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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

        FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2004

OR

        FOR THE TRANSITION PERIOD FROM                                  TO                                 

COMMISSION FILE NUMBER 000-28009

RAINMAKER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value (Title of Class)

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2004, based upon the closing sales price reported by the Nasdaq SmallCap Market on that date was $59.8 million. The aggregate market value of Common Stock held by non-affiliates of the registrant on February 28, 2005, was $22.9 million, based upon the last sales price reported for such date on the Nasdaq SmallCap Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

At February 28, 2005, registrant had 47,745,898 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed by Registrant with the Securities and Exchange Commission within 120 days of Registrant’s fiscal year ended December 31, 2004 are incorporated by reference in Part III of this Form 10-K.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K 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.

Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are general market conditions, unfavorable economic conditions, our ability to execute our business strategy, our ability to integrate acquisitions (including our recent acquisition of Sunset Direct) and expand our call center without disruption to our business, the effectiveness of our sales team and approach, our ability to target, analyze and forecast the revenue to be derived from a client and the costs associated with providing services to that client, the date during the course of a calendar year that a new client is acquired, the length of the integration cycle for new clients and the timing of revenues and costs associated therewith, our client concentration given that the Company is currently dependent on a few large client relationships, potential competition in the marketplace, the ability to retain and attract employees, market acceptance of our service programs and pricing options, our ability to maintain our existing technology platform and to deploy new technology, our ability to sign new clients and control expenses, the possibility of the discontinuation of some client relationships, the financial condition of our clients’ business and other factors detailed in the Company’s filings with the Securities and Exchange Commission.

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

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RAINMAKER SYSTEMS, INC.

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PART I

ITEM 1.    BUSINESS

Introduction

Rainmaker Systems, Inc. and its subsidiaries (“Rainmaker,” “we,” “our,” “us”) was founded in 1991 and is a leading provider of outsource sales and marketing programs. Our cost-effective programs generate service revenue and promote customer retention for our clients. Core services include professional telesales, direct marketing, hosted e-commerce and order management, which represents almost 100% of our net revenue. Additional services include customer database enhancement and CRM technology integration. These services are available individually or as an integrated solution.

On February 8, 2005, Rainmaker acquired all of the issued and outstanding voting securities of Quarter End, Inc. by means of a merger of Quarter End, Inc. and a wholly owned subsidiary of Rainmaker, with Quarter End, Inc. continuing as the surviving corporation. Quarter End, Inc. conducted business under the name Sunset Direct and changed its name to Sunset Direct, Inc. (“Sunset Direct”) in connection with the transaction. Founded in 1992, Sunset Direct is an outsourcing company that helps primarily high-tech companies to improve their business-to-business selling process. Sunset Direct provides strategic lead generation services and applications that include: outsourced call center services, on-site training workshops, database and list management services and Web-based lead generation campaigns. Sunset Direct has approximately 160 employees with headquarters in Austin, Texas.

The following business discussion does not include the operations of Sunset Direct.

Industry Background

Businesses have recognized the value of improving their customer relationships to increase revenue and customer loyalty. For technology companies, this revenue and loyalty is often the result of customers purchasing support contracts and maintenance agreements.

As technology companies evaluate the resources needed to deploy sales and marketing programs for support contracts and maintenance agreements, they may find a significant commitment is required for building the needed systems infrastructure and expertise. They must also balance the level of internal resources devoted to building customer relationships with the level of resources committed to other corporate priorities, such as acquiring new customers and developing new products.

We believe that companies faced with this type of resource dilemma may find it advantageous to focus on their core strengths and to outsource their non-core functions to others with expertise in those specific areas. Outsourcing has moved from traditional functions such as manufacturing and facilities management to critical areas such as customer service. According to a Gartner forecast from July 2004, combined software and hardware support services in North America will grow from $59.8 billion in 2004 to $68.4 billion in 2008.

The Rainmaker Solution

We specialize in business-to-business sales, marketing, and ecommerce services on an outsourced basis for technology companies. In addition, our services include customer database hosting and enhancement, technology integration with client systems, and order management, including invoicing and collecting payment from our clients’ customers. Our services are designed to generate increased revenue from the sale of service contracts to our technology clients’ customers. While increased revenue is the primary benefit of our services, an important side benefit is an enhanced relationship with the customers we contact on behalf of our clients. By selecting Rainmaker to focus on this aspect of their business, clients are able to focus their attention on other business priorities.

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We identify and profile our clients’ customers in order to maximize selling opportunities through all stages of the service contract life cycle. From the point of purchase, until a product is replaced or retired, there are a variety of opportunities to generate services revenue, including the following:

Our services incorporate the following distinguishing characteristics:

Our Clients

Our clients consist of hardware and software companies with significant customer bases and products that benefit from focused sales and marketing programs for support contracts or maintenance agreements. We generate a significant portion of our net revenues from sales to the customers of a limited number of clients. In 2004 and 2003, sales to customers of Dell Products, L.P. (Dell), Hewlett-Packard Company (HP), Nortel Networks, Inc. (Nortel) and Sybase, Inc. (Sybase) each accounted for more than 10% of our net revenues. On a combined basis, sales to customers of these clients accounted for 96% and 99% of our net revenues in 2004 and 2003, respectively. The largest individual client accounted for 47% and 34% of our net revenues in 2004 and 2003, respectively.

