##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM            TO
 Commission file number 000-24643
 DIGITAL RIVER, INC.
  DELAWARE
    
    41-1901640(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 9625 WEST 76TH STREET
EDEN PRAIRIE, MINNESOTA 55344
 (952) 253-1234
 
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007Condensed Consolidated Statements of Income for the three months ended March 31, 2008 and 2007Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Qualitative and Quantitative Disclosure about Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSIGNATURESEXHIBIT INDEXComputation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DIGITAL RIVER, INC.
 
   (Unaudited)March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    305,800
    
    
    $
    381,788Short-term investments
    
    
    289,612
    
    
    
    315,636Accounts receivable, net of allowance of $2,891 and $2,489
    
    
    63,127
    
    
    
    64,914Deferred income taxes
    
    
    2,809
    
    
    
    7,899Prepaid expenses and other
    
    
    5,976
    
    
    
    4,577Total current assets
    
    
    667,324
    
    
    
    774,814Property and equipment, net
    
    
    31,583
    
    
    
    31,102Goodwill
    
    
    280,460
    
    
    
    261,885Intangible assets, net of accumulated amortization of $63,065 and $59,493
    
    
    39,951
    
    
    
    32,382Deferred income taxes
    
    
    15,606
    
    
    
    15,606Other assets
    
    
    6,661
    
    
    
    11,955TOTAL ASSETS
    
    $
    1,041,585
    
    
    $
    1,127,744LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Convertible senior notes
    
    $
    195,000
    
    
    $
    Accounts payable
    
    
    191,329
    
    
    
    180,386Accrued payroll
    
    
    13,564
    
    
    
    12,704Deferred revenue
    
    
    11,980
    
    
    
    10,384Accrued acquisition costs
    
    
    46
    
    
    
    399Other accrued liabilities
    
    
    39,773
    
    
    
    41,229Total current liabilities
    
    
    451,692
    
    
    
    245,102NON-CURRENT LIABILITIES:Convertible senior notes
    
    
    
    
    
    
    195,000Other liabilities
    
    
    11,736
    
    
    
    11,362Total non-current liabilities
    
    
    11,736
    
    
    
    206,362TOTAL LIABILITIES
    
    
    463,428
    
    
    
    451,464COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares
issued or outstanding
    
    
    
    
    
    
    Common Stock, $.01 par value; 120,000,000 shares authorized; 42,958,416
and 42,502,019 shares issued
    
    
    430
    
    
    
    425Treasury stock at cost; 5,875,351 and 1,952,884 shares
    
    
    (215,920
    )
    
    
    (77,707
    )Additional paid-in capital
    
    
    602,385
    
    
    
    597,128Retained earnings
    
    
    143,784
    
    
    
    125,501Accumulated other comprehensive income
    
    
    47,478
    
    
    
    30,933Total stockholders equity
    
    
    578,157
    
    
    
    676,280TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,041,585
    
    
    $
    1,127,744
  3




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##### Table of Contents



DIGITAL RIVER, INC.
 
   Three Months EndedMarch 31,2008
    
    
    2007Revenue
    
    $
    103,634
    
    
    $
    91,631Costs and expensesDirect cost of services
    
    
    4,175
    
    
    
    2,563Network and infrastructure
    
    
    10,188
    
    
    
    7,495Sales and marketing
    
    
    39,730
    
    
    
    34,189Product research and development
    
    
    12,670
    
    
    
    8,652General and administrative
    
    
    10,244
    
    
    
    10,113Depreciation and amortization
    
    
    3,834
    
    
    
    2,858Amortization of acquisition-related intangibles
    
    
    2,176
    
    
    
    2,746Total costs and expenses
    
    
    83,017
    
    
    
    68,616Income from operations
    
    
    20,617
    
    
    
    23,015Interest Income
    
    
    6,246
    
    
    
    7,882Other expense, net
    
    
    (749
    )
    
    
    (889
    )Income before income tax expense
    
    
    26,114
    
    
    
    30,008Income tax expense
    
    
    7,831
    
    
    
    9,302Net income
    
    $
    18,283
    
    
    $
    20,706Net income per share  basic
    
    $
    0.47
    
    
    $
    0.51Net income per share  diluted
    
    $
    0.43
    
    
    $
    0.46Shares used in per-share calculation  basic
    
    
    38,528
    
    
    
    40,492Shares used in per-share calculation  diluted
    
    
    43,506
    
    
    
    46,348
  4




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##### Table of Contents



DIGITAL RIVER, INC.
 
