UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

(MARK ONE)
/ X / FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001

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

FOR THE TRANSITION PERIOD FROM ________________ TO ________________

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 (I.R.S. Employer Identification
incorporation or organization) Number)

1800 GREEN HILLS ROAD 95066
SCOTTS VALLEY, CALIFORNIA (zip code)
(address of principal executive offices)

Registrant's telephone number, including area code: (831) 430-3800

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. Yes /X/ No / /

At October 11, 2001, registrant had outstanding 37,987,858 shares of Common
Stock.

RAINMAKER SYSTEMS, INC.
FORM 10-Q
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS

Page
----
PART I. FINANCIAL INFORMATION

Item 1. Interim Financial Statements:
Balance Sheets .................................................. 3
Statements of Operations ........................................ 4
Statements of Cash Flows ........................................ 5
Notes to Financial Statements ................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 8
Item 3. Qualitative and Quantitative Disclosures About Market Risk ...... 17

PART II. OTHER INFORMATION

Item 1. Legal proceedings ............................................... 18
Item 2. Changes in securities and use of proceeds ....................... 18
Item 6. Exhibits and reports on Form 8-K ................................ 18

Signatures ...................................................... 19

PART I. - FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except share data)

September 30, December 31,
2001 2000
------------- ------------
(unaudited) (*)

Assets
Current assets:
Cash and cash equivalents ......................................................... $ 9,673 $ 22,879
Accounts receivable, less allowance for sales returns and doubtful accounts
of $593 in 2001 and $608 in 2000 ............................................. 4,909 8,271
Inventories ....................................................................... 31 403
Other receivables ................................................................. 173 680
Prepaid expenses and other current assets ......................................... 729 1,211
-------- --------
Total current assets ........................................................ 15,515 33,444
Property and equipment, net ............................................................ 7,006 8,483
Other noncurrent assets ................................................................ 254 295
-------- --------
Total assets ................................................................ $ 22,775 $ 42,222
======== ========

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable .................................................................. $ 5,501 $ 9,508
Payable to a related party ........................................................ 444 817
Accrued compensation and benefits ................................................. 982 2,567
Accrued liabilities ............................................................... 534 1,823
Current portion of capital lease obligations ...................................... 731 1,183
-------- --------
Total current liabilities ................................................... 8,192 15,898

Capital lease obligations, less current portion ........................................ 481 1,018
Other long-term liabilities ............................................................ 23 23

Stockholder's equity:
Common stock, $0.001 par value:
Authorized shares - 80,000,000;
Issued and outstanding shares - 37,987,858 in 2001 and 38,336,904 in 2000 .... 38 38
Additional paid-in capital ............................................................. 56,633 57,732
Deferred stock compensation ............................................................ (87) (363)
Accumulated deficit .................................................................... (42,505) (32,124)
-------- --------
Total stockholders' equity ................................................... 14,079 25,283
-------- --------
Total liabilities and stockholders' equity ................................... $ 22,775 $ 42,222
======== ========

----------
* Amounts as of December 31, 2000 are derived from December 31, 2000 audited
financial statements.

See accompanying notes.

RAINMAKER SYSTEMS, INC
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2001 2000 2001 2000
------- ------- -------- --------
(unaudited) (unaudited)

CRM services revenue ............................................ $ 9,836 $14,279 $ 32,814 $ 46,537
Cost of CRM services revenue .................................... 6,615 10,264 22,586 33,654
------- ------- -------- --------
CRM services gross profit ................................. 3,221 4,015 10,228 12,883

Selling, general and administrative expenses .................... 5,702 9,371 20,972 29,234
Restructuring charge ............................................ -- -- -- 868
------- ------- -------- --------
Operating loss ............................................ (2,481) (5,356) (10,744) (17,219)
Interest income, net ............................................ 58 417 363 1,430
------- ------- -------- --------
Net loss .................................................. $(2,423) $(4,939) $(10,381) $(15,789)
======= ======= ======== ========
Net loss per common share:
Basic ..................................................... $ (0.06) $ (0.13) $ (0.27) $ (0.41)
======= ======= ======== ========
Diluted ................................................... $ (0.06) $ (0.13) $ (0.27) $ (0.41)
======= ======= ======== ========
Number of shares used in per share computations:
Basic ..................................................... 37,956 38,963 37,958 38,694
======= ======= ======== ========
Diluted ................................................... 37,956 38,963 37,958 38,694
======= ======= ======== ========

See accompanying notes.

