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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED:  MARCH 31, 2003

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-28009

RAINMAKER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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.

(1)    Yes  x    No  ¨

(2)    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.    ¨  Yes    x  No

As of April 30, 2003, the registrant had 38,833,593 shares of Common Stock outstanding.

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RAINMAKER SYSTEMS, INC.

FORM 10-Q

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2003

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PART I.—FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

RAINMAKER SYSTEMS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)

The accompanying notes are an integral part of these financial statements.

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RAINMAKER SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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RAINMAKER SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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RAINMAKER SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

—UNAUDITED—

1. BASIS OF PRESENTATION

The accompanying financial statements of Rainmaker Systems, Inc. (“Rainmaker,” “we,” “our,” “us”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of results to be expected for the year ending December 31, 2003, or any other period. 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, 2002.

Certain prior year amounts in 2002 have been reclassified to conform to 2003 presentation. Such reclassifications had no effect on previously reported results of operations, total assets or accumulated deficit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting practices requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside the company, and other relevant facts and circumstances. Actual results could differ from those estimates. Areas that are particularly significant include revenue recognition and presentation policies, valuation of accounts receivable, the assessment of the recoverability and measuring impairment of fixed assets, and recognition of restructuring reserves.

Revenue Recognition and Presentation

Revenue from the sale of service contracts and maintenance renewals is recognized when a purchase order from the client’s customer is received; the service contract or maintenance agreement is delivered; the fee is fixed or determinable; the collection of the receivable is reasonably assured; and no significant post-delivery obligations remain unfulfilled. Revenue from product sales is recognized at the time of shipment of the product directly to the client’s customer. Revenue from services we perform is recognized as the services are accepted. Revenue from fee-based activities is recognized once these services have been delivered. A substantial amount of our sales transactions are reported based on the gross amount we bill to our clients’ customers for products and services, since we take title and assume risk of loss for products and service contracts sold, we can sell the products or service contracts at prices we determine, and we assume the full credit risk for the products and service contracts. However, we also sell products and services on behalf of our clients whereby, based on the evaluation of the specific facts and circumstances, we record revenue equal to the net amount we earn in the transaction.

In determining whether it is more appropriate to report revenue based on the gross amount billed to our clients’ customer or the net amount we earn in a transaction, we evaluate specific indicators. These indicators include, but are not limited to, 1) whether the vendor is the primary obligor in the transaction, 2) whether the vendor assumes general inventory risk, 3) whether the vendor has latitude for setting the pricing for the goods or services it sells to its customers, and 4) whether the vendor bears the credit risk in the transaction. Absence of these indicators might indicate that revenue should be recorded at the net amount earned in the transaction.

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Stock-Based Compensation

As of March 31, 2003, we had two stock-based employee compensation plans, which are more fully described in Note 8 of our Annual Report on Form 10-K. We account for our stock-based awards to employees in accordance with the intrinsic value method and disclose the pro forma effect on operations of using the fair value method of valuing these awards. The fair value of these awards is calculated using the Black-Scholes option pricing model, which requires that we estimate the volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. The calculation of fair value is highly sensitive to the expected life of the stock-based award and the volatility of our stock, both of which we estimate based primarily on historical experience.

For the three months ended March 31, 2003 and 2002, we recorded no stock-based compensation. Had we recognized compensation expense for the grant date fair value of stock-based awards granted to employees and non-employee members of our Board of Directors, our net loss and net loss per share would have increased to the pro forma amounts below (in thousands, except per share data):

For pro forma purposes, the estimated fair value of our stock-based grants is amortized using the graded method over the options’ vesting period for stock options granted under the 1999 Stock Incentive Plan and the purchase period for stock purchases under the employee stock purchase plan.

Recently Issued Accounting Standards

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003, variable interest entities in which an enterprise obtains an interest after that date, and variable interest entities in which an enterprise obtained an interest prior to FIN 46’s issuance date and in which such interest remains as of July 1, 2003. We do not have any ownership in any variable interest entities as of March 31, 2003, and therefore, adoption of FIN 46 did not have a material impact on our financial statements in the quarter ended March 31, 2003, nor is it expected to have a material impact on our financial statements upon its full adoption on July 1, 2003.

3. NET LOSS PER SHARE

Basic earnings per common share is computed using the weighted-average number of shares of common stock outstanding during the year, less shares subject to repurchase. Diluted earnings per common share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options, using the treasury stock method, and convertible securities, using the if converted method, as of the beginning of the period presented or the original issuance date, if later.

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

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Options to purchase 4,570,056 and 2,007,631 shares of common stock were outstanding at March 31, 2003 and 2002, respectively, and were not included in the diluted net loss per share computation, as the effect of including such shares would be antidilutive because of the net loss recorded in each period. At March 31, 2003 and 2002, there were 63 and 3,434, respectively, of common shares subject to repurchase.

