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

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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
Scotts Valley, California 95066
(address of principal executive offices) (zip code)

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 April 20, 2001, registrant had 37,737,330 shares outstanding of Common
Stock.

RAINMAKER SYSTEMS, INC.
FORM 10-Q QUARTERLY REPORT
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 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.................................. 16

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)

March 31, December 31,
2001 2000
----------- ------------
(unaudited)

Assets
Current assets:
Cash and cash equivalents................................................................ $ 15,092 $ 22,879
Accounts receivable, less allowance for sales returns and doubtful accounts
of $553 in 2001 and $608 in 2000...................................................... 7,014 8,271
Inventories.............................................................................. 246 403
Other receivables........................................................................ 372 680
Prepaid expenses and other current assets................................................ 1,433 1,211
-------- ----------
Total current assets................................................................ 24,157 33,444
Property and equipment, net.................................................................. 8,220 8,483
Other noncurrent assets...................................................................... 273 295
-------- ----------
Total assets........................................................................ $ 32,650 $ 42,222
======== ==========

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................................................... $ 7,819 $ 9,508
Payable to a related party............................................................... 353 817
Accrued compensation and benefits........................................................ 1,977 2,567
Accrued liabilities...................................................................... 1,131 1,823
Current portion of capital lease obligations............................................. 987 1,183
-------- ----------
Total current liabilities........................................................... 12,267 15,898

Capital lease obligations, less current portion.............................................. 819 1,018
Other long-term liabilities.................................................................. 23 23

Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares: 80,000,000;
Issued and outstanding shares: 37,737,330 in 2001 and 38,336,904 in 2000........... 38 38
Additional paid-in capital................................................................... 56,573 57,732
Deferred stock compensation.................................................................. (266) (363)
Accumulated deficit.......................................................................... (36,804) (32,124)
-------- ----------
Total stockholders' equity.......................................................... 19,541 25,283
-------- ----------
Total liabilities and stockholders' equity.......................................... $ 32,650 $ 42,222
======== ==========

See accompanying notes.

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

Three months ended
March 31,
--------------------

2001 2000
---- ----
(unaudited)

CRM services revenue $12,224 $17,451
Cost of CRM services revenue 8,803 12,828
------- -------
CRM services gross profit...................... 3,421 4,623

Selling, general and administrative expenses 8,307 9,881
------- -------
Operating loss................................. (4,886) (5,258)
Interest income, net 210 510
------- -------
Net loss....................................... (4,676) (4,748)
======= =======

Net loss per common share:
Basic.......................................... $ (0.12) $ (0.12)
======= =======
Diluted........................................ $ (0.12) $ (0.12)
======= =======
Number of shares used in per share computations:
Basic.......................................... 38,057 38,383
======= =======
Diluted........................................ 38,057 38,383
======= =======

See accompanying notes.

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

Three months ended
March 31,
-------------------------------
2001 2000
------- -------
(unaudited)

Operating activities:
Net loss....................................................................... $(4,676) $(4,748)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 754 280
Amortization of deferred stock compensation................................... 97 205
Provision (credit) for sales returns and doubtful accounts.................... (55) 8
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 1,312 (863)
Inventories.................................................................. 157 (123)
Income taxes receivable...................................................... -- 37
Prepaid expenses and other assets............................................ (199) (112)
Other receivables............................................................ 308 (308)
Accounts payable............................................................. (1,689) 1,892
Payable to a related party................................................... (464) 1,103
Accrued compensation and benefits............................................ (590) 186
Accrued liabilities.......................................................... (692) 62
------- -------
Net cash used in operating activities........................................... (5,737) (2,381)
------- -------
Investing activities:
Purchase of property and equipment............................................. (492) (2,033)
Purchase of short-term investments............................................. -- (3,002)
------- -------
Net cash used in investing activities........................................... (492) (5,035)
------- -------
Financing activities:
Proceeds from issuance of common stock from option exercises................... 21 42
Repurchase of common stock..................................................... (1,184) --
Repayment of capital lease obligations......................................... (395) (54)
------- -------
Net cash used in financing activities........................................... (1,558) (12)
------- -------
Net decrease in cash and cash equivalents....................................... (7,787) (7,428)
Cash and cash equivalents at beginning of period............................... 22,879 41,129
------- -------
Cash and cash equivalents at end of period..................................... $15,092 $33,701
======= =======

Supplemental disclosure of cash paid during the period:
Interest paid.................................................................. $ 53 $ 42
======= =======
Income taxes paid, net of refunds.............................................. $ -- $ (50)
======= =======

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 interim period ended March 31, 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 practices 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. 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 3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1999, the Financial Accounting Standards Board issued FAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which amends FAS 133 to be effective
for all fiscal years beginning after June 15, 2000. FAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Rainmaker does not hold any derivative financial instruments
and does not currently engage in hedging activities. Adoption of FAS 133 did not
have a material impact on Rainmaker's financial position or results of
operations. Rainmaker adopted FAS 133 in the first quarter of 2001, effective
January 1, 2001.