RAINMAKER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)

Nine months ended
September 30,
-------------------------
2001 2000
-------- --------
(unaudited)

Operating activities:
Net loss ........................................................ $(10,381) $(15,789)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment ....... 2,231 1,129
Amortization of deferred stock compensation ................... 231 503
Provision (credit) for sales returns and doubtful accounts .... (15) 62
Changes in operating assets and liabilities:
Accounts receivable ......................................... 3,377 1,076
Inventories ................................................. 372 197
Income taxes receivable ..................................... 2 1,105
Prepaid expenses and other assets ........................... 523 (631)
Other receivables ........................................... 507 (298)
Accounts payable ............................................ (4,007) 1,246
Payable to a related party .................................. (373) (923)
Accrued compensation and benefits ........................... (1,585) 554
Accrued liabilities ......................................... (1,291) 711
-------- --------
Net cash used in operating activities .............................. (10,403) (11,058)

Investing activities:
Proceeds from sale of catalog/distributor ....................... -- 800
Purchase of property and equipment .............................. (754) (5,740)
Sale of short-term investments .................................. -- 2,756
Purchase of long-term investments ............................... -- (100)
-------- --------
Net cash used in investing activities .............................. (754) (2,284)

Financing activities:
Repurchase of common stock ...................................... (1,194) --
Proceeds from issuance of common stock under ESPP ............... 50 461
Proceeds from issuance of common stock from option exercises .... 84 189
Repayment of capital lease obligations .......................... (989) (605)
-------- --------
Net cash (used) provided by financing activities ................... (2,049) 45
-------- --------
Net decrease in cash and cash equivalents .......................... (13,206) (13,297)
Cash and cash equivalents at beginning of period ................ 22,879 41,129
-------- --------
Cash and cash equivalents at end of period ...................... $ 9,673 $ 27,832
======== ========
Supplemental disclosure of cash paid during the period:
Interest paid ................................................... $ 131 $ 177
======== ========
Income taxes refunded ........................................... $ -- $ (1,155)
======== ========
Supplemental schedule of noncash investing and financing
activities:
Acquisition of equipment under capital leases ................... $ -- $ 1,590
======== ========

See accompanying notes.

RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying financial statements of Rainmaker Systems, Inc.
("Rainmaker") 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. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The interim
financial statements are unaudited but reflect all adjustments (consisting of
normal recurring items) which are necessary for their fair presentation, in the
opinion of management. The results of operations for the three and nine months
ended September 30, 2001 are not necessarily indicative of results to be
expected for the year ending December 31, 2001. These 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, 2000.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited financial
statements and accompanying notes. Actual results could differ from those
estimates.

NOTE 2. REVENUE RECOGNITION

Revenue from the sale of service contracts and maintenance renewals is
recognized when a purchase order from the end user 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. Revenue from product sales is
recognized at the time of shipment of the product directly to the customer.
Revenue from services we perform is recognized as the services are delivered.
Substantially all of our sales transactions are reported under the "gross"
method, which is based on the total purchase price billed by us to customers for
our clients' products and services. We also sell products and services on behalf
of our clients whereby we record revenue net, equal to the amount earned in the
transaction.

NOTE 3. NET LOSS PER SHARE

Basic net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during the year, less shares
subject to repurchase. Diluted net loss per share also gives effect, as
applicable, to the potential dilutive effect of outstanding stock options, using
the if converted method, as of the beginning of the period presented or the
original date of issuance, if later. Rainmaker has excluded all outstanding
options and shares subject to repurchase from the calculation of diluted net
loss per share because all such securities are anti-dilutive.

NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" to be effective for all business combinations initiated
after June 30, 2001. Under the provisions of the statement, the use of
pooling-of-interests method of accounting for those transactions is prohibited
and all business combinations should be accounted for using the purchase method
of accounting. Rainmaker has adopted SFAS 141 as of July 1, 2001. Adoption of
SFAS 141 did not have a material impact on Rainmaker's financial position or
results of operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" to be effective for all fiscal years
beginning after December 15, 2001. SFAS No. 142 establishes accounting and
reporting standards for goodwill and intangible assets acquired singly, as part
of a group or in a business combination and supersedes APB Opinion No. 17,
"Intangible Assets." The statement requires that goodwill or intangible assets
with indefinite lives will no longer be amortized, but should be tested for
impairment at least annually, using a two-step approach to assess any impairment
to goodwill at the established reporting unit level. Rainmaker will adopt SFAS
142 at the beginning of its fiscal year 2002. Rainmaker does not expect adoption
of SFAS 142 to have a material impact on Rainmaker's financial position or
results of operations.