   Three Months EndedMarch 31,2008
    
    
    2007OPERATING ACTIVITIESNet income
    
    $
    18,283
    
    
    $
    20,706Adjustments to reconcile net income to net cash provided by
operating activitiesAmortization of acquisition-related intangibles
    
    
    2,176
    
    
    
    2,746Change in accounts receivable allowance, net of acquisitions
    
    
    411
    
    
    
    119Depreciation and amortization
    
    
    3,834
    
    
    
    2,858Stock-based compensation expense related to stock-based
compensation plans
    
    
    3,031
    
    
    
    3,476Excess tax benefits from stock-based compensation
    
    
    (412
    )
    
    
    (8,496
    )Deferred and other income taxes
    
    
    5,345
    
    
    
    4,500Change in operating assets and liabilities (net of acquisitions)Accounts receivable
    
    
    4,374
    
    
    
    10,055Prepaid and other assets
    
    
    3,732
    
    
    
    985Accounts payable
    
    
    4,798
    
    
    
    9,981Deferred revenue
    
    
    1,248
    
    
    
    (197
    )Income tax payable
    
    
    (7,357
    )
    
    
    4,760Other accrued liabilities
    
    
    5,190
    
    
    
    (72
    )Net cash provided by operating activities
    
    
    44,653
    
    
    
    51,421INVESTING ACTIVITIESPurchases of investments
    
    
    (94,714
    )
    
    
    (79,341
    )Sales of investments
    
    
    122,050
    
    
    
    52,075Cash paid for acquisitions, net of cash received
    
    
    (16,481
    )
    
    
    (4,344
    )Purchases of equipment and capitalized software
    
    
    (4,192
    )
    
    
    (3,445
    )Net cash provided by/(used in) investing activities
    
    
    6,663
    
    
    
    (35,055
    )FINANCING ACTIVITIESExercise of stock options
    
    
    1,985
    
    
    
    5,639Repurchase of common stock
    
    
    (137,858
    )
    
    
    Repurchase of restricted stock to satisfy tax withholding obligation
    
    
    (355
    )
    
    
    (224
    )Excess tax benefits from stock-based compensation
    
    
    412
    
    
    
    8,496Net cash provided by/(used in) financing activities
    
    
    (135,816
    )
    
    
    13,911EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    8,512
    
    
    
    1,658NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (75,988
    )
    
    
    31,935CASH AND CASH EQUIVALENTS, beginning of period
    
    
    381,788
    
    
    
    390,243CASH AND CASH EQUIVALENTS, end of period
    
    $
    305,800
    
    
    $
    422,178SUPPLEMENTAL DISCLOSURES:Cash paid for interest on convertible senior notes
    
    $
    1,219
    
    
    $
    1,219Cash paid for income taxes
    
    $
    8,772
    
    
    $
    52Noncash investing and financing activities:Common stock issued in acquisitions and earn-outs
    
    $
    
    
    
    $
    986
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##### Table of Contents



DIGITAL RIVER, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. BASIS OF PRESENTATION
  Summary of Significant Accounting Policies
  Research and Development and Software Development
  Stock-Based Compensation Expense
 
    6




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Comprehensive Income
  Recent Accounting Pronouncements
   2. NET INCOME PER SHARE
  7




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedMarch 31,2008
    
    
    2007Earnings per share  basicNet income  basic
    
    $
    18,283
    
    
    $
    20,706Weighted average shares outstanding  basic
    
    
    38,528
    
    
    