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Services

Our primary service offering for sales and marketing of time-based contracts is Contracts Renewals Plus ^® (CRP), a modular solution that allows clients to select the services they need, from the most complex, fully outsourced solution to the simplest marketing or telesales project. Our services combine a technology infrastructure, established processes, and trained, customer-oriented personnel to deliver a comprehensive solution that is designed to cost-effectively generate increased revenue from our clients’ customer bases. Our services extend beyond contract sales and renewals to include contract reactivations, conversion of free warranties into paid services, service upgrades, add-on license sales, and new license sales. Our primary services are designed to effectively profile a client’s customer base and then market and sell service and support contracts. We believe that the more information we obtain concerning a client’s customer, the more likely we will be able to market and sell services that meet the needs of the client’s customer. We implement these services using a variety of proprietary systems and communication channels, including web site and email interaction, fax, personal assistance and direct mail. We believe that our services foster deeper, richer customer relationships that strengthen customer loyalty to our clients. During 2004, 2003 and 2002, Contract Renewals Plus generated 98%, 97% and 96% of our net revenue, respectively.

Within CRP, we generate additional sales and cultivate closer customer relationships through innovative sales and marketing programs that include:

The Rainmaker Strategy

Our objective is to strengthen our position in providing outsourced sales and marketing services to technology companies. The following are the key elements of our strategy:

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Sales and Marketing

We market our services to hardware, software and other technology companies through a direct sales force. We have a well-defined target customer and use direct marketing, public relations, and trade association programs to communicate our service offerings. Our direct sales professionals typically have significant enterprise-level technology sales experience. We employ sales professionals who are responsible for developing new clients as well as new opportunities with existing clients. We support the sales process with cross-functional representation from support groups including operations, finance, order management and technology. We also support this effort with product management professionals responsible for continued development and enhancement of our service offerings.

Services and Technology Development

We use a combination of business processes and technical systems to support our marketing and sales services. We collect customer input and conduct regular internal reviews to identify areas for improvement of our existing processes and systems as well as opportunities for development of new service offerings. We believe we follow best industry practices for developing the design, coding, production, documentation and testing of our processes and systems. Our technical systems are based on a combination of commercially available hardware and software as well as custom software developed internally. Our policy is to select market-leading commercial products and to leverage open-systems development environments for our internal development efforts. We believe this policy provides a stable technical foundation for the development and operation of our technical systems. We focus our proprietary technical development efforts on business functions that are unique to the process of marketing and selling service contracts. These business functions include: the loading, repair and analysis of customer data, direct marketing and telesales activities such as customer interaction tracking, pricing configuration and tracking, e-commerce tools, rapid deployment of client branded service, contract websites, and billing and reporting systems that expedite invoicing and collections as well as the transfer of data and reports to our clients.

Employees

As of December 31, 2004, we employed 138 people. Our 81 sales and marketing personnel are responsible for promoting and selling our clients’ products, building relationships with our clients’ customers and for promoting our services to new and existing clients. This includes 75 personnel consisting of direct marketing and professional telesales who are responsible for delivering the Company’s end user customer communication programs and driving service contract sales. We also employed 23 technology personnel who develop and maintain the computer, Internet, web and telecommunications infrastructure that provides the foundation for our service offerings. Our remaining 34 employees were in general administration and finance.

Our total headcount increased to 298 employees with the acquisition of Sunset Direct. At the date of acquisition, Sunset Direct employed 160 people of which 141 are in sales and marketing, 10 are technology personnel and 9 are in general administration and finance.

None of our employees are represented by a labor union or are subject to a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relationships with our employees to be good.

Competition

The market for solutions and services to generate revenue from clients’ customers and build relationships with those customers is intensely competitive and subject to rapid change. In addition to the competitors listed

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below, we face competition from internal departments of current and potential clients. Our competitors have a variety of strategic business and pricing models.

The main competitors of our services are companies that offer solutions that are specifically designed to sell service contracts. We are aware of two companies of this type; ServiceSource and Encover. ServiceSource offers a telesales-based service without the web site and other technology components that Rainmaker offers. Encover’s offering is similar to Rainmaker’s. Both ServiceSource and Encover are private and based in the San Francisco Bay Area.

To supplement its internal efforts, a prospect company will often use point solution providers to deliver the technology or outsourcing needed to handle a specific touchpoint (or single action) of the business process. These services can include outbound call centers or web site development agencies. Because these point solution providers often have limited specialization in the process of managing service contracts, their specialization tends to be the specific point activity. Point solution competitors include: companies that may tailor or integrate existing systems and processes; companies that provide various components of hosted ecommerce services; and companies that provide any variety of outsourced customer interaction services.

