##### 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 SEPTEMBER 30, 2009
 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
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Qualitative and Quantitative Disclosure about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT INDEX
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 DIGITAL RIVER, INC.
 
   (Unaudited)September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash
equivalents
    
    $
    396,421
    
    
    $
    490,335Short-term
investments
    
    
    14,939
    
    
    
    10,000Accounts receivable, net of
allowance of $2,214 and $2,457
    
    
    51,574
    
    
    
    53,216Deferred income
taxes
    
    
    7,654
    
    
    
    7,613Prepaid expenses
and other
    
    
    16,000
    
    
    
    42,522Total current assets
    
    
    486,588
    
    
    
    603,686Property and
equipment, net
    
    
    54,420
    
    
    
    41,733Goodwill
    
    
    278,682
    
    
    
    273,788Intangible assets, net of accumulated
amortization of $72,653 and $66,346
    
    
    27,697
    
    
    
    32,222Long-term investments
    
    
    94,335
    
    
    
    93,213Deferred income taxes
    
    
    23,063
    
    
    
    24,824Other assets
    
    
    2,459
    
    
    
    786TOTAL ASSETS
    
    $
    967,244
    
    
    $
    1,070,252LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Convertible senior
notes
    
    $
    
    
    
    $
    186,195Accounts payable
    
    
    196,969
    
    
    
    184,361Accrued payroll
    
    
    14,968
    
    
    
    14,841Deferred revenue
    
    
    17,693
    
    
    
    13,651Accrued acquisition
liabilities
    
    
    43
    
    
    
    3,278Other accrued
liabilities
    
    
    37,365
    
    
    
    41,336Total current
liabilities
    
    
    267,038
    
    
    
    443,662NON-CURRENT
LIABILITIES:Convertible senior
notes
    
    
    8,805
    
    
    
    8,805Other liabilities
    
    
    15,001
    
    
    
    15,712Total non-current
liabilities
    
    
    23,806
    
    
    
    24,517TOTAL LIABILITIES
    
    
    290,844
    
    
    
    468,179STOCKHOLDERS 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;
44,853,606 and
43,225,401 shares
issued
    
    
    448
    
    
    
    432Treasury stock at cost; 6,233,012
and 6,211,477 shares
    
    
    (216,738
    )
    
    
    (216,163
    )Additional paid-in
capital
    
    
    641,811
    
    
    
    623,778Retained earnings
    
    
    228,499
    
    
    
    189,096Accumulated other comprehensive
income
    
    
    22,380
    
    
    
    4,930Total stockholders
equity
    
    
    676,400
    
    
    
    602,073TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
    
    $
    967,244
    
    
    $
    1,070,252
  3




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DIGITAL RIVER, INC.
 
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    99,419
    
    
    $
    96,301
    
    
    $
    298,914
    
    
    $
    298,309Costs and
expenses (exclusive of depreciation and amortization expense shown separately below):Direct cost of services
    
    
    4,582
    
    
    
    3,913
    
    
    
    12,475
    
    
    
    12,557Network and infrastructure
    
    
    11,786
    
    
    
    10,552
    
    
    
    33,062
    
    
    
    31,136Sales and marketing
    
    
    38,073
    
    
    
    35,419
    
    
    
    115,709
    
    
    
    114,396Product research and development
    
    
    14,134
    
    
    
    12,993
    
    
    
    39,605
    
    
    
    38,737General and administrative
    
    
    9,319
    
    
    
    9,861
    
    
    
    28,280
    
    
    
    30,939Depreciation and amortization
    
    
    5,162
    
    
    
    4,047
    
    
    
    13,635
    
    
    
    11,838Amortization of acquisition-related intangibles
    
    
    1,800
    
    
    
    2,001
    
    
    
    5,719
    
    
    
    6,347Total costs and expenses
    
    
    84,856
    
    
    
    78,786
    
    
    
    248,485
    
    
    
    245,950Income from operations
    
    
    14,563
    
    
    
    17,515
    
    
    
    50,429
    
    
    
    52,359Interest Income
    
    
    557
    
    
    
    4,513
    
    
    
    2,508
    
    
    
    15,057Other income (expense), net
    
    
    264
    
    
    
    (1,387
    )
    
    
    (9
    )
    
    
    (3,789
    )Income before income tax expense
    
    
    15,384
    
    
    
    20,641
    
    
    
    52,928
    
    
    
    63,627Income tax expense
    
    
    4,341
    
    
    