NOTE 5. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes revenues and expenses and gains and
losses that are not included in net income (loss), but, rather are recorded
directly in stockholders' equity. To date, we have not had any significant
transactions that are required to be reported in comprehensive income (loss).

NOTE 6. REPURCHASE OF COMMON STOCK

In November 2000, Rainmaker's Board of Directors authorized a program to
repurchase up to 2,000,000 shares of Rainmaker's outstanding Common Stock. For
the three months and nine months ended September 30, 2001, Rainmaker repurchased
and retired 12,000 and 637,000 shares of its Common Stock for a total
consideration of $10,200 and $1.2 million, respectively.

NOTE 7. SEGMENT REPORTING

Rainmaker operates in one market segment, the sale of installed base
marketing services, software maintenance licenses, services, and customer
retention programs to software and other technology companies. Rainmaker
primarily operates in one geographical segment, North America. Substantially all
of our sales are made to customers in the United States.

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 "Factors That May Affect Future
Results and Market Price of Stock", 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.

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

Rainmaker Systems, Inc. ("Rainmaker") is a leading outsource provider of
Internet-enabled sales and marketing services. Rainmaker delivers targeted
programs to maximize revenue per customer and strengthen customer loyalty. Our
Contract Renewals Plus/SM/ service optimizes the sales and management of support
contracts and software subscriptions. By integrating technology, processes and
people, Rainmaker provides a transparent customer relationship infrastructure
for its clients.

Our CRM services revenue consists of sales of our clients' software
subscriptions, support, maintenance and service contracts, training services,
software licenses and upgrades to our clients' installed customer base.
Substantially all of our sales transactions are reported under the "gross"
method, which is based on the total purchase price billed by us to customers for
our clients' products and services. We also sell products and services on behalf
of our clients whereby we record revenue net, equal to the amount earned in the
transaction. Revenue from the sale of service contracts and maintenance renewals
is recognized when a purchase order from the end user is received; the service
contract or maintenance agreement is delivered; the collection of the receivable
is reasonably assured; and no significant post-delivery obligations remain.
Revenue from product sales is recognized at the time of shipment of the product
directly to the customer. Revenue from services we perform is recognized as the
services are delivered. Revenue from sales of new clients' products and services
typically increases over several quarters before reaching a more moderate level
of growth. However, revenue growth can be affected by many factors including
customer contract renewal history, customer product satisfaction and competitive
pricing.

Cost of revenue includes payments for our clients' products and services
based on the specific pricing terms of each contract and costs associated with
fee-based revenues. Costs associated with fee-based revenues consist primarily
of salaries and other personnel-related expenses. Some client relationships may
be structured such that the costs of these products and services are higher
during the start up phase of our relationship until higher purchase discounts
are achieved from increased sales volume. In these relationships, once we
integrate a client's customer database and begin to meet targeted sales volumes,
our gross margins from that client can improve.

Selling, general and administrative expenses primarily include costs
associated with the marketing and selling of our clients' products and services,
including client integration costs, salaries of marketing and

sales personnel, technology systems and communications costs, product and
service development and administrative overhead.

Interest income (expense), net, reflects income received on cash and cash
equivalents and interest expense on leases to secure equipment and software.

We incurred an operating loss and net loss for 1999, 2000 and for the three
and nine months ended September 30, 2001. During 1999 and 2000, we incurred
increasing operating and net losses as we increased our operating expenses to
build our CRM services business. New clients require significant up-front
investments including the costs to hire additional staff and create the
necessary infrastructure to deliver our services. These costs are typically
incurred some time before significant revenue is generated. In late 2000, we
repackaged our service offering to include fee-based pricing. We now charge for
many of these costs; however, these costs could have an adverse effect on our
future financial condition and operating results, depending on market acceptance
of new service combinations and pricing options.