    40,492Earnings per share  basic
    
    $
    0.47
    
    
    $
    0.51Earnings per share  dilutedNet income  basic
    
    $
    18,283
    
    
    $
    20,706Exclude: Interest expense and amortized financing cost of
convertible senior notes, net of tax benefit
    
    
    434
    
    
    
    435Net income  diluted
    
    $
    18,717
    
    
    $
    21,141Weighted average shares outstanding  basic
    
    
    38,528
    
    
    
    40,492Dilutive impact of non-vested stock and options outstanding
    
    
    553
    
    
    
    1,431Dilutive impact of convertible senior notes
    
    
    4,425
    
    
    
    4,425Weighted average shares outstanding  diluted
    
    
    43,506
    
    
    
    46,348Net income per share  diluted
    
    $
    0.43
    
    
    $
    0.46
  3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
 Acquisitions completed in 2008
   Acquisitions completed in 2007
  8




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Future Earn-outs
  Pro Forma Operating Results (Unaudited)
  Three Months EndedMarch 31,2008
    
    2007Revenue
    
    $
    103,634
    
    
    $
    96,007Income from operations
    
    
    20,617
    
    
    
    23,095Net income
    
    
    18,283
    
    
    
    20,786Basic net income per share
    
    $
    0.47
    
    
    $
    0.51Diluted net income per share
    
    $
    0.43
    
    
    $
    0.46
  Goodwill and Other Intangible Assets
    As of March 31, 2008Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    63,827
    
    
    
    35,683
    
    
    $
    28,144Non-compete agreements
    
    
    5,787
    
    
    
    5,448
    
    
    
    339Technology/tradename
    
    
    33,401
    
    
    
    21,933
    
    
    
    11,468Total
    
    $
    103,015
    
    
    $
    63,064
    
    
    $
    39,951
 As of December 31, 2007Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    57,327
    
    
    $
    33,761
    
    
    $
    23,566Non-compete agreements
    
    
    5,351
    
    
    
    5,328
    
    
    
    23Technology/tradename
    
    
    29,197
    
    
    
    20,404
    
    
    
    8,793Total
    
    $
    91,875
    
    
    $
    59,493
    
    
    $
    32,382
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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Year2008
    
    $
    6,4562009
    
    
    7,7512010
    
    
    5,8492011
    
    
    4,5512012
    
    
    4,4222013
    
    
    2,723Thereafter
    
    
    8,199Total
    
    $
    39,951
 4. STOCKHOLDERS EQUITY
 Option and Restricted Stock Awards
 2007 Plan
  1998 Plan
  General Stock Award Information
   10




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  WeightedShares
    
    
    
    
    
    
    Options
    
    
    AverageAvailable
    
    
    Options
    
    
    Price
    
    
    Pricefor Grant
    
    
    Outstanding
    
    
    Per Share
    
    
    Per ShareBalance, December 31, 2006
    
    
    1,540,200
    
    
    
    3,557,783
    
    
    $
    2.59-$57.36
    
    
    $
    18.68Granted
    
    
    (573,376
    )
    
    
    573,376
    
    
    
    45.07 - 56.61
    
    
    
    54.17Restricted stock effect
on shares available for
grant
    
    
    (251,426
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (1,219,519
    )
    
    
    2.59 - 45.24
    
    
    
    11.08Canceled/expired
    
    
    133,330
    
    
    
    (133,330
    )
    
    
    4.56 - 56.61
    
    
    
    38.01Additional Shares Reserved
    
    
    2,000,000
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ABalance, December 31, 2007
    
    
    2,848,728
    
    
    
    2,778,310
    
    
    $
    2.59-$57.36
    
    
    $
    28.41Granted
    
    
    (532,000
    )
    
    
    532,000
    
    
    
    30.68- 31.86
    
    
    
    31.79Restricted stock effect
on shares available for
grant
    
    
    (489,789
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (129,871
    )
    
    
    4.56- 27.28
    
    
    
    15.29Canceled/expired
    
    
    30,081
    
    
    