4. COMPREHENSIVE LOSS

Comprehensive loss consists of net loss adjusted for the effect of unrealized holding gains or losses on available-for-sale securities. For the three months ended March 31, 2003 and 2002, the unrealized holding loss was zero and $20,000, respectively. Comprehensive loss for the three months ended March 31, 2003 and 2002 was $802,000 and $1.4 million, respectively.

5. ACCRUED RESTRUCTURING AND OTHER RELATED CHARGES

During the fourth quarter of 2001, we recorded restructuring and other related charges of $2.4 million, or $0.06 per share in connection with a restructuring program approved by the board of directors. This resulted in a reduction of 39 positions at all levels throughout Rainmaker whose total annual salary at the date of termination was approximately $2.6 million. All affected employees were informed of the reduction and their severance amounts prior to December 31, 2001. The charges consisted of cash severance payments made to severed employees, lease payments related to facilities consolidation, write-offs of abandoned property, equipment and leasehold improvements whose estimated fair market value was zero, and discontinued use of internally developed and licensed software.

As of December 31, 2002, all severance and legal costs related to the restructuring program had been paid and there were no remaining obligations for severance or legal costs related to the restructuring. The remaining cash expenditures as of March 31, 2003, related to lease cancellation and facility exit costs which will be paid monthly through December 2003.

The following table summarizes the activity related to the restructuring liability for the three months ended March 31, 2003 (in thousands):

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6. SEGMENT REPORTING

We operate in one market segment, the sale and marketing of technology companies’ products and services to their customers. We primarily operate in one geographical segment, North America. Substantially all of our sales are made to our clients’ customers in the United States.

7. INCOME TAX BENEFIT

In March 2002, the Internal Revenue Service issued the Job Creation and Worker Assistance Act of 2002 which extended the regular and alternative minimum tax net operating loss carryback period from two years to five years for losses arising in 2001 or 2002 tax years. As a result of this new law, we recorded an income tax benefit of $146,000 during the three months ended March 31, 2002, attributable to the estimated recovery of income taxes paid in prior periods. In addition, as a result of this recovery, we recorded an income tax benefit of $23,000 during the three months ended March 31, 2003, attributable to previously unrecognized prior year research and development credits released as a result of this new law.

8. RELATED PARTY TRANSACTIONS

In prior years and during the period ended June 30, 2002, we purchased inventories and service agreements from a client who had a board member who also sits on our Board of Directors. As of June 28, 2002, this board member was no longer on the board of our client. Total purchases from such client during the three months ended March 31, 2002 amounted to $649,000. During the same three-month period, we received marketing development fund reimbursements of $17,000 from that client. At March 31, 2003 and December 31, 2002, all outstanding payables to this client have been included in the accompanying balance sheets as a component of accounts payable.

In February of 2002, Rainmaker entered into an agreement with a member of its Board of Directors to procure consulting services. The agreement had a two-month term commencing February 2002, with minimum cash compensation to the board member of $53,000, based upon specific deliverables during the term. As of December 31, 2002, we had recorded and paid all $53,000 of consulting fees related to this agreement and the consulting agreement has expired pursuant to its terms.

9. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments and Contingencies

During February 2003, we entered into a financing lease for maintenance services in the amount of $172,000, with an effective annual interest rate of 9.4%. The lease is for a period of twelve months and payments are made monthly. Future minimum lease payments for the remainder of 2003 are $136,000 and $15,000 in 2004.

Guarantees

As security for four of our capital leases, in 2002, we entered into two separate letters of credit in the original amounts of $89,000 and $124,000. These letters of credit will decline over time as we pay down the associated obligations that they secure. As of March 31, 2003, these letters of credit had current values of $45,000 and $93,000,

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respectively. On April 1, 2003, the current values of these letters of credit were reduced to $22,000 and $62,000, respectively.

In December 2002, we obtained a standby letter of credit in the original amount of $770,000 as security for our financing obligations related to certain of our liability insurance premiums. The letter of credit declines over time as we pay down the associated financing obligation that it secures. As of March 31, 2003, this letter of credit had a current value of $770,000. On April 17, 2003, the current value of this letter of credit was reduced to $755,000.

In February 2003, we entered into a letter of credit agreement, which secures amounts owed under a financing lease entered into in February 2003. The letter of credit has a maximum value of $186,000 and has an initial expiration of March 31, 2004. The letter of credit will automatically renew for a period of six months beginning March 31, 2004, if we do not provide notification to the bank that the letter of credit is not to be renewed. In any event, the letter of credit will expire no later than September 30, 2004.

From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third party claims. These obligations primarily relate to certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of their employment relationship. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of March 31, 2003 or December 31, 2002.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

We are a leading outsource provider of sales and marketing programs for service contracts. Our cost-effective programs generate service revenue and promote customer retention for our clients. Core services include professional telesales, direct marketing, and hosted ecommerce. Additional services include customer database enhancement, CRM technology integration and order management. These services are available individually or as an integrated solution.