    5,007
    
    
    
    13,525
    
    
    
    16,491Net income
    
    $
    11,043
    
    
    $
    15,634
    
    
    $
    39,403
    
    
    $
    47,136Net income per share  basic
    
    $
    0.30
    
    
    $
    0.43
    
    
    $
    1.07
    
    
    $
    1.27Net income per share  diluted
    
    $
    0.29
    
    
    $
    0.39
    
    
    $
    1.05
    
    
    $
    1.15Shares used in per-share calculation  basic
    
    
    37,151
    
    
    
    36,495
    
    
    
    36,899
    
    
    
    37,186Shares used in per-share calculation  diluted
    
    
    38,093
    
    
    
    41,620
    
    
    
    37,599
    
    
    
    42,203
  4




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##### Table of Contents



DIGITAL RIVER, INC.
 
   Nine Months EndedSeptember 30,2009
    
    
    2008OPERATING ACTIVITIESNet income
    
    $
    39,403
    
    
    $
    47,136Adjustments to reconcile net income to net cash provided by operating activitiesAmortization of acquisition-related intangibles
    
    
    5,719
    
    
    
    6,347Change in accounts receivable allowance, net of acquisitions
    
    
    216
    
    
    
    632Depreciation and amortization
    
    
    13,635
    
    
    
    11,838Stock-based compensation expense related to stock-based
compensation plans
    
    
    13,256
    
    
    
    10,161Excess tax benefits from stock-based compensation
    
    
    (615
    )
    
    
    (1,685
    )Deferred and other income taxes
    
    
    2,466
    
    
    
    6,927Change in operating assets and liabilities (net of acquisitions)Accounts receivable
    
    
    2,141
    
    
    
    10,204Prepaid and other assets
    
    
    20,601
    
    
    
    (7,819
    )Accounts payable
    
    
    10,219
    
    
    
    1,310Deferred revenue
    
    
    3,833
    
    
    
    1,789Income tax payable
    
    
    1,900
    
    
    
    (10,289
    )Other accrued liabilities
    
    
    (6,568
    )
    
    
    39Net cash provided by operating activities
    
    
    106,206
    
    
    
    76,590INVESTING ACTIVITIESPurchases of investments
    
    
    (17,279
    )
    
    
    (460,549
    )Sales of investments
    
    
    17,600
    
    
    
    516,108Cash paid for acquisitions, net of cash received
    
    
    (4,445
    )
    
    
    (22,221
    )Purchases of equipment and capitalized software
    
    
    (26,143
    )
    
    
    (15,169
    )Net cash (used in)/provided by investing activities
    
    
    (30,267
    )
    
    
    18,169FINANCING ACTIVITIESCash paid for convertible senior notes
    
    
    (186,660
    )
    
    
    6,841Exercise of stock options
    
    
    9,133
    
    
    
    Sales of common stock under employee stock purchase plan
    
    
    1,336
    
    
    
    1,446Repurchase of common stock
    
    
    
    
    
    
    (137,858
    )Repurchase of restricted stock to satisfy tax withholding obligation
    
    
    (575
    )
    
    
    (387
    )Excess tax benefits from stock-based compensation
    
    
    615
    
    
    
    1,685Net cash used in financing activities
    
    
    (176,151
    )
    
    
    (128,273
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    6,298
    
    
    
    (3,025
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (93,914
    )
    
    
    (36,539
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    490,335
    
    
    
    381,788CASH AND CASH EQUIVALENTS, end of period
    
    $
    396,421
    
    
    $
    345,249SUPPLEMENTAL DISCLOSURES:Cash paid for interest on convertible senior notes
    
    $
    1,274
    
    
    $
    2,438Cash paid for income taxes
    
    $
    15,649
    
    
    $
    17,039
  5




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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
  Software Development
  Comprehensive Income
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net Income
    
    $
    11,043
    
    
    $
    15,634
    
    
    $
    39,403
    
    
    $
    47,136Other comprehensive income/(loss):Unrealized foreign exchange gain/(loss) on the revaluation of
investments in foreign subsidiaries
    
    
    10,992
    
    
    
    (21,740
    )
    
    
    11,089
    
    
    
    (7,269
    )Reduction in temporary impairment of auction rate securities
    
    
    1,599
    
    
    
    
    
    
    
    10,123
    
    
    
    Unrealized gain/(loss) on investments
    
    
    14
    
    
    
    (956
    )
    