    (30,081
    )
    
    
    27.28- 56.61
    
    
    
    46.91Balance, March 31, 2008
    
    
    1,857,020
    
    
    
    3,150,358
    
    
    $
    2.59-$57.36
    
    
    $
    29.34
   Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Weighted
    
    
    AggregateNumber
    
    
    Average
    
    
    Average
    
    
    Intrinsic
    
    
    Number
    
    
    Average
    
    
    IntrinsicExercise Price
    
    Outstanding
    
    
    Life Remaining
    
    
    Price
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    Value$2.59 - $3.88
    
    
    19,187
    
    
    2.8 years
    
    $
    2.74
    
    
    $
    541,554
    
    
    
    19,187
    
    
    $
    2.74
    
    
    $
    541,5544.56 - 7.55
    
    
    201,244
    
    
    3.3 years
    
    
    5.60
    
    
    
    5,106,340
    
    
    
    201,244
    
    
    
    5.60
    
    
    
    5,106,3409.12 - 13.92
    
    
    446,753
    
    
    4.6 years
    
    
    11.72
    
    
    
    8,602,082
    
    
    
    374,441
    
    
    
    11.87
    
    
    
    7,150,78016.72 - 22.98
    
    
    427,204
    
    
    5.5 years
    
    
    22.41
    
    
    
    3,657,883
    
    
    
    400,418
    
    
    
    22.63
    
    
    
    3,339,93323.01 - 30.69
    
    
    730,323
    
    
    7.0 years
    
    
    28.00
    
    
    
    2,167,029
    
    
    
    457,603
    
    
    
    28.02
    
    
    
    1,349,78131.84 - 57.36
    
    
    1,325,647
    
    
    8.6 years
    
    
    48.65
    
    
    
    
    
    
    
    244,055
    
    
    
    46.45
    
    
    
    $2.59 - $57.36
    
    
    3,150,358
    
    
    6.5 years
    
    $
    28.87
    
    
    $
    20,074,888
    
    
    
    1,696,948
    
    
    $
    22.89
    
    
    $
    17,488,388
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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  WeightedRestricted
    
    
    AverageStock
    
    
    Intrinsic ValueNon-Vested Balance, December 31, 2006
    
    
    89,500
    
    
    $
    39.96Granted
    
    
    198,889
    
    
    
    53.75Vested
    
    
    (23,713
    )
    
    
    39.19Forfeited
    
    
    (31,272
    )
    
    
    48.54Non-Vested Balance, December 31, 2007
    
    
    233,404
    
    
    $
    50.64Granted
    
    
    331,300
    
    
    
    31.82Vested
    
    
    (52,054
    )
    
    
    49.84Forfeited
    
    
    (4,774
    )
    
    
    50.46Non-Vested Balance,March 31, 2008
    
    
    507,876
    
    
    $
    38.44
 Inducement Equity Incentive Plan
  Employee Stock Purchase Plan
  Stock Repurchase Activity
   Rule 10b5-1 Trading Plans
  12




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Expense Information under SFAS 123(R)
  Three Months EndedMarch 31,2008
    
    
    2007Costs and expensesDirect cost of services
    
    $
    192
    
    
    $
    195Network and infrastructure
    
    
    32
    
    
    
    72Sales and marketing
    
    
    1,102
    
    
    
    1,268Product research and development
    
    
    262
    
    
    
    552General and administrative
    
    
    1,443
    
    
    
    1,389Stock-based compensation included in costs and expenses
    
    
    3,031
    
    
    
    3,476Tax benefit
    
    
    (668
    )
    
    
    (1,047
    )Stock-based compensation expense, net of tax
    
    $
    2,363
    
    
    $
    2,429
 Valuation Information under SFAS 123(R)
  Three Months EndedMarch 31,2008
    
    2007Risk-free interest rate
    
    
    2.0
    %
    
    
    4.5
    %Expected life (years)
    
    
    3.5
    
    
    
    3.5Volatility factor
    
    
    0.46
    
    
    