We incurred operating losses and net losses for the three months ended March 31, 2003 and for the years ended December 31, 2002, 2001 and 2000. We also continue to invest in new clients. New clients may 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. 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.

Beginning in the second half of 2000 and continuing through March 31, 2003, we have focused on our core service contracts business. The portion of our net revenues from sales of our core service contracts is 97% for the quarter ended March 31, 2003 as compared to 94% in the quarter ended March 31, 2002. In addition to focusing on our core service contracts business, in the second half of 2001, we implemented a restructuring program to streamline our operations and reduce our operating expenses. As part of these restructuring activities, we reduced headcount by 39 positions and wrote-off abandoned facilities, property and equipment. In connection with these actions, we recorded restructuring and other related charges of $2.4 million in 2001. During 2002, we recorded recoveries of restructuring and other related charges of $240,000, resulting from lower than anticipated employee severance and legal costs and a reduction in the lease term for our unoccupied facility.

As of December 31, 2002, all severance and legal costs related to the restructuring program had been paid and there were no remaining obligations for severance and legal costs related to the restructuring. The following table summarizes the activity related to the restructuring liability for the three months ended March 31, 2003 (in thousands):

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As a result of the focus on our core service contracts business and restructuring activities, we have been able to hold our operating expenses relatively constant while increasing our gross margin.

Our business primarily consists of marketing and selling our clients’ products and services to their 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 the sale of the client’s products and services may decline.

In 2001, we discontinued marketing and selling certain clients’ products and services. As a result of this, as well as the unfavorable economic conditions in the United States, our net revenue has, and may continue to, decline. If the economic conditions in the United States continue to 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. During these unfavorable economic periods, it may be more difficult to sign new clients or expand relationships with existing clients. In addition, during unfavorable economic periods, spending on existing and new technology may decrease, resulting in downgrades of service contracts or fewer new service contracts, which may have a material adverse impact on our business. This impact may be offset as technology companies may compensate for decreased spending on new technology and technology upgrades with more robust service contracts on their existing technology.

Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to our facilities, employees, clients or clients’ customers. The potential for future terrorist attacks, the national and international response to terrorist attacks or perceived threats to national security, and other acts of war or hostility, have created many uncertainties that could adversely affect our business or results of operations in ways that cannot presently be predicted.

Our quarterly operating results may continue to fluctuate in the future based on a number of factors, many of which are beyond our control. We believe that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. Our operating results are expected to vary significantly from quarter to quarter and are difficult to predict. Our historical revenue has tended to fluctuate based on seasonal buying patterns of our clients and their customers. Our prospects must be considered in light of the risks, expenses and difficulties encountered by technology companies, particularly given that we operate in new and rapidly evolving markets, and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. See “Factors That May Affect Future Results and Market Price of Stock” below.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience, as well as all known facts and circumstances that we believe are relevant and assumptions as to future events. Actual results may differ from our estimates. Our significant accounting polices are described in Note 1 of Notes to Financial Statements included in our Annual Report on Form 10-K. The significant accounting policies that we believe are critical, either because they relate to financial statement line items that are key indicators of our financial performance (e.g., revenue) and/or because their application requires significant management judgment, are described in the following paragraphs.

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

Revenue Recognition and Presentation

Revenue from the sale of service contracts and maintenance renewals is recognized when a purchase order from the client’s customer is received; the service contract or maintenance agreement is delivered; the fee is fixed or determinable; the collection of the receivable is reasonably assured; and no significant post-delivery obligations remain unfulfilled. Revenue from product sales is recognized at the time of shipment of the product directly to the client’s customer. Revenue from services we perform is recognized as the services are accepted. Revenue from fee-based activities, such as customized integration and development, is recognized once these services have been delivered. A substantial amount of our sales transactions are reported based on the gross amount we bill to our clients’ customers for products and services, since we take title and assume risk of loss for products and service contracts sold, we can sell the products or service contracts at prices we determine, and we assume the full credit risk for the products and service contracts. However, we also sell products and services on behalf of our clients whereby, based on the evaluation of the specific facts and circumstances, we record revenue equal to the net amount that we earn in the transaction. The difference between our gross billings, a measurement of the total volume of products and services billed by us to our clients’ customers, and our net revenue earned was $4.8 million and $132,000 in the three months ended March 31, 2003 and 2002, respectively.

The aspects of our revenue recognition policy that involve significant judgments and estimates include the following:

Gross versus Net Presentation—We evaluate each arrangement with our clients to determine whether we should report revenue as the gross amount billed to our client’s customer versus the net amount earned in the transaction. In determining whether to report revenue at the gross amount or net amount, we evaluate the existence of specific indicators as provided in the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principle versus Net as an Agent.” The primary indicators include, but are not limited to, 1) whether the vendor is the primary obligor in the transaction, 2) whether the vendor assumes general inventory risk, 3) whether the vendor has latitude for setting the pricing for the goods or services it sells to its customers, and 4) whether the vendor bears credit risk in the transaction. The evaluation of the indicators involves significant management judgment. To the extent that facts or circumstances change, our conclusion as to whether to report revenue at the gross amount or net amount may change, which could have a significant impact on our reported net revenues, although it would not impact our gross billings, net income (loss), financial position or cash flows.