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 connection with the financial statements and the notes thereto, which
appear elsewhere in this report as well as with Rainmaker's financial statements
and notes thereto included in Rainmaker's Annual Report on Form 10-K for the
year ended December 31, 2000.

Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------

CRM services revenue .......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of CRM services revenue .................. 67.3 71.9 68.8 72.3
----- ----- ----- -----
CRM services gross profit ................ 32.7 28.1 31.2 27.7
Selling, general and administrative expenses .. 57.9 65.6 63.9 62.8
Restructuring charge .......................... -- -- -- 1.9
----- ----- ----- -----
Operating loss ................................ (25.2) (37.5) (32.7) (37.0)
Interest income, net ..................... 0.6 2.9 1.1 3.1
----- ----- ----- -----
Net loss ...................................... (24.6)% (34.6)% (31.6)% (33.9)%
===== ===== ===== =====

Comparison of Three Months Ended September 30, 2001 and 2000

CRM Services Revenue. Revenue from CRM services decreased 31.1% to $9.8
million for the three months ended September 30, 2001 from $14.3 million for the
comparable period of 2000. This decrease is primarily due to clients with whom
we discontinued marketing and selling of their products and services in 2000 and
2001. In late 2000 and the first half of 2001, we discontinued relationships
with various clients to achieve our financial goals. Revenues associated with
these clients represented $106,000 for the three months ended September 30, 2001
as compared to $5.5 million of revenue in the comparable period of 2000. For the
three months ended September 30, 2001, revenue from the marketing and selling of
products and services sold to customers of continuing clients increased
$988,000.

CRM Services Gross Profit. Gross profit from CRM services decreased 19.8%
to $3.2 million for the three months ended September 30, 2001, from $4.0 million
for the comparable period in 2000. Gross margin from CRM services increased to
32.7% in the most recent period compared to 28.1% during the comparable period
of the prior year. The increase in gross margin is due primarily to an increased
focus on our core Contract Renewals Plus services and a change in the mix of
existing clients, resulting from our decision in late 2000 to focus on clients
with whom we can maintain profitable business relationships. We expect our gross
margins to continue to vary based on the mix of clients and the services
provided.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 39.2% to $5.7 million for the three months
ended September 30, 2001 from $9.4 million for the comparable period of 2000. As
a percentage of total revenue, these expenses decreased to 57.9% for the

most recent period from 65.6% in the comparable period of the prior year. The
percentage and absolute dollar decrease was primarily attributable to a
reduction in personnel (a decrease of 63 headcount at September 30, 2001,
compared to September 30, 2000), resulting from restructuring activities, other
staff reduction initiatives, normal attrition, and an increased effort to manage
and reduce operating expenses.

Interest Income and Expense. We recorded $94,000 of interest income and
$36,000 of interest expense or net interest income of $58,000 in the three
months ended September 30, 2001. This compares to $500,000 of interest income
and $78,000 of interest expense or net interest income of $423,000 in the
comparable period of 2000. The net decrease was primarily attributable to lower
invested cash balances and lower interest rates.

Comparison of Nine Months Ended September 30, 2001 and 2000

CRM Services Revenue. Revenue from CRM services decreased 29.5% to $32.8
million for the nine months ended September 30, 2001 from $46.5 million for the
comparable period of 2000. This decrease is primarily due to clients with whom
we discontinued marketing and selling of their products and services in 2000 and
2001. In late 2000 and the first half of 2001, we discontinued relationships
with various clients to achieve our financial goals. Revenues associated with
these clients represented $3.2 million of revenue for the nine months ended
September 30, 2001 as compared to $18.1 million of revenue in the comparable
period of 2000. For the nine months ended September 30, 2001, revenue from the
marketing and selling of products and services sold to customers of continuing
clients increased $1.2 million.

CRM Services Gross Profit. Gross profit from CRM services decreased 20.6%
to $10.2 million for the nine months ended September 30, 2001, from $12.9
million for the comparable period in 2000. Gross margin from CRM services
increased to 31.2% in the most recent period compared to 27.7% during the
comparable period of the prior year. The increase in gross margin is due
primarily to an increased focus on our core Contract Renewals Plus services and
a change in the mix of existing clients, resulting from our decision in late
2000 to focus on clients with whom we can maintain profitable business
relationships. We expect our gross margins to continue to vary based on the mix
of clients and the services provided.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 28.3% to $21.0 million for the nine months
ended September 30, 2001 from $29.2 million for the comparable period of 2000.
As a percentage of total revenue, these expenses increased to 63.9% for the most
recent period from 62.8% in the comparable period of the prior year. The
increase in selling, general and administrative expenses as a percentage of
revenue is due to a lower base of revenue for the nine months ended September
30, 2001. Selling, general and administrative expenses as a percentage of
revenue will continue to fluctuate based on our revenue base and management of
expenses.