    
    6
    
    
    
    (1,161
    )Tax expense
    
    
    (600
    )
    
    
    
    
    
    
    (3,768
    )Other comprehensive income/(loss)
    
    
    12,005
    
    
    
    (22,696
    )
    
    
    17,450
    
    
    
    (8,430
    )Comprehensive income/(loss)
    
    $
    23,048
    
    
    $
    (7,062
    )
    
    $
    56,853
    
    
    $
    38,706
 6




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Foreign Currency
   Recent Accounting Pronouncements
 Accounting Standards Codification (ASC):
 Interim Disclosures about Fair Value of Financial Instruments:
 Other-than-temporary Impairments:
    7




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Fair Value Measurements and Disclosures:
 Subsequent Events:
 2. NET INCOME PER SHARE
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Earnings per share  basicNet income  basic
    
    $
    11,043
    
    
    $
    15,634
    
    
    $
    39,403
    
    
    $
    47,136Weighted average shares outstanding  basic
    
    
    37,151
    
    
    
    36,495
    
    
    
    36,899
    
    
    
    37,186Earnings per share  basic
    
    $
    0.30
    
    
    $
    0.43
    
    
    $
    1.07
    
    
    $
    1.27Earnings per share  dilutedNet income  basic
    
    $
    11,043
    
    
    $
    15,634
    
    
    $
    39,403
    
    
    $
    47,136Exclude: Interest expense and amortized financing cost of convertible senior notes, net of tax benefit
    
    
    21
    
    
    
    435
    
    
    
    63
    
    
    
    1,304Net income  diluted
    
    $
    11,064
    
    
    $
    16,069
    
    
    $
    39,466
    
    
    $
    48,440Weighted average shares outstanding  basic
    
    
    37,151
    
    
    
    36,495
    
    
    
    36,899
    
    
    
    37,186Dilutive impact of non-vested stock and options outstanding
    
    
    742
    
    
    
    700
    
    
    
    500
    
    
    
    592Dilutive impact of convertible senior notes
    
    
    200
    
    
    
    4,425
    
    
    
    200
    
    
    
    4,425Weighted average shares outstanding  diluted
    
    
    38,093
    
    
    
    41,620
    
    
    
    37,599
    
    
    
    42,203Net income per share  diluted
    
    $
    0.29
    
    
    $
    0.39
    
    
    $
    1.05
    
    
    $
    1.15
 8




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
 Business Combinations
  Acquisitions completed in 2008
    Future Earn-outs
  9




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 4. STOCK-BASED COMPENSATION
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Costs and expensesDirect cost of services
    
    $
    160
    
    
    $
    220
    
    
    $
    501
    
    
    $
    659Network and infrastructure
    
    
    215
    
    
    
    60
    
    
    
    535
    
    
    
    123Sales and marketing
    
    
    1,704
    
    
    
    1,403
    
    
    
    4,864
    
    
    
    3,788Product research and development
    
    
    670
    
    
    
    371
    
    
    
    1,748
    
    
    
    969General and administrative
    
    
    1,909
    
    
    
    1,569
    
    
    
    5,608
    
    
    
    4,622Stock-based compensation included in costs and expenses
    
    $
    4,658
    
    
    $
    3,623
    
    
    $
    13,256
    
    
    $
    10,161
 5. INCOME TAXES
      6. DEBT
   10




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    7. INVESTMENTS
  Unrealized Gain/(Loss)
    
    
    
    
    

    
    Maturities/Reset DatesLess than 12
    
    
    Greater than 12
    
    
    
    
    
    
    Less than 12
    
    
    Greater than 12Cost
    
    
    Months
    

    Months
    
    
    Fair Value
    
    Months
    
    
    MonthsBalance, September 30, 2009U.S. government sponsored agencies
    
    $
    4,999
    
    
    $
    12
    
    
    
    
    
    
    $
    5,011
    
    
    
    
    
    
    $
    5,011Corporate Bonds
    
    
    8,573
    
    
    
    (45
    )
    
    
    
    
    
    
    8,528
    
    
    
    2,105
    
    
    
    6,423Student loan bonds (1)
    
    
    101,900
    
    
    
    (6,165
    )
    
    
    
    
    
    
    95,735
    
    
    
    1,400
    
    
    
    94,335Total available-for-sale securities
    
    $
    115,472
    
    
    $
    (6,198
    )
    
    $
    
    
    