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

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate our estimates, including those related to bad debts, investments, commissions and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These policies include, but are not limited to:

We have other equally important accounting policies and practices; however, once adopted, these other policies either generally do not require us to make significant estimates or assumptions or otherwise only require

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implementation of the adopted policy, not a judgment as to the policy itself. Despite our intention to establish accurate estimates and assumptions, actual results could differ from those estimates under different assumptions or conditions.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts based upon estimated losses resulting from the inability of our clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience.

Impairment of Long-Lived Assets

We review all of our long-lived assets, including fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and a significant change in our market capitalization relative to our net book value. An asset or a group of assets is determined to be impaired if the estimated future undiscounted net cash flows attributable to the asset or group of assets are less than their carrying value. If impairment exists, it is measured as the difference between the carrying value of the asset or group of assets and their estimated fair values. Fair values are determined using third party valuations, discounted cash flow analyses or other generally accepted methods. Estimating future cash flows attributable to a particular asset or group of assets is difficult, and requires the use of significant judgment.

Restructuring and Other Related Charges

During the fourth quarter of fiscal 2001, we implemented a restructuring program to focus and streamline our business and reduce operating expenses. In connection with this program, we reduced headcount and consolidated facilities. As a result of these actions we recorded restructuring and other related charges consisting of cash severance payments to be made to severed employees, lease payments related to property abandoned as a result of our facilities consolidation, and legal and other costs. Each reporting period we review these estimates based on the status of execution of our restructuring plan and, to the extent that these assumptions change due to changes in market conditions and our business, the ultimate restructuring expenses could vary.

As of December 31, 2002, our restructuring actions related to employee severance, legal and other costs were complete and we had no remaining obligations related to such activities. The remaining cash expenditures related to our restructuring liability of $107,000 as of March 31, 2003, are expected to be made over the remaining term of our facility lease, which expires in December 2003.

Concentrations

We generate a significant portion of our net revenues from the marketing and selling of products and services for a limited number of clients. For the three months ended March 31, 2003, sales to customers of Hewlett-Packard Company (“HP”), Sybase, Inc. (“Sybase”) and Nortel Networks, Inc. (“Nortel”) each accounted for more than 10% of our net revenues. In the three months ended March 31, 2002, sales to customers of HP, Sybase, Nortel and Caldera International, Inc. (“Caldera”), each accounted for more than 10% of net revenues. In the three months ended March 31, 2003 and 2002, sales to customers of the previously mentioned clients collectively accounted for 91% and 100%, respectively, of net revenues. No individual client’s customers in the aggregate accounted for more than 40% and 33% of net revenues, respectively, in the three months ended March 31, 2003 and 2002.

As a percentage of gross billings, Dell Products, L.P. (“Dell”), HP, Sybase and Nortel, each accounted for more than 10% of our gross billings in the three months ended March 31, 2003. For the three months ended March 31, 2002, sales to customers of HP, Sybase, Nortel and Caldera each accounted for more than 10% of our gross billings. For the three months ended March 31, 2003 and 2002, sales to customers of the previously mentioned clients collectively accounted for 98% and 98%, respectively, of gross billings. No individual client’s customers in the aggregate accounted for more than 35% and 32% of our gross billings in the three months ended March 31, 2003 and 2002,

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respectively. Gross billings represents the amount we invoice to our clients’ customers and we believe it provides a meaningful indication of the volume of our business. See the reconciliation of net services revenue to gross billings below under the caption “Comparison of Three Months Ended March 31, 2003 and 2002.”

We have outsource services agreements with our clients that expire at various dates ranging from July 2003 to January 2005. Many of our client agreements contain automatic renewal clauses. These clients may, however, terminate their contracts in accordance with the provisions of each contract. In most cases, a client must provide us with advance written notice of its intention to terminate.

We expect that a small number of clients will continue to account for a significant portion of our net revenue and gross billings. In addition, our technology clients operate in industries that are experiencing consolidation, which may reduce the number of our existing and potential clients.

Other Financial Statement Categories

Net services revenue consists of sales of our clients’ hardware and software support and service contracts, licenses and license upgrades to our clients’ customer base. Most of our revenue is based on a “pay for performance” model in which we generate revenue only when we complete the sale of our clients’ products and services. A substantial amount of our sales transactions are reported based on the gross amount we bill to our clients’ customers for products and services, since we take title and assume risk of loss for products and services we sell, we can sell the products or service contracts at prices we determine, and we assume the full credit risk for the products and service contracts. However, we also sell products and services on behalf of our clients whereby, based on the evaluation of the specific facts and circumstances, we record revenue equal to the net amount we earn in the transaction.