NOTE 4. 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, Rainmaker has not had any
significant transactions that are required to be reported in comprehensive
income (loss).

NOTE 5. 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 ended March 31, 2001, Rainmaker repurchased and retired 625,000
shares of its Common Stock for a total consideration of $1.2 million.

RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 6. SUBSEQUENT EVENT

In April 2001, Rainmaker announced that it will reduce its operating expenses
going forward by 10 to 20 percent, which will include a workforce reduction of
approximately 10 percent.

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.

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.

Rainmaker was founded in 1991 as UniDirect Corporation, a
catalog/distributor of business software. We distributed UNIX, NT and Web Server
software products manufactured primarily by The Santa Cruz Operation, Inc.
("SCO"), Microsoft Corporation, Corel Corporation, V-Systems Inc. and SunSoft,
Inc. Our customers consisted of end users, resellers and distributors. In
January 1995, we entered the customer relationship management ("CRM") services
business and signed our first CRM services contract. In 1997, we decided to
focus exclusively on CRM services and added three new CRM services clients that
year. In May 1998, we sold our UniDirect catalog and VarCity distributor
businesses to Savoir Technology Group, Inc. The total consideration received was
$4.6 million.

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, cash
equivalents and short-term investments 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
months ended March 31, 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
--------------------
March 31, March 31,
2001 2000
---- ----

CRM services revenue........................... 100.0 % 100.0 %
Cost of CRM services revenue................... 72.0 73.5
------ ------
CRM services gross profit.................... 28.0 26.5
Selling, general and administrative expenses... 68.0 56.6
------ ------
Operating loss................................. (40.0) (30.1)
Interest income (expense), net................ 1.7 2.9
------ ------
Net loss....................................... (38.3)% (27.2)%
====== ======

Comparison of Three Months Ended March 31, 2001 and 2000

CRM Services Revenue. Revenue from CRM services decreased 30.0% to $12.2
million for the three months ended March 31, 2001 from $17.5 million for the
comparable period of 2000. This decrease is primarily due to a decline in
business attributable to one of our largest clients and to clients with whom we
discontinued marketing and selling their products and services in 2000. Revenue
from the marketing and selling of products and services from one of our largest
clients decreased $3.1 million in the three months ended March 31, 2001 compared
to the comparable period of the prior year. In late 2000, we restructured
relationships with various clients to achieve more near-term profits. During
late 2000, we terminated relationships with eight clients, whose marketing and
selling of their products and services represented $3.5 million of revenue for
the three months ended March 31, 2000.

CRM Services Gross Profit. Gross profit from CRM services decreased 26.0%
to $3.4 million for the three months ended March 31, 2001, from $4.6 million for
the comparable period in 2000. Gross margin from CRM services increased to 28.0%
in the most recent period compared to 26.5% during the

comparable period of the prior year. The increase in gross margin is due
primarily to a change in service and product mix 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 fluctuate based on our mix of products and services and
mix of existing and new clients.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 15.9% to $8.3 million for the three months
ended March 31, 2001 from $9.9 million for the comparable period of 2000. The
percentage and absolute dollar decrease was primarily attributable to a
reduction in personnel (a decrease of 54 average headcount at March 31, 2001
compared to March 31, 2000), and an increased effort to manage and reduce
operating expenses. As a percentage of total revenue, these expenses increased
to 68.0% for the most recent period from 56.6% in the comparable period of the
prior year. The increase in selling, general and administrative expenses as a
percentage of total revenue is primarily due to a lower base of revenue for the
three months ended March 31, 2001, compared to the comparable period of the
prior year. Operating expenses as a percentage of revenue will continue to
fluctuate based on our revenue base and management of operating expenses. Going
forward, we will reduce our operating expenses by 10 to 20 percent, which will
include a workforce reduction of approximately 10 percent.

Interest Income and Expense. We recorded $210,000 of net interest income
in the three months ended March 31, 2001, as compared to $510,000 in the
comparable period of 2000. The decrease was primarily attributable to lower
invested cash balances.

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, cash equivalents and
short-term investments were $15.1 million at March 31, 2001. Working capital at
March 31, 2001 was $11.9 million.