Restructuring. During the second quarter of 2000, we recorded a
restructuring charge of $868,000 or $0.02 per share, in connection with a
restructuring program, approved by the Board of Directors during the quarter,
designed to accelerate a return to profitability. The program resulted in a
reduction of 22 positions at all levels throughout Rainmaker. The restructuring
charges consisted of $625,000 related to cash severance payments and $50,000
related to legal and other expenses. The restructuring program was completed as
of December 31, 2000. The remaining $193,000 of the charge was not used and was
reversed in the fourth quarter of 2000.

Interest Income and Expense. We recorded $494,000 of interest income and
$131,000 of interest expense or net interest income of $363,000 in the nine
months ended September 30, 2001. This compares to $1.6 million of interest
income and $177,000 of interest expense or net interest income of $1.4 million
in the comparable period of 2000. The net decrease was primarily attributable to
lower invested cash balances and lower interest rates.

Liquidity and Sources of Capital

Historically, we have funded operations from operating cash flows and net
cash proceeds from private placements of preferred stock, and in November 1999,
the initial public offering of our common stock.

Cash, and cash equivalents were $9.7 million at September 30, 2001. Working
capital at September 30, 2001 was $7.3 million.

Cash used in operating activities during the nine months ended September
30, 2001 was $10.4 million compared to $11.1 million for the comparable period
of the prior year. Net cash used for the nine months ended September 30, 2001
was primarily due to a net loss of $10.4 million, after adjusting for noncash
charges of depreciation and amortization of $2.5 million, offset by changes in
our operating assets and liabilities of $2.5 million. Changes in our operating
assets and liabilities resulted primarily from a decrease in our current
liabilities partially offset by decreases in accounts receivable, inventory,
prepaid expenses and other assets. For the comparable period in 2000, net cash
used in operating activities for the first nine months of 2000 was primarily due
to a net loss of $15.8 million, after adjusting for noncash charges of
depreciation and amortization of $1.6 million and changes in our operating
assets and liabilities of $3.1 million. Changes in our operating assets and
liabilities resulted primarily from decreases in our accounts receivable,
inventory and income taxes receivable and increases in accounts payable, accrued
compensation and benefits and other accrued liabilities, partially offset by
decreases in payable to a related party and increases to prepaid expenses, other
receivables and other assets.

Cash used in investing activities during the first nine months of 2001 was
$754,000 compared to $2.3 million for the comparable period of the prior year.
The change was due to decreased capital expenditures in 2001. During the first
nine months of 2000, capital expenditures consisted primarily of computers and
software related to our ERP system and other infrastructure-related initiatives.

Cash used by financing activities during the nine months ended September
30, 2001 was $2.0 million compared to cash provided by financing activities of
$45,000 for the comparable period of the prior year. During the first nine
months of 2001, we repurchased and retired $1.2 million of common stock and
repaid $989,000 of capital lease obligations. This was offset partially by
$134,000 of proceeds received from the issuance of common stock from stock
option exercises and our employee stock purchase plan. For the comparable period
in 2000, we received $650,000 in proceeds from the issuance of common stock from
stock option exercises and our employee stock purchase plan. This was partially
offset by $605,000 of repayments of capital lease obligations.

We believe that our cash, cash equivalents and short-term investments at
September 30, 2001 will be sufficient to meet our liquidity needs for at least
the next twelve months.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

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

We entered into the CRM services business in January 1995. We incurred an
operating loss of $2.5 million and a net loss of $2.4 million for the three
months ended September 30, 2001 and an operating loss of $5.4 million and a net
loss of $4.9 million for three months ended September 30, 2000. For the nine
months ended September 30, 2001, we incurred an operating loss of $10.7 million
and a net loss of $10.4 million. For the nine months ended September 30, 2000,
we incurred an operating loss of $17.2 million and a net loss of $15.8 million.
We may incur losses in the future, depending on the timing of signing new
clients, impact of new and existing clients and our ability to continue to
increase our operating efficiencies.