    0.51Expected dividends
    
    
    
    
    
    
    
    5. INCOME TAXES
  13




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     6. DEBT
     7. FAIR VALUE MEASUREMENTS
  14




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Level 1  -
    
    Observable inputs such as quoted prices in active markets;Level 2  -
    
    Inputs, other than the quoted prices in active markets, that are observable either
directly or indirectly; andLevel 3  -
    
    Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumption.
      Fair Value MeasurementsAs of March 31, 2008Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash equivalents
    
    $
    305,800
    
    
    $
    305,800
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    289,612
    
    
    
    172,412
    
    
    
    
    
    
    
    117,200Total assets measured
at fair value
    
    $
    595,412
    
    
    $
    478,212
    
    
    $
    
    
    
    $
    117,200
  15




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 8. LITIGATION
 
 16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The discussion in this Quarterly Report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed below. Additional
factors that could cause or contribute to such differences include, but are not limited to, those
identified below, and those discussed in the section entitled Risk Factors, included in Item 1A
of Part II of this Quarterly Report. When used in this document, the words believes, expects,
anticipates, intends, plans, and similar expressions, are intended to identify certain of
these forward-looking statements. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all related forward-looking
statements wherever they appear in this document.
 Overview
       17




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Critical Accounting Policies
  Revenue Recognition. (
      Allowance for Doubtful Accounts.
 Credit Card Chargeback Reserve.
 18




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Goodwill, Intangibles and Other Long-Lived Assets.
 Income Taxes and Deferred Taxes
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 Stock-Based Compensation Expense
  19




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Results of Operations
  Three Months EndedMarch 31,2008
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of Revenue (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    4.0
    
    
    
    2.8Network and infrastructure
    
    
    9.8
    
    
    
    8.2Sales and marketing
    
    
    38.3
    
    
    
    37.3Product research and development
    
    
    12.3
    
    
    
    9.4General and administrative
    
    
    9.9
    
    
    
    11.0Depreciation and amortization
    
    
    3.7
    
    
    
    3.1Amortization of acquisition-related costs
    
    
    2.1
    
    
    
    3.1Total costs and expenses
    
    
    80.1
    
    
    
    74.9Income from operations
    
    
    19.9
    
    
    
    25.1Interest Income
    
    
    6.0
    
    
    
    8.6Other expense, net
    
    
    (0.7
    )
    
    
    (1.0
    )Income before income tax expense
    
    
    25.2
    
    
    
    32.7Income tax expense
    
    
    7.6
    
    
    
    10.1Net income
    
    
    17.6
    %
    
    
    22.6
    %
  REVENUE.
  DIRECT COST OF SERVICES.
 20




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##### Table of Contents



NETWORK AND INFRASTRUCTURE.
  SALES AND MARKETING.
  PRODUCT RESEARCH AND DEVELOPMENT.
  GENERAL AND ADMINISTRATIVE.
 21




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DEPRECIATION AND AMORTIZATION.
  AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES.
 INTEREST INCOME.
 OTHER EXPENSE, NET.
 INCOME TAXES.
   22




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Off Balance Sheet Arrangements
  23




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Liquidity and Capital Resources
         24




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Payment due by period (in thousands)Total Amount
    
    Apr-Dec
    
    
    
    
    
    
    
    
    
    2013 andContractual Obligations
    
    Committed
    
    2008
    
    2009-2010
    
    2011-2012
    
    ThereafterOperating Lease Obligations
    
    $
    18,007
    
    
    $
    3,830
    
    
    $
    6,140
    
    
    $
    1,978
    
    
    $
    6,058Convertible Senior Notes
    
    $
    234,000
    
    
    $
    1,219
    
    
    $
    4,875
    
    
    $
    4,875
    
    
    $
    223,031Total
    
    $
    252,007
    
    
    $
    5,049
    
    
    $
    11,015
    
    
    $
    6,853
    
    
    $
    229,089
       25




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26




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Item 3. Qualitative and Quantitative Disclosure about Market Risk
 Interest Rate Risk
   Foreign Currency Risk
   Transaction Exposure
  Translation Exposure
  27