Cost of services revenue includes payments for our clients’ products and services that we sell, 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 may be 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 may improve. Cost of revenue also consists of the cost of inbound and outbound shipping, net of amounts recovered from our clients’ customers, as well as the costs of designing, producing and delivering marketing services.

Sales and marketing expenses include costs associated with the marketing and selling of our services and costs associated with promoting and selling our clients’ products and services. Included in these costs are client integration costs, compensation costs of marketing and sales personnel, sales commissions, bonuses, marketing and promotional expenses and costs related to product and service development. Also included are unreimbursed client-related marketing expenses. Most of the costs are personnel related and are relatively fixed. Bonuses and sales commissions will typically change in proportion to revenue or profitability.

Technology expenses include costs associated with systems and telecommunications, including compensation and related costs for technology personnel, consultants, purchases of non-capitalizable software and hardware, and support and maintenance costs related to our systems. This financial statement category excludes all depreciation on systems hardware and software.

General and administrative expenses include costs associated with the administration of our business and consist primarily of compensation and related costs for administrative personnel, insurance, and legal and other professional fees. Most of these costs relate to personnel, insurance and facilities and are relatively fixed.

Depreciation and amortization expenses consist of depreciation and amortization of property, equipment and software licenses.

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

Related Party Transactions

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In prior years and during the period ended June 30, 2002, we purchased inventories and service agreements from a client who had a board member who also sits on our Board of Directors. As of June 28, 2002, this board member was no longer on the board of our client. Total purchases from such client during the three months ended March 31, 2002 amounted to $649,000. During the same three-month period, we received marketing development fund reimbursements of $17,000 from that client. At March 31, 2003 and December 31, 2002, all outstanding payables to this client have been included in the accompanying balance sheets as a component of accounts payable.

In February of 2002, Rainmaker entered into an agreement with a member of its Board of Directors to procure consulting services. The agreement had a two-month term commencing February 2002, with minimum cash compensation to the board member of $53,000, based upon specific deliverables during the term. As of December 31, 2002, we had recorded and paid all $53,000 of consulting fees related to this agreement and the consulting agreement has expired pursuant to its terms.

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 our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Comparison of Three Months Ended March 31, 2003 and 2002

Net Services Revenue.  Net services revenue increased 22.4% to $10.4 million for the three months ended March 31, 2003, from $8.5 million for the comparable period of 2002. This increase was primarily due to an increase in volume with certain existing clients, and increased revenue from new clients. Increases in the volume of business with certain existing clients resulted in an increase of $2.3 million in net revenues for the three months ended March 31, 2003 as compared to the same period in the prior year. Net revenues from new clients were $792,000 for the three months ended March 31, 2003. These increases were partially offset by decreases in the volume of business with other clients of $400,000.

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A substantial amount of our net services revenue is reported based on the gross amounts we bill to our clients’ customers for their products and services. We also sell products and services on behalf of our clients whereby we record revenue equal to the net amount that we earn in the transaction. Gross billings, a measurement of the total volume of products and services billed by us to our clients’ customers for their products and services, increased 76.7% to $15.2 million for the three months ended March 31, 2003, from $8.6 million for the comparable period of 2002. The increase is primarily due to new clients for which we had $5.5 million of gross billings in the three months ended March 31, 2003. We believe that gross billings, a non-GAAP financial measure, provides a meaningful indication of the volume of our business activity. The following table reconciles our net services revenue and our gross billings for the three months ended March 31, 2003 and 2002 (in thousands):

Gross Profit.  Gross profit increased 33.3% to $3.2 million for the three months ended March 31, 2003, from $2.4 million for the comparable period in 2002. Gross margin increased to 31.2% for the three months ended March 31, 2003, compared to 28.3% during the comparable period of the prior year. The increase in gross margin was due primarily to a change in the mix of existing clients and the mix of our clients’ products and services that we sell. We expect our gross margins to continue to vary based on the mix of clients and the services provided.

Sales and Marketing Expenses.  Sales and marketing expenses increased 54.5% to $1.7 million for the three months ended March 31, 2003, from $1.1 million for the comparable period of 2002. This increase is primarily due to an increase of $351,000 related to allocations of certain technology and general and administrative overhead expenses to sales and marketing expenses for the three months ended March 31, 2003 as compared to the comparable period in 2002. Previously, these costs were included in technology and general and administrative expenses. In addition, as a result of increased client marketing activities, marketing expenses increased $97,000 for the three months ended March 31, 2003 as compared to the same period in 2002.

Technology Expenses.  Technology expenses decreased 41.2% to $425,000 for the three months ended March 31, 2003, from $725,000 for the comparable period of 2002. This decrease is the result of the allocation of certain technology-related overhead expenses to sales and marketing and general and administrative expenses in the amount of $263,000 for the three months ended March 31, 2003. In prior periods, such costs were included in technology expenses.