Because we depend on a small number of clients for a significant portion of our
revenue, the loss of a single client could result in a substantial decrease in
our revenue.

We have generated a significant portion of our revenue from a limited
number of clients. As of September 30, 2001, we have eight clients. For the
three months ended September 30, 2001, sales to customers of Sybase, Inc.
("Sybase"), Hewlett-Packard ("HP"), IBM, and Caldera Systems Inc. ("Caldera,"
formerly The Santa Cruz Operation, Inc.) each individually accounted for 10% or
more of our CRM services revenue. For the three months ended September 30, 2000,
sales to customers of Sybase, Parametric Technology Corporation ("PTC"), The
Santa Cruz Operation, Inc. and Novell, Inc. ("Novell") each individually
accounted for 10% or more of our CRM services revenue. For the three months
ended

September 30, 2001 and 2000, sales to customers previously mentioned
collectively represented 82.8% and 73.8%, respectively, of Rainmaker's CRM
services revenue. For the nine months ended September 30, 2001, sales to
customers of Sybase, HP, Caldera, and Novell each individually accounted for
approximately 10% or more of our CRM services revenue. For the nine months ended
September 30, 2000, sales to customers of Sybase, The Santa Cruz Operation,
Inc., PTC, and Novell each individually accounted for 10% or more of our CRM
services revenue. For the nine months ended September 30, 2001 and 2000, sales
to customers previously mentioned collectively represented 69.8% and 70.3%,
respectively, of Rainmaker's CRM services revenue. We expect that a small number
of clients will continue to account for a significant portion of our revenue for
the foreseeable future. The loss of any of our principal clients could cause a
significant decrease in our revenue. In addition, our software and technology
clients operate in industries that are consolidating, which may reduce the
number of our existing and potential clients.

In late 2000, we decided to focus our resources on clients with whom we can
maintain a profitable business relationship. This resulted in the
discontinuation of relationships with certain clients and a lower base of
revenues. In 2000 and the first half of 2001, we discontinued relationships with
clients whose marketing and selling of their products and services represented
$5.5 million and $18.1 million in revenue, respectively for the three months and
nine months ended September 30, 2000. There is a possibility that we may
discontinue more client relationships which could cause a decrease in our
revenue.

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

Our business primarily consists of marketing and selling our clients'
products and services to their existing customers. In addition, most of our
revenue is based on a "pay for performance" model in which our compensation is
based on the amount of our clients' products and 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 from sales of that client's products and
services may decline.

We are exposed to general economic conditions.

As a result of recent unfavorable economic conditions in the United
States, our revenue may decline. If the economic conditions in the United States
worsen or if a wider or global economic slowdown occurs, we may experience a
material adverse impact on our business, operating results, and financial
condition.

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

We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results have
generally improved from quarter to quarter until recently, our future operating
results may not follow past trends in every quarter even if they continue to
improve overall. In any future quarter, our operating results may be below the
expectation of public market analysts and investors.

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

o the growth of the market for outsourced CRM solutions;

o the demand for and acceptance of our services;

o the demand for our clients' products and services;

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

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

o the success of our direct sales force.

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

Selection of our services often entails an extended decision-making process
on the part of prospective clients. We often must provide a significant level of
education regarding the use and benefit of our services, which may delay the
evaluation and acceptance process. The selling cycle can extend to approximately
six to nine months or longer between initial client contact and signing of a
contract for our services. Additionally, once our services are selected, the
integration of our services often 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 of our services,
the length and unpredictability of the sales and integration cycles will make it
difficult for us to forecast the growth and timing of our revenue from the
marketing and selling of our clients' products and services.

If we are unable to attract and retain highly qualified management and 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 recruiting qualified personnel, and
there can be no assurance that we will not experience difficulties in the
future. Any difficulties could limit our future growth. The loss of certain key
personnel, particularly Michael Silton, our chairman, president and chief
executive officer, could seriously harm our business. We have obtained life
insurance policies in the amount of $6.3 million on Michael Silton.

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

Competition in CRM services is intense, and we expect such competition to
increase in the future. Our competitors include comprehensive system
integrators, e-commerce solutions providers, and other outsource providers of
different components of customer interaction management. We also face
competition from internal departments of current and potential clients. Many of
our existing or potential competitors have greater name 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 results and stock price.