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Item 4. Controls and Procedures
 (a)
    
    We are committed to maintaining disclosure controls and procedures designed to ensure that
information required to be disclosed in our periodic reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our
management, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of March 31, 2008. Based upon this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated
under the Securities Exchange Act of 1934) were effective in providing reasonable assurance
that material information required to be disclosed by us in this Form 10-Q was recorded,
processed, summarized and reported in a timely manner.(b)
    
    During the quarter ended March 31, 2008, there was no change in our internal control over
financial reporting that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
 Limitations on the Effectiveness of Controls
  28




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      
 Item 1A. Risk Factors
 The risks described below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial also may impair our business operations. Our
business financial condition or results of operations could be materially adversely affected by any
of these risks and the value of our common stock could decline due to any of these risks. This
quarterly report also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including the risks faced by us described below and elsewhere in
this report.
 A loss of any client that accounts for a large portion of our revenue would cause our revenue to
decline.
  29




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Our future success cannot be predicted based upon our operating history.
  Failure to properly manage and sustain our expansion efforts could strain our management and other
resources.
  We intend to continue to expand our international operations and these efforts may not be
successful in generating additional revenue.
  §
    
    Changes in regulatory requirements and tariffs;§
    
    Uncertainty of application of local commercial, tax, privacy and other laws and
regulations;§
    
    Reduced protection of intellectual property rights;§
    
    Difficulties in physical distribution for international sales;§
    
    Higher incidences of credit card fraud and difficulties in accounts receivable
collection;§
    
    The burden and cost of complying with a variety of foreign laws, rules and regulations;§
    
    The possibility of unionization of our workforce outside the United States, particularly
in Europe;§
    
    Political, social and economic instability;§
    
    Import and export license requirements and restrictions of the United States and every
other country in which we operate; and§
    
    Political or economic constraints on international trade or instability.
   30




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Our operating results are subject to fluctuations in demand for products and services offered by us
or our clients.
  New obligations to collect or pay transaction taxes could substantially increase the cost to us of
doing business.
  We could be liable for fraudulent, improper or illegal uses of our platforms.
  Loss of our credit card acceptance privileges would seriously hamper our ability to process the
sale of merchandise.
  31




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Our failure to attract and retain software and digital products publishers, manufacturers, online
retailers and online channel partners as clients would cause our revenue and operating profits to
decline.
  The matters relating to the investigation by the Special Committee of the Board of Directors and
the restatement of our consolidated financial statements may result in additional litigation and
governmental enforcement actions.
  Activities related to our internal review of historical stock option practices have required us to
incur substantial expenses for legal, accounting, tax and other professional services, have
diverted managements attention from our business, and could, in the future, harm our business,
financial condition, results of operations and cash flows.
   We may incur additional expenses in order to assist our employees with potential income tax
liabilities which may arise under Section 409A of the Internal Revenue Code.
  32




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Implementing our acquisition strategy could result in dilution and operating difficulties leading
to a decline in revenue and operating profit.
    We may need to raise additional capital to achieve our business objectives, which could result in
dilution to existing investors or increase our debt obligations.
  33




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Our operating results have fluctuated in the past and are likely to continue to do so, which could
cause the price of our common stock to be volatile.
  §
    
    The addition of new clients or loss of current clients;§
    
    The introduction by us of new websites, web stores or services that may require a
substantial investment of our resources;§
    
    The introduction by others of competitive websites, web stores or services or products;§
    
    Our ability to continue to upgrade and develop our systems and infrastructure to meet
emerging market needs and remain competitive in our service offerings;§
    
    Economic conditions, particularly those affecting e-commerce;§
    
    Client decisions to delay new product launches or to invest in e-commerce initiatives;§
    
    The performance of our newly acquired assets or companies;§
    
    Slower than anticipated growth of the online market as a vehicle for the purchase of
software products;§
    