General and Administrative Expenses.  General and administrative expenses of $1.6 million for the three months ended March 31, 2003, were consistent with $1.5 million for the comparable period of 2002. Decreased legal and professional fees and administrative expenses of $91,000 were offset by increased payroll-related and investor relations expenses.

Depreciation and Amortization Expenses.  Depreciation and amortization expenses decreased 32.0% to $401,000 for the three months ended March 31, 2003, from $590,000 for the comparable period in 2002. The decrease is the result of lower depreciation expense on lower property and equipment balances in 2003 as compared to 2002.

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

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The decrease in interest income was attributable to lower average interest rates and, to a lesser extent, lower invested balances. The increase in interest expense was the result of higher average capital lease and financing obligation balances outstanding for the three months ended March 31, 2003, as compared to the comparable period in 2002.

Income Tax Benefit. In March 2002, the Internal Revenue Service Issued the Job Creation and Worker Assistance Act of 2002, which extended the regular and alternative minimum tax net operating loss carryback period from two years to five years for losses arising in 2001 or 2002. As a result of this new law, we recorded an income tax benefit of $146,000 during the three months ended March 31, 2002, attributable to the recovery of income taxes paid in prior periods. In addition, as a result of this recovery, we recorded an income tax benefit of $23,000 during the three months ended March 31, 2003, attributable to previously unrecognized prior year research and development credits released as a result of this new law.

Liquidity and Sources of Capital

Cash and cash equivalents were $6.9 million at March 31, 2003 as compared to $8.1 million at December 31, 2002. Working capital was $2.7 and $3.3 million at March 31, 2003 and December 31, 2002, respectively. Net accounts receivable increased $918,000 or 16.4% from December 31, 2002 to March 31, 2003, primarily as a result of increased volume of sales transactions during the period. Our days sales outstanding, on a net services revenue basis, were 52 days at March 31, 2003, as compared to 49 days at December 31, 2002 and 47 days at March 31, 2002. On a gross billings basis, our days sales outstanding were 36 days at March 31, 2003, as compared to 46 days at March 31, 2002. Gross billings represents the amount we invoice to our clients’ customers for the services we sell. We believe that gross billings, a non-GAAP financial measure, provides a meaningful indication of the volume of our business activity. The following table reconciles net services revenue to gross billings and net services revenue days sales outstanding to days sales outstanding on a gross billings basis for the three months ended March 31, 2003 and 2002, respectively (dollars in thousands):

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Cash used in operating activities during the three months ended March 31, 2003, was $699,000, as compared to $372,000 during the three months ended March 31, 2002. Cash used in operating activities during the three months ended March 31, 2003, was primarily the result of net loss, adjusted for non-cash items, of $442,000 and an increase in accounts receivable of $843,000. These uses of cash were partially offset by a decrease in income taxes receivable of $211,000, an increase in accounts payable of $686,000 and a decrease in other current liabilities of $405,000. In the three months ended March 31, 2002, net cash used in operating activities was the result of net loss, adjusted for non-cash items, of $898,000, and increases in current liabilities of $434,000, offset by a decrease in accounts receivable of $898,000.

Cash used in investing activities during the three months ended March 31, 2003 was $143,000, compared to cash provided by investing activities of $51,000 during the three months ended March 31, 2002. For the three months ended March 31, 2003, cash used in investing activities was the result of purchases of certain property and equipment during the period, while cash provided by investing activities during the three months ended March 31, 2002, was the result of proceeds from the sale of investments.

Cash used in financing activities during the three months ended March 31, 2003 and 2002, was $435,000 and $173,000, respectively, and was the result of repayments of our debt obligations.

Our principal source of liquidity as of March 31, 2003 consisted of $6.9 million of cash and cash equivalents. We anticipate that our existing capital resources and cash flow expected to be generated from future operations will enable us to maintain our current level of operations, our planned operations and our planned capital expenditures for at least the next twelve months.

Off-Balance Sheet Arrangements

Leases

As of March 31, 2003, our off-balance sheet arrangements include operating leases of our facility and certain property and equipment that expire at various times through 2007. These arrangements allow us to obtain the use of the equipment and facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and cash flow related to purchasing the assets. During the three months ended March 31, 2003, we recorded rent expense related to these leases of $122,000.

Guarantees

As security for four of our capital leases, in 2002 we entered into two separate letters of credit in the original amounts of $89,000 and $124,000. These letters of credit will decline over time, in accordance with the remaining balance payable under the financing which they secure. As of March 31, 2003, these letters of credit had current values of $45,000 and $93,000, respectively. On April 1, 2003, the current values of these letters of credit were reduced to $22,000 and $62,000, respectively.

In December 2002, we obtained a standby letter of credit in the original amount of $770,000 as security for our financing obligations related to certain of our liability insurance premiums. The letter of credit declines over time in accordance with the remaining balance of our financing obligation. As of March 31, 2003, this letter of credit had a current value of $770,000. On April 17, 2003, the current value of this letter of credit was reduced to $755,000.