    $
    109,274
    
    
    $
    3,505
    
    
    $
    105,769Balance, December 31, 2008U.S. government sponsored agencies
    
    $
    9,900
    
    
    $
    100
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    Student loan bonds (1)
    
    
    109,500
    
    
    
    (16,287
    )
    
    
    
    
    
    
    93,213
    
    
    
    
    
    
    
    93,213Total available-for-sale securities
    
    $
    119,400
    
    
    $
    (16,187
    )
    
    $
    
    
    
    $
    103,213
    
    
    $
    10,000
    
    
    $
    93,213
  Note 8. Fair Value Measurements
  8. FAIR VALUE MEASUREMENTS
       11




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    determination of the penalty coupon rate, frequency of reset period associated with each ARS
    
    an average redemption period of seven years
    
    a contribution of the ARS paying its contractually stated interest rate
    
    determination of the risk adjusted discount rate based on LIBOR rates for these
maturities plus market information on student loan credit spreads
   Fair Value MeasurementsAs of September 30, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash equivalents
    
    $
    396,421
    
    
    $
    396,421
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    14,939
    
    
    
    14,939
    
    
    
    Long-term investments
    
    
    94,335
    
    
    
    
    
    
    
    
    
    
    
    94,335Total assets measured at fair value
    
    $
    505,695
    
    
    $
    411,360
    
    
    $
    
    
    
    $
    94,335
   12




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DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)Short-term
    
    
    Long-termInvestments
    
    
    Investments
    
    
    TotalBalance as of December 31, 2007
    
    $
    119,750
    
    
    $
    
    
    
    $
    119,750Total gains or losses (realized/unrealized)Included in other comprehensive income
    
    
    
    
    
    
    (16,287
    )
    
    
    (16,287
    )Purchases, issuances, and settlements
    
    
    (10,250
    )
    
    
    
    
    
    
    (10,250
    )Transfers in and/or out of Level 3
    
    
    (109,500
    )
    
    
    109,500
    
    
    
    Balance as of December 31, 2008
    
    
    
    
    
    
    93,213
    
    
    
    93,213Total gains or losses (realized/unrealized)Included in other comprehensive income
    
    
    
    
    
    
    8,784
    
    
    
    8,784Purchases, issuances, and settlements
    
    
    
    
    
    
    1,338
    
    
    
    1,338Transfers in and/or out of Level 3
    
    
    
    
    
    
    (9,000
    )
    
    
    (9,000
    )Balance as of September 30, 2009
    
    $
    
    
    
    $
    94,335
    
    
    $
    94,335
 Fair Value of Financial Instruments
   9. LITIGATION
  10. SUBSEQUENT EVENTS
 Symantec Announcement.
 Disclosure Standard.
 13




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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 and Item 1A of Part 1 of the Form 10-K for the period ended
December 31, 2008. 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. We have no obligation to update the matters set
forth herein.
 Overview
      14




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th
  Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    4.6
    
    
    
    4.0
    
    
    
    4.1
    
    
    
    4.2Network and infrastructure
    
    
    11.9
    
    
    
    11.0
    
    
    
    11.1
    
    
    
    10.4Sales and marketing
    
    
    38.3
    
    
    
    36.8
    
    
    
    38.7
    
    
    
    38.3Product research and development
    
    
    14.2
    
    
    
    13.5
    
    
    
    13.2
    
    
    
    13.0General and administrative
    
    
    9.4
    
    
    
    10.2
    
    
    
    9.5
    
    
    
    10.4Depreciation and amortization
    
    
    5.2
    
    
    
    4.2
    
    
    
    4.6
    
    
    
    4.0Amortization of acquisition-related costs
    
    
    1.8
    
    
    
    2.1
    
    
    
    1.9
    
    
    
    2.1Total costs and expenses
    
    
    85.4
    
    
    
    81.8
    
    
    
    83.1
    
    
    
    82.4Income from operations
    
    
    14.6
    
    
    
    18.2
    
    
    
    16.9
    
    
    
    17.6Interest Income
    
    
    0.6
    
    
    
    4.7
    
    
    
    0.8
    
    
    
    5.0Other income (expense), net
    
    
    0.3
    
    
    
    (1.5
    )
    
    
    
    
    
    
    (1.3
    )Income before income tax expense
    
    
    15.5
    
    
    
    21.4
    
    
    
    17.7
    
    
    
    21.3Income tax expense
    
    
    4.4
    
    
    
    5.2
    
    
    
    4.5
    
    
    
