SECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549  FORM 10-Q  x      QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 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.(Exact name of registrant as specified in its charter) DELAWARE
  41-1901640(State or other jurisdiction of
  (I.R.S. Employerincorporation or organization)
  Identification Number)
 9625 WEST 76TH
STREET, SUITE 150
EDEN PRAIRIE, MINNESOTA 55344(Address of principal executive offices) (952) 253-1234(Registrants telephone number, including area code)  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.  YesxNoo COMMON STOCK, $0.01 PAR VALUE
  24,371,657 SHARES(Class)
  Outstanding as of May 2, 2001
    DIGITAL
RIVER, INC.

Form
10-Q

Index



PART I.
  FINANCIAL INFORMATIONItem 1.
  Financial StatementsCondensed
  Consolidated Balance Sheets at March 31, 2001 and December 31, 2000Condensed
  Consolidated Statements of Operations for the three months ended March 31,
  2001  and
  2000Condensed
  Consolidated Statements of Cash Flows for the three months ended March 31,
  2001  and
  2000Notes
  to Condensed Consolidated Financial Statementsand Results of OperationsItem
  2.
  Management's
  Discussion and Analysis of Financial Condition and Results of OperationsItem
  3.
  Qualitative
  and Quantitative Disclosure about Market RiskPART II.
  OTHER INFORMATIONItem
  4.
  Changes
  in securities and use of proceedsItem 6.
  Exhibits
  and Reports on Form 8-KSIGNATURESExhibit IndexPART
I.FINANCIAL
INFORMATION

ITEM
1.FINANCIAL STATEMENTS

DIGITAL
RIVER, INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS

(In
Thousands, Except Share Data)



March 31,
  December 31,2001
  2000(unaudited)ASSETSCURRENT
  ASSETS:Cash
  and cash equivalents
  $26,708
  $16,920Short-term investments
  6,000
  14,977Accounts receivable, net
  6,316
  4,903Prepaid expenses and other
  1,288
  1,123Total
  current assets
  40,312
  37,923PROPERTY AND
  EQUIPMENT, NET
  14,423
  13,570GOODWILL, NET AND
  OTHER ASSETS
  23,778
  17,910$78,513
  $69,403LIABILITIES AND
  STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
  $19,131
  $14,339Accrued payroll
  2,248
  2,287Deferred revenue
  1,631
  1,833Other current liabilities
  2,621
  2,426Total
  current liabilities
  25,631
  20,885STOCKHOLDERS EQUITY:Preferred Stock, $.01 par
  value; 5,000,000 sharesauthorized; no shares issued and outstanding
  --
  --Common Stock, $.01 par value;
  60,000,000 shares authorized;24,362,488 and
  22,275,317 shares issued and outstanding
  244
  223Additional paid-in capital
  142,905
  132,403Deferred compensation
  (131)
  (194)Accumulated deficit
  (90,136)
  (83,914)Total
  stockholders equity
  52,882
  48,518$78,513
  $69,403See accompanying notes to condensed consolidated financial
  statements.DIGITAL
RIVER, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(In
Thousands, Except Per Share Data; Unaudited)



Three Months Ended
  March 31,2001
  2000REVENUE
  $13,047
  $6,883COSTS AND EXPENSES (exclusive ofdepreciation expense shown separately
  below):Direct cost of services
  557
  295Network and infrastructure
  2,964
  1,790Sales and marketing
  6,785
  6,479Product research and development
  2,469
  3,664General and administrative
  1,097
  1,234Depreciation and amortization
  1,120
  703Amortization of goodwill and
  acquisition related costs
  4,644
  5,394Total costs and
  expenses
  19,636
  19,559LOSS FROM OPERATIONS
  (6,589)
  (12,676)INTEREST INCOME
  348
  685Net loss
  $(6,241)
  $(11,991)Basic and diluted net loss per share
  $(.28)
  $(.58)Basic and diluted weighted average common
  shares outstanding
  22,482
  20,775See
  accompanying notes to condensed consolidated financial statements.

DIGITAL
RIVER, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In
Thousands; Unaudited)



Three Months Ended
  March 31,2001
  2000OPERATING ACTIVITIES:Net loss
  $(6,241)
  $(11,991)Adjustments to reconcile net
  loss to net cash used in operating activities:Amortization of
  goodwill and acquisition related costs
  4,644
  5,394Depreciation and
  amortization
  1,120
  703Deferred
  compensation expense
  57
  150Changes in assets
  and liabilities:Accounts receivable and prepaid expense
  (1,578)
  579Accounts payable
  4,792
  931Other
  current liabilities and deferred revenue
  (286)
  761Net cash provided
  by (used in) operating activities
  2,508
  (3,473)INVESTING ACTIVITIES:Purchases of investments
  
  (12,065)Proceeds from sales of
  investments
  9,000
  23,500Purchases of equipment
  (1,549)
  (4,027)Acquisitions, net of cash received
  (307)
  Patent acquisition costs
  (7)
  (16)Net cash
  provided by investing activities
  7,137
  7,392FINANCING ACTIVITIES:Sales of Common Stock
  143
  3,345Net cash
  provided by financing activities
  143
  3,345Net
  increase in cash and cash equivalents
  9,788
  7,264CASH AND CASH
  EQUIVALENTS, beginning of period
  16,920
  15,120CASH AND CASH
  EQUIVALENTS, end of period
  $26,708
  $22,384SUPPLEMENTAL CASH FLOW
  DISCLOSURE:Issuance of Common Stock in
  connection with acquisitions and related earn-out payments
  $10,386
  $3,093See accompanying notes
  to condensed consolidated financial statements.DIGITAL
RIVER, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.BASIS
OF PRESENTATION:

The unaudited condensed
consolidated financial statements included herein reflect all adjustments, consisting
only of normal recurring adjustments, which in the opinion of management are
necessary to fairly state the Companys consolidated financial position,