In February 2003, we entered into a letter of credit agreement, which secures amounts owed under a financing lease entered into in February 2003. The letter of credit has a maximum value of $186,000 and has an initial expiration of March 31, 2004. The letter of credit will automatically renew for a period of six months beginning March 31, 2004, if we do not provide notification to the bank that the letter of credit is not to be renewed. In any event, the letter of credit will expire no later than September 30, 2004.

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From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third party claims. These obligations primarily relate to certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of their employment relationship. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of March 31, 2003 or December 31, 2002.

Contractual Obligations

During February 2003, we entered into a financing lease for maintenance services in the amount of $172,000, with an effective annual interest rate of 9.4%. The lease is for a period of twelve months and payments are made monthly. Future minimum lease payments in the remainder of 2003 are $136,000 and $15,000 in 2004.

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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 incurred an operating loss of $807,000 and net loss of $802,000 for the three months ended March 31, 2003, an operating loss of $3.8 million and net loss of $3.5 million for 2002, and an operating loss of $14.7 million and net loss of $14.4 million for 2001. We may incur losses in the future, depending on the timing of signing of new clients, impact of new and existing clients, our decisions to further invest in our technology or infrastructure, 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. For the three months ended March 31, 2003, sales to customers of HP, Sybase and Nortel each accounted for more than 10% of our net revenues. In the three months ended March 31, 2002, sales to customers of HP, Sybase, Nortel and Caldera each accounted for more than 10% of net revenues. In the three months ended March 31, 2003 and 2002, sales to customers of the previously mentioned clients collectively accounted for 91% and 100%, respectively, of net revenues. No individual client accounted for more than 40% and 33% of net revenues, respectively, in the three months ended March 31, 2003 and 2002.

As a percentage of gross billings, Dell Products, L.P. (“Dell”), HP, Sybase and Nortel, each accounted for more than 10% of our gross billings in the three months ended March 31, 2003. For the three months ended March 31, 2002, sales to customers of HP, Sybase, Nortel and Caldera each accounted for more than 10% of our gross billings. For the three months ended March 31, 2003 and 2002, sales to customers of the previously mentioned clients collectively accounted for 98% and 98%, respectively, of gross billings. No individual clients accounted for more than 35% and 32% of our gross billings in the three months ended March 31, 2003 and 2002, respectively. Gross billings represents the amount we invoice to our clients’ customers and we believe it provides a meaningful indication of the volume of our business. See the reconciliation of net services revenue to gross billings as included in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Liquidity and Capital Resources.”

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 experience consolidation from time to time, which could reduce the number of our existing and potential clients.

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 customers. In addition, most of our revenue is based on a “pay for performance” model in which our revenues are 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 the 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 has and may continue to 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. During these unfavorable economic periods, it may be more difficult to sign new clients or expand relationships with existing clients.

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

Terrorist acts or acts of war my cause damage to our employees, facilities, clients, our clients’ customers, and vendors, which could significantly impact our revenues, costs and expenses and financial position. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and

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results of operations in ways that cannot be presently predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

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 length and unpredictability of the sales and integration cycles for our full solution service offering 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 nine to twelve 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 make it difficult for us to forecast the growth and timing of our revenue.

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

Our success depends to a significant extent upon the contributions of our executive officers and key sales and technical personnel and our ability to attract and retain highly qualified sales, technical and managerial personnel. Competition for personnel is intense as these personnel are limited in supply. We have at times experienced difficulty in 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, and Martin Hernandez, our chief operating officer and chief financial officer, could seriously harm our business. We have obtained life insurance policies in the amount of $6.3 million on Michael Silton and $3.0 million on Martin Hernandez.

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 system integrators, ecommerce solutions providers, and other outsource providers of different components of customer interaction management. We also face competition from internal marketing departments of current and potential clients. Additionally, we may face competition from outsource providers with substantial off-shore facilities which may enable them to compete aggressively with similar service offerings at a substantially lower price. Many of our existing or potential competitors have greater 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 demand for outsourced sales and marketing services is highly uncertain.

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Demand and acceptance of our sales and marketing services is dependent upon companies’ willingness to outsource these processes. It is possible that these outsourced 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 growth.

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

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.

Any business combinations in which we participate could result in dilution, unfavorable accounting charges and difficulties in successfully managing our business.

As part of our business strategy, we review from time to time business combination prospects that would complement our existing business or enhance our technological capabilities. Future business combinations 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, business combinations entail numerous risks and uncertainties, including:

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 business combinations, we may enter into business combinations with complementary businesses, products or technologies in the future. However, we may not be able to locate suitable business combination 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 clients or our clients’ customers.

Our success is dependent in large part on our continued investment in sophisticated computer, Internet and telecommunications systems. We have invested significantly in technology and anticipate that it will be necessary to continue to do so in the future to remain competitive. These technologies are evolving rapidly and are characterized by short product life cycles, which require us to anticipate 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

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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 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. While we maintain insurance coverage for business interruptions, such coverage does not extend to losses caused by earthquake and such coverage may not be sufficient to cover all possible losses.