The growth in demand for outsourced sales and marketing services is highly
uncertain.

Demand and acceptance of our sales and marketing services is dependent upon
companies being willing to outsource these processes. 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 currently anticipate, our
business, financial condition and operating results may be materially adversely
affected.

Our success depends on our ability to successfully manage additional growth.

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

Our business strategy may ultimately include 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.

Our long-term growth strategy may include expansion into international
markets. As a result, we may need to establish international operations, hire
additional personnel and establish relationships with additional clients and
customers in those markets. This expansion may require significant financial
resources and management attention and could have a negative effect on our
earnings. We cannot assure you that we will be successful in creating
international demand for our CRM services or that we will be able to effectively
sell our clients' products and services in international markets.

The development of international operations may also involve the following
risks:

o the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers;

o the increased cost associated with designing and operating Web sites
in foreign languages;

o differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites;
and

o difficulties in collecting international accounts receivable for the
products and services that we sell.

We cannot assure you that these factors will not have an adverse effect on
future international sales and earnings.

Any acquisitions we may make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.

As part of our business strategy, we review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expense related to
identifiable intangible assets, any of which could cause our financial
performance to suffer. Furthermore, acquisitions entail numerous risks and
uncertainties, including:

o difficulties in the assimilation of operations, personnel,
technologies, products and the information systems of the acquired
companies;

o diversion of management's attention from other business concerns;

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

o potential loss of key employees of acquired organizations.

We cannot be certain that we would be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could limit our future growth. Although we do
not currently have any agreement with respect to any material acquisitions, we
may make acquisitions of complementary businesses, products or technologies in
the future. However, we may not be able to locate suitable acquisition
opportunities.

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 customers or clients.

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 technological developments. We may be unsuccessful in
anticipating, managing, adopting and integrating technological

changes on a timely basis, or we may not have the capital resources available to
invest in new technologies. Temporary or permanent loss of these systems could
limit our ability to conduct our business and result in lost revenue.

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. A user 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. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate.

Damage to our single facility and the California energy crisis may disable our
operations.

Our operations are housed in a single facility in Scotts Valley,
California. We have taken precautions to protect ourselves from events that
could interrupt our services, such as off-site storage of computer backup data
and a backup power source, but there can be no assurance that an earthquake,
fire, flood or other disaster affecting our facility would not disable these
operations. Any significant damage to this facility from an earthquake or other
disaster could prevent us from operating our business.

California's two largest power companies have been experiencing power
shortages that have resulted in "rolling" blackouts to maintain the stability of
the state power grid. Our facilities have backup generators but we may be
susceptible to power interruptions as long as the energy crisis continues. One
of the power companies, PG&E, has filed an additional contingency plan with the
California Public Utilities Commission that would, if implemented, result in
lengthy and routine power interruptions that would directly impact our
leading-edge process technology development efforts, which could have a material
adverse impact on our business. We are continuing to assess the impact of the
energy crisis on our operations.

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 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, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other 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 United States, so if our business expands into foreign
countries, risks associated with protecting our intellectual property will
increase. We have applied for registration of the service mark "Rainmaker
Systems," "Contracts Renewals Plus, and "Education Sales Plus" in the United
States, and certain foreign countries.

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 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.

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

The Federal Trade Commission's ("FTC's") telemarketing sales 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. 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 email and facsimile transmissions. The failure 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, would not limit our activities in the future or
significantly increase the cost of regulatory compliance.

Our directors and their affiliates will own a large percentage of our stock and
can significantly influence all matters requiring stockholder approval.

Our directors and entities affiliated with them together control
approximately 48% of our outstanding shares (based on the number of shares
outstanding as of September 30, 2001). As a result, any significant combination
of those stockholders, acting together, will have the ability to control 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 Rainmaker, which, in turn, could
depress the market price of our common 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.

The provisions of Delaware law and of our certificate of incorporation and
bylaws could make it difficult for a third party to acquire us, even though an
acquisition might be beneficial to our stockholders. Our certificate of
incorporation provides our board of directors the authority, without stockholder
action, to issue up to 20,000,000 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. In addition, our bylaws establish an
advance notice procedure for stockholder proposals and for nominating candidates
for election as directors. Delaware corporate law also contains provisions that
can affect the ability to take over a company.