    The cost of compliance with U.S. and foreign regulations relating to our business; and§
    
    Our ability to retain and attract personnel commensurate with our business needs; and§
    
    Acquisitions.
   Security breaches could hinder our ability to securely transmit confidential information and could
materially affect our reputation, business operations, operating results and financial condition.
   34




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Claims of infringement of other parties intellectual property rights could require us to expend
significant resources, enter into unfavorable licenses or require us to change our business plans.
  Claims against us related to the software products that we deliver electronically and the tangible
goods that we deliver physically could require us to expend significant resources.
  If our internal control over financial reporting or disclosure controls and procedures are not
effective, there may be errors in our financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in our reported financial information,
which could lead to a decline in our stock price.
    35




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Because the e-commerce industry is highly competitive and has low barriers to entry, we may be
unable to compete effectively.
  §
    
    In-house development of e-commerce capabilities using tools or applications from
companies, such as Art Technology Group, Inc. and IBM Corporation;§
    
    E-Commerce capabilities custom-developed by companies, such as IBM Global Services and
Accenture, Inc.;§
    
    Other providers of outsourced e-commerce solutions, such as GSI Commerce, Inc. and
asknet Inc.;§
    
    Companies that provide technologies, services or products that support a portion of the
e-commerce process, such as payment processing, including CyberSource Corporation and
PayPal Corp.;§
    
    Companies that offer various online marketing services, technologies and products,
including ValueClick, Inc. and aQuantive, Inc.;§
    
    High-traffic, branded websites that generate a substantial portion of their revenue from
e-commerce and may offer or provide to others the means to offer their products for sale,
such as Amazon.com, Inc.; and§
    
    Web hosting, web services and infrastructure companies that offer portions of our
solution and are seeking to expand the range of their offering, such as Network Solutions,
LLC, Akamai Technologies, Inc., Yahoo!, Inc., eBay, Inc. and Hostopia.com, Inc.
   Changes in government regulation could limit our Internet activities or result in additional costs
of doing business over the Internet.
  §
    
    User privacy with respect to adults and minors;§
    
    Our ability to collect and/or share necessary information that allows us to conduct
business on the Internet;§
    
    Export compliance;§
    
    Pricing, taxation, and regulatory fees;§
    
    Fraud;§
    
    Advertising;§
    
    Intellectual property rights;§
    
    Information security;§
    
    Quality of products and services;
 36




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§
    
    Security breaches;§
    
    Processing of credit card information;§
    
    Taxes; and§
    
    Recycling of consumer products.
  Failure to develop our technology to accommodate increased traffic could reduce demand for our
services and impair the growth of our business.
   System failures could reduce the attractiveness of our service offerings.
   §
    
    Fire, flood and other natural disasters;
 37




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§
    
    Operator negligence, improper operation by, or supervision of, employees, physical and
electronic break-ins, misappropriation, computer viruses and similar events; and§
    
    Power loss, computer systems failures, and Internet and telecommunications failure.
  We may become liable to clients who are dissatisfied with our services.
  We depend on key personnel.
   Protecting our intellectual property is critical to our success.
   Our clients sales cycles are lengthy, which may cause us to incur substantial expenses and expend
management time without generating corresponding consumer revenue, which would impair our cash
flow.
  38




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The listing of our network addresses on anti-spam lists could harm our ability to service our
clients and deliver goods over the Internet.
  We are subject to regulations relating to consumer privacy.
    Compliance with future laws imposed on e-commerce may substantially increase our costs of doing
business or otherwise adversely affect our ability to offer our services.
   39




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We are exposed to foreign currency exchange risk.
  Changes in our tax rates could affect our future results.
  Developments in accounting standards may cause us to increase our recorded expenses, which in turn
would jeopardize our ability to demonstrate sustained profitability.
  Internet-related stock prices are especially volatile and this volatility may cause our stock price
to fluctuate significantly.
  40