Cash used in operating activities during the three months ended March 31,
2001 was $5.7 million compared to $2.4 million for the comparable period of the
prior year. The change of $3.3 million was due primarily to changes in our
balance sheet accounts. During the first quarter of 2001, accounts payable,
accrued compensation and benefits and other accrued liabilities decreased by a
total of $3.4 million compared to an increase of $3.2 million in the comparable
period of last year. These uses were partially offset by decreases in accounts
receivable of $1.3 million compared to an increase in accounts receivable of
$863,000 in the comparable period of the prior year.

Cash used in investing activities during the first quarter of 2001 was
$492,000 compared to $5 million for the comparable period of the prior year. The
change was due primarily to decreased purchases of short-term investments and
capital equipment in 2001. During the first quarter of 2000, capital
expenditures consisted primarily of computers and software related to our ERP
system and other technology initiatives.

Cash used in financing activities during the three months ended March 31,
2001 was $1.6 million compared to $12,000 for the comparable period of the prior
year. In the first quarter of 2001, we repurchased and retired $1.2 million of
common stock and repaid $395,000 of capital lease obligations. This was offset
partially by $21,000 of proceeds received from the issuance of common stock from
stock option exercises. In the first quarter of 2000, we repaid $54,000 of
capital lease obligations which were offset by $42,000 in proceeds received from
the issuance of common stock from stock option exercises.

We believe that our cash, cash equivalents and short-term investments at
March 31, 2001 will be sufficient to meet our liquidity needs for at least the
next twelve months.

Recent Account Pronouncements

Factors That May Affect Future Results and Market Price of Stock

We have incurred recent losses and expect to incur losses in the future.

We entered into the CRM services business in January 1995. We incurred an
operating loss of $4.9 million and a net loss of $4.7 million for the three
months ended March 31, 2001 and an operating loss of $5.3 million and a net loss
of $4.7 million for the three months ended March 31, 2000. We expect to incur
operating and net losses for at least the next twelve months as we continue to
build our business.

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 the sales of
products and services of a limited numbers of clients. As of March 31, 2001, we
have 11 clients. For the three months ended March 31, 2001, sales to customers
of Sybase, Inc. ("Sybase"), Parametric Technology Corporation ("PTC"), The Santa
Cruz Operation, Inc. ("SCO"), Hewlett-Packard ("HP"), PumaTech, Inc., and
Novell, Inc. ("Novell") accounted for approximately 24%, 21%, 16%, 14%, 11% and
10%, respectively of our CRM services revenue. For the three months ended March
31, 2000, sales to customers of SCO, Sybase, PTC, and Novell accounted for
approximately 28%, 21%, 12%, and 10%, respectively of our 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 other 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 to certain clients and a lower base of
revenues. In 2000, we terminated relationships with eight clients, whose
marketing and selling of their products and services represented $3.5 million in
revenue for the three months ended March 31, 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 from 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 the sale of 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:

. the growth of the market for outsourced CRM 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 develop and implement additional services, products and
technologies; and
. 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.

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 includes 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:

. the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers;
. the increased cost associated with designing and operating Web sites
in foreign languages;
. differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites;
and
. 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 expenses related to goodwill
and other intangible assets, any of which

could cause our financial performance to suffer. Furthermore, acquisitions
entail numerous risks and uncertainties, including:

. difficulties in the assimilation of operations, personnel,
technologies, products and the information systems of the acquired
companies;
. diversion of management's attention from other business concerns;
. 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 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 are currently experiencing a power
shortage that has resulted in "rolling" blackouts to maintain the stability of
the state power grid. Our facilities are 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 e-mail 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 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 50% of our outstanding shares (based on the number of shares
outstanding as of March 31, 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:

. quarter to quarter variations in results of operations;
. loss of a major client;
. 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; or
. 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.

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 March 31, 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 March 31, 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 $9,103 $9,103
Weighted average interest rate 5.9%

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 $20.9 million of the proceeds have been used for
operating activities through March 31, 2001 and approximately $7.9 million of
the proceeds have been used for capital expenditures. The balance of such
proceeds is 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
Rainmaker's net proceeds of the offering were paid directly or indirectly to any
director, officer or their associates, persons owning 10% 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:

10.25 +Amendment No. 2, dated March 1, 2001, to Outsource
Services Agreement dated March 26, 1999 between
Rainmaker Systems, Inc. and Novell, Inc., together
with amendments dated September 8, 1999.

10.26 +Amendment No. 1, dated February 5, 2001, to Internet
Applications Division (IAD) Reseller Agreement dated
March 22, 1999 between Sybase, Inc. and Rainmaker
Systems, 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

None

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: May 2, 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)