Our stock price may be volatile resulting in potential litigation.

If our stock price is volatile, 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. The trading price of our common stock could
fluctuate widely due to:

o quarter to quarter variations in results of operations;

o loss of a major client;

o announcements of technological innovations by us or our competitors;

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

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

o changes in market valuations of similar companies;

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

o other events or factors that may be beyond our control.

In addition, the securities markets in general have experienced extreme
price and trading volume volatility in the past. The trading prices of
securities of many business process outsourcing companies 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.

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

Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has requirements that a company must meet in order to remain listed on the
Nasdaq National Market. If we continue to experience losses from our operations
or we are unable to raise additional funds or our stock price does not meet
minimum standards, we might not be able to maintain the standards for continued
operation on the Nasdaq National Market, including the minimum bid price
requirement of $1.00 per share and net tangible assets of $4 million. Although
our net tangible assets were $14.1 million as of September 30, 2001, the minimum
bid price for our common stock has been below $1.00. If as a result of the
application of these listing requirements, our common stock is delisted from the
Nasdaq National Market, our stock would become harder to buy and sell.
Consequently, if we were removed from the Nasdaq National 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. Currently, the Nasdaq has implemented a moratorium on the
minimum bid price and market value of public float requirements for continued
listing on the Nasdaq Stock Market until January 2, 2002. There is no guarantee
that we will be able to maintain the standards for continued operation on the
Nasdaq National Market that are reinstituted at that time.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET 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 in a variety of short-term and liquid securities including money
market funds, commercial paper, U.S. government and agency securities and
municipal bonds. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing market
interest rate. As of September 30, 2001, 100% of our portfolio was invested in
instruments which mature in less than 90 days.

The following presents the amount of our cash equivalents that may be
subject to market risk and weighted average interest rate as of September 30,
2001. This amount does not include money market funds because those funds are
not subject to market risk.

Maturing in Estimated
three months Fair
or less Value
------------ ---------
(in thousands)
Fixed rate securities $3,970 $3,970
Weighted average interest rate 3.08%

PART II. - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Rainmaker completed the initial public offering of 5,750,000 shares of its
common stock, including 750,000 shares subject to an overallotment option,
pursuant to a registration statement on Form S-1 (Commission File No. 333-86445)
declared effective on November 16, 1999. The joint book-running managing
underwriters of the public offering were Donaldson, Lufkin & Jenrette and Thomas
Weisel Partners LLC.

The shares were sold at a price per share of $8.00. The aggregate offering
price of the shares offered by Rainmaker was $46,000,000, less underwriting
discounts and commissions of $3,220,000 and expenses of approximately
$2,207,000. Approximately $25.6 million of the proceeds has been used for
operating activities through September 30, 2001 and $8.1 million of the proceeds
have been used for capital expenditures. The balance of such proceeds are to be
used for general corporate purposes to support business expansion including new
client acquisition, capital expenditures, development of new services and
possible expansion into international markets. In addition, we may use a portion
of the net proceeds to acquire complementary products, technologies or
businesses; however, we currently have no commitments or agreements and are not
involved in any negotiations to do so. None of the net proceeds of the offering
were paid directly or indirectly to any director, officer, general partner or
Rainmaker or their associates, persons owning 10 percent or more of any class of
equity securities of Rainmaker, or an affiliate of Rainmaker.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The following Exhibits are filed with this report as indicated below.

10.29+ Non Technical Services Agreement, dated July 10, 2001 between
Rainmaker Systems, Inc. and Nortel Networks, Inc.

+ Confidential treatment has been requested by Rainmaker for certain
portions of the referenced exhibit pursuant to Rule 24b-2.

(b) Reports on Form 8-K

On September 4, 2001, Rainmaker filed a report on Form 8-K under Item
5 - Other Items. The 8-K discussed the termination of Rainmaker's
agreement with Novell, Inc. as of September 30, 2001 and the
termination of Rainmaker's agreement with PumaTech, Inc. as of
September 14, 2001.

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: October 19, 2001 By: /s/ MICHAEL SILTON
-------------------------------------
Michael Silton,
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

By: /s/ MARTIN HERNANDEZ
-------------------------------------
Martin Hernandez,
Secretary, Chief Operating Officer
and interim Chief Financial Officer
(Chief Accounting Officer)