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 to register the RAINMAKER SYSTEMS, RAINMAKER (and Design), CONTRACT RENEWALS PLUS, and EDUCATION SALES PLUS service marks in the United States and certain other countries. We have received registrations or have pending applications for the RAINMAKER SYSTEMS service mark in the United States, Canada, Australia, the European Community, Switzerland, Norway and New Zealand; the RAINMAKER (and Design) service mark in the United States and the European Community, the CONTRACT RENEWAL PLUS service mark in the United States, Switzerland, Canada, Norway and the European Community; and the EDUCATION SALES PLUS mark in the United States and Switzerland.

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

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

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, or judicial interpretation of existing or future laws would not limit our activities in the future or significantly increase the cost of regulatory compliance.

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

Our directors, executive officers and entities affiliated with them together beneficially control approximately 48.3% of our outstanding shares (based on the number of shares outstanding as of March 31, 2003). As a result, any significant combination of those stockholders, acting together, may 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. 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:

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.

Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of our corporate governance and securities disclosure or compliance practices. That Act also requires the SEC to promulgate new rules on a variety of subjects, in addition to rule proposals already made, and Nasdaq has proposed revisions to its requirements for companies that are Nasdaq-listed. We expect these developments to increase our legal compliance costs. We expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

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

Like most other public companies, we carry insurance protecting our officers and directors and us against claims relating to the conduct of our business. This insurance covers, among other things, the costs incurred by companies and

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their management to defend against and resolve claims relating to management conduct and results of operations, such as securities class action claims. These claims typically are extremely expensive to defend against and resolve. Hence, as is customary, we purchase and maintain insurance to cover some of these costs. We pay significant premiums to acquire and maintain this insurance, which is provided by third-party insurers. Since 1999, the premiums we have paid for this insurance have increased substantially. One consequence of the current economic downturn and decline in stock prices has been a substantial general increase in the number of securities class actions and similar claims brought against public corporations and their management. Many, if not all, of these actions and claims are, and will likely continue to be, at least partially insured by third-party insurers. Consequently, insurers providing director and officer liability insurance have in recent periods sharply increased the premiums they charge for this insurance, raised retentions (that is, the amount of liability that a company is required to itself pay to defend and resolve a claim before any applicable insurance is provided), and limited the amount of insurance they will provide. Moreover, insurers typically provide only one-year policies. We renewed our director and officer insurance in the fourth quarter of 2002 for a one-year term. In the fourth quarter of 2003, we will be required to do the same. Particularly in the current economic environment, we cannot assure that we will be able to obtain sufficient director and officer liability insurance coverage at acceptable rates and with acceptable deductibles and other limitations. Failure to obtain such insurance could materially harm our financial condition in the event that we are required to defend against and resolve any future securities class actions or other claims made against us or our management. Further, the inability to obtain such insurance in adequate amounts may impair our future ability to retain and recruit qualified officers and directors.

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

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

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

Our common stock was previously listed on the Nasdaq National Market and, effective as of May 30, 2002, is currently listed on the Nasdaq SmallCap Market. Nasdaq has requirements that a company must meet in order to remain listed on the Nasdaq SmallCap Market. If we continue to experience losses from our operations, or are unable to raise additional funds or our stock price does not meet minimum standards, we may not be able to maintain the standards for continued listing on the Nasdaq SmallCap Market, which include, among other things, that our stock maintain a minimum closing bid price of at least $1.00 per share (subject to applicable grace and cure periods). If as a result of the application of such listing requirements our common stock is delisted from the Nasdaq SmallCap Market, our stock would become harder to buy and sell. Consequently, if we were removed from the Nasdaq SmallCap 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.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have occurred from our report on Form 10-K for the year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Based on their review, as of a date within 90 days of the filing of this Form 10-Q, our Chief Executive Officer and our Chief Financial Officer have concluded that their review has provided them with reasonable assurance that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly

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affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

We have a documented formal ethics policy to which all of our financial executives agree to adhere and advocate in governing his/her professional and ethical conduct. We also have a documented formal Standards of Business Ethics and Conduct to which all our employees agree to adhere. Included in the Standard of Business Ethics and Conduct is our policy prohibiting retaliation or retribution against any employee for cooperating in an investigation or for making a complaint or report regarding business ethics or conduct of any other employee or director.

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PART II.—OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On March 28, 2003, we filed a current report on Form 8-K to report under Item 7 and Item 9 the filing of certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

On April 24, 2003, we filed a current report on Form 8-K to furnish our earnings release reporting financial results for the fiscal quarter ended March 31, 2003.

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SIGNATURES

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

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CERTIFICATIONS

I, Michael Silton, certify that:

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I, Martin Hernandez, certify that:

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