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§
    
    Actual or anticipated variations in quarterly operating results;§
    
    Announcements of technological innovations;§
    
    The ability to sign new clients and the retention of existing clients;§
    
    Loss of key clients;§
    
    New products or services that we offer;§
    
    Competitive developments, including new products or services, or new relationships by
our competitors;§
    
    Changes that affect our clients or the viability of their product lines;§
    
    Changes in financial estimates by securities analysts;§
    
    Conditions or trends in the Internet and online commerce industries;§
    
    Global unrest and terrorist activities;§
    
    Changes in the economic performance and/or market valuations of other Internet or online
e-commerce companies;§
    
    Required changes in generally accepted accounting principles and disclosures;§
    
    Our announcement of significant acquisitions, strategic partnerships, joint ventures or
capital commitments or results of operations or other developments related to those
acquisitions;§
    
    Additions or departures of key personnel; and§
    
    Sales or other transactions involving our common stock or our convertible notes.
  Provisions of our charter documents, other agreements and Delaware law may inhibit potential
acquisition bids for us.
  The investment of our substantial cash balance and our investments in marketable debt securities
are subject to risks which may cause losses and affect the liquidity of these investments.
  41




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Total number of
    
    Approximate dollar valueTotal number
    
    Average
    
    shares purchased
    
    of shares that may yet beof shares
    
    price paid
    
    as part of publicly
    
    purchased under the planPeriod
    
    purchased
    
    per share
    
    announced plan
    
    (in millions)January 1, 2008 - January 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    137.0February 1, 2008 - February 29, 2008
    
    
    3,911,545
    
    
    $
    35.24
    
    
    
    3,911,545
    
    
    $
    0.0March 1, 2008 - March 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.0Total
    
    
    3,911,545
    
    
    
    
    
    
    
    3,911,545
 42




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Item 6. Exhibits
  EXHIBITNUMBER
    
    
    
    
    DESCRIPTION OF DOCUMENTS3.1
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as amended, as currently in effect.3.2
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    (3
    )
    
    Specimen of Common Stock Certificate.4.2
    
    (1
    )
    
    Form of Senior Debt Indenture.4.3
    
    (1
    )
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    (4
    )
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank,
N.A. as trustee, including therein the form of the Note.12.1
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed as exhibits 3.1 and 3.3 and exhibits 4.5 and 4.6 to our
Registration Statement on Form S-3, File No. 333-81626, filed on
January 29, 2002, declared effective on February 12, 2002, and
incorporated herein by reference.(2)
    
    Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 2000, filed on March 27, 2001, and incorporated
herein by reference.(3)
    
    Filed as an exhibit to our Registration Statement on Form S-1, File
No. 333-56787, declared effective on August 11, 1998, and incorporated
herein by reference.(4)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July
13, 2004 and incorporated herein by reference. 43




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##### Table of Contents



Date: May 12, 2008
    
    
    
    DIGITAL RIVER, INC.By:
    
    /s/ THOMAS M. DONNELLYThomas M. DonnellyChief Financial Officer(Principal Financial and Accounting Officer)
 44




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EXHIBITNUMBER
    
    
    
    
    DESCRIPTION OF DOCUMENTS3.1
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as amended, as currently in effect.3.2
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    (3
    )
    
    Specimen of Common Stock Certificate.4.2
    
    (1
    )
    
    Form of Senior Debt Indenture.4.3
    
    (1
    )
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    (4
    )
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank,
N.A. as trustee, including therein the form of the Note.12.1
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed as Exhibits 3.1 and 3.3 and Exhibits 4.5 and 4.6 to our
Registration Statement on Form S-3, File No. 333-81626, filed on
January 29, 2002, declared effective on February 12, 2002, and
incorporated herein by reference.(2)
    
    Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 2000, filed on March 27, 2001, and incorporated
herein by reference.(3)
    
    Filed as an exhibit to our Registration Statement on Form S-1, File
No. 333-56787, declared effective on August 11, 1998, and incorporated
herein by reference.(4)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July
13, 2004 and incorporated herein by reference. 45