    5.5Net income
    
    
    11.1
    %
    
    
    16.2
    %
    
    
    13.2
    %
    
    
    15.8
    %
 REVENUE.
  DIRECT COST OF SERVICES.
 15




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##### Table of Contents



NETWORK AND INFRASTRUCTURE.
  SALES AND MARKETING.
  PRODUCT RESEARCH AND DEVELOPMENT.
  GENERAL AND ADMINISTRATIVE.
  DEPRECIATION AND AMORTIZATION.
 16




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##### Table of Contents



AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES.
 INTEREST INCOME.
 OTHER INCOME (EXPENSE), NET.
 INCOME TAXES.
  Off Balance Sheet Arrangements
  17




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##### Table of Contents



Liquidity and Capital Resources
        
    
    determination of the penalty coupon rate, frequency of reset period associated with each ARS
    
    an average redemption period of seven years
    
    a contribution of the ARS paying its contractually stated interest rate
    
    determination of the risk adjusted discount rate based on LIBOR rates for these
maturities plus market information on student loan credit spreads
  18




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##### Table of Contents



Application of Critical Accounting Policies
 Critical Accounting Estimates and Policies
  Recent Accounting Pronouncements
 Accounting Standards Codification (ASC):
 Interim Disclosures about Fair Value of Financial Instruments:
 Other-than-temporary Impairments:
    Fair Value Measurements and Disclosures:
 19




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##### Table of Contents



Subsequent Events:
 
 Item 3.
    
    Qualitative and Quantitative Disclosure about Market Risk
 Interest Rate Risk
   Foreign Currency Risk
   Transaction Exposure
  Translation Exposure
  20




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##### Table of Contents



Other Market Risks
 Investments in auction-rate securities
  21




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##### Table of Contents



Item 4.
    
    Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Limitations on the Effectiveness of Controls
  22




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
    23




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##### Table of Contents



Item 1A.
    
    Risk Factors
  Client development and retention is essential to our success, and our failure to do so may result
in significant fluctuations in our revenues, operating results, growth rate, and stock price.
  A significant portion of our revenues are derived from a limited number of clients, the loss of any
of which could materially adversely affect our business, financial condition or results of
operations, and stock price.
 TM
  Our stock price may be volatile.
  24




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##### Table of Contents



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, whether using tools or applications from
companies, such as Art Technology Group, Inc. and IBM Corporation or through internally
developed solutions (e.g. as announced on October 12, 2009, Symantec has elected not to renew
its e-commerce agreement with us and will migrate its online store traffic to an internally
developed e-commerce system, which will result in the termination of our e-commerce agreement
with Symantec on June 30, 2010);
    
    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.
   Loss of our credit card acceptance privileges, changes to payment networks, fees, rules or
practices, or the imposition of fines or increased fees from banks or payment processors, would
seriously hamper our ability to process the sale of merchandise.
 25




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##### Table of Contents



Failure to successfully implement a new enterprise resource planning (ERP) system could
adversely affect our business
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 None
 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
 None
 26




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##### Table of Contents



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 (4)
    
    Form of Senior Debt Indenture.4.3 (4)
    
    Form of Subordinated Debt Indenture.4.4
    
    References are made to Exhibits 3.1 and 3.2.4.5 (5)
    
    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.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 an exhibit to the Companys Current Report on
Form 8-K, filed on June 1, 2006, 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 exhibits 4.2 and 4.3 to our Registration Statement
on Form S-3, File No. 333-56787, declared effective on
February 12, 2002, and incorporated herein by reference.(5)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K,
filed on July 13, 2004 and incorporated herein by reference. 27




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##### Table of Contents



Date:       November 9, 2009
    DIGITAL RIVER, INC.By:

/s/ Thomas M. DonnellyThomas M. DonnellyChief Financial Officer
(Principal Financial and Accounting Officer) 28




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##### Table of Contents



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 (4)
    
    Form of Senior Debt Indenture.4.3 (4)
    
    Form of Subordinated Debt Indenture.4.4
    
    References are made to Exhibits 3.1 and 3.2.4.5 (5)
    
    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.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 an exhibit to the Companys Current Report on
Form 8-K, filed on June 1, 2006, 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 exhibits 4.2 and 4.3 to our Registration Statement
on Form S-3, File No. 333-56787, declared effective on
February 12, 2002, and incorporated herein by reference.(5)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K,
filed on July 13, 2004 and incorporated herein by reference. 29