There are also regional companies that offer services similar to ours, particularly for teleservices and technology integration. A few of the larger companies that offer potentially competitive outsource services include: Convergys Corporation, Digital Impact, Digital River, Inc., Harte-Hanks, Inc., Sitel Corporation, Sykes Enterprises, Inc., and West Corporation. In addition, many large ERP software developers, including Oracle Corporation, Salesforce.com, Inc. and Siebel Systems, Inc., and their consulting partners have developed sales and marketing solutions that may compete with our offerings.

The principal competitive factors affecting our market include the return on investment from the implementation of our service and the breadth, performance, scalability and reliability of the service once implemented. Although we believe that our pay-for-performance model, ease of integration and comprehensive service offering currently competes favorably with respect to these factors, our market is relatively new and evolving rapidly.

Intellectual Property and Proprietary Rights

We protect our intellectual property through a combination of service mark, trade name and copyright protection, trade secret protection and confidentiality agreements with our employees and independent contractors, and have procedures to control access to and distribution of our technology, documentation and other proprietary information and the proprietary information of our clients. Effective trade name, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services and products are made available on-line. The steps we take to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trade names, trademarks, service marks and similar proprietary rights. In addition, other parties may assert claims of infringement of intellectual property or other proprietary rights against us. The legal status of many aspects of intellectual property on the Internet is currently uncertain. We have applied to register the RAINMAKER SYSTEMS, RAINMAKER (and Design), CONTRACT RENEWALS PLUS, and EDUCATION SALES PLUS services marks in the United States and certain foreign countries, and have received registrations for the RAINMAKER SYSTEMS service mark in the United States, Canada, Australia, the European Community, Switzerland, Norway and New Zealand, the RAINMAKER (and Design) in the United States and the European Community, the CONTRACTS RENEWALS PLUS mark in the United States and Switzerland, and the EDUCATION SALES PLUS mark in the United States and Switzerland.

Government Regulation

We are subject, both directly and indirectly, to various laws and governmental regulations relating to our business. In addition, laws with respect to online commerce may cover issues such as pricing, distribution,

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characteristics and quality of products and services. Laws affecting the Internet may also cover content, copyrights, libel, and personal privacy. Any new legislation or regulation or the application of existing laws and regulations to the Internet could have a material adverse effect on our business.

Although our online transmissions currently originate in California, the governments of other states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. As our services are available over the Internet virtually anywhere in the world, multiple jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each of those jurisdictions. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify. It is possible that state and foreign governments might also attempt to regulate our transmissions of content on our Web site or prosecute us for violations of their laws. We cannot assure you that state or foreign governments will not charge us with violations of local laws or that we might not unintentionally violate these laws in the future.

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 client’s customers or to collect and use such information.

Our business is also subject to regulation in connection with our direct marketing activities. 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 have a material adverse effect on our business. There can be no assurance that additional federal or state legislation, 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.

Financial Information About Geographic Areas

Rainmaker and Sunset Direct primarily operate in one geographical segment, North America. Substantially all of our sales are made to our clients’ customers in the United States of America. See “Segment Reporting” in Note 1 to our Financial Statements.

Available Information

Our web site is http://www.rmkr.com. We make available, free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on our website is not part of this report.

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ITEM 2.    PROPERTIES

Facilities

Our headquarters is located in one building in Scotts Valley, California. We occupy approximately 23,400 square feet of floor space covered by a lease that expires in September 2005.

On February 8, 2005, we acquired Sunset Direct which occupies approximately 46,400 square feet in one building in Austin, Texas covered by a lease that expires in June 2009 and 7,400 square feet in one building in Wallace, Idaho covered by a month-to-month lease.

We believe these facilities are adequate for our current needs.

ITEM 3.    LEGAL PROCEEDINGS

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

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

Not applicable.

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PART II

Our common stock is traded on the Nasdaq SmallCap Market under the symbol RMKR. The following table lists the high and low closing prices for Rainmaker’s common stock as reported on Nasdaq for each full quarterly period within the two most recent fiscal years.

As of February 28, 2005, we had approximately 190 common stockholders of record. On February 28, 2005, the last reported sale price of our common stock on the Nasdaq SmallCap Market was $0.69 per share.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

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ITEM 6.     SELECTED FINANCIAL DATA

The following selected financial data should be read together with our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report. The statement of operations data for the years ended December 31, 2004, 2003, and 2002 and the balance sheet data at December 31, 2004 and 2003 are derived from our audited financial statements that are included elsewhere in this annual report. The statement of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001, and 2000 are derived from our audited financial statements not included herein. Revenue presentation and certain prior year amounts have been reclassified to conform to the 2004 presentation. Historical results of operations are not necessarily indicative of future results.