

On April 25, 2007, we completed a follow-on public offering of our common stock in which we issued 3,500,000 additional shares.

On July 19, 2007, we completed a Stock Purchase Agreement with the shareholders of Qinteraction Limited. Under the terms of the Purchase Agreement, the Company issued 559,284 shares of its common stock, representing approximately $4.8 million in Rainmaker common stock based upon the five-day average closing stock price before and after July 23, 2007, the date on which the transaction was announced. Such shares are initially subject to a contractual prohibition of sale with shares available for sale from closing as follows: 241,890 shares were subject to 6 months lockup which has now expired and these shares are now freely tradable, 241,891 shares were subject to 12 months lockup which has now expired and these shares are now freely tradable. In addition, 75,503 of the shares of the common stock consideration have been placed in escrow to secure certain customary indemnity obligations under the Purchase Agreement. Two-thirds of the escrow is scheduled to be released after 12 months from closing and the remaining one-third may be available for release after 15 months from closing. The release of such shares from escrow is subject to post-closing conditions, potential adjustments and offsets. No shares have been released from escrow as of yet as the Company has filed a claim against the escrow. The agreement also provided for a potential additional payment at the end of twelve months following the closing, based on the achievement of certain financial milestones which the company has determined has not been achieved, and which would otherwise result in the issuance of up to $3.5 million in additional Rainmaker common stock and a payment of $4.5 million in cash.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information with respect to repurchases of our common stock during the three months ended September 30, 2008:

	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (b)	Approximate Dollar Value that May Yet be Purchased Under the Program (b)
July 1, 2008 – July 31, 2008	2,380	$	2.90	—	$	3,000,000
August 1, 2008 – August 31, 2008	35,726	$	3.14	26,149	$	2,918,204
September 1, 2008 – September 30, 2008	64,373	$	2.55	62,189	$	2,759,638
	102,479	$	2.76	88,338

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(a) These amounts include shares owned and tendered by employees to satisfy tax withholding obligations on the vesting of restricted share awards. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of our shares on the date of vesting.

(b) On July 31, 2008, the Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to $3 million of Rainmaker’s common stock. The Stock Repurchase Program will have a one-year term and may be commenced, suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a) Exhibits

The following exhibits are filed with this report as indicated below:

31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, furnished under Exhibit 32 of Item 601 of Regulation S-K.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, furnished under Exhibit 32 of Item 601 of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RAINMAKER SYSTEMS, INC.
Dated: November 7, 2008	/s/ MICHAEL SILTON
	Michael Silton
	Chief Executive Officer (Principal Executive Officer)
	/s/ STEVE VALENZUELA
	Steve Valenzuela
	Secretary and Chief Financial Officer (Chief Accounting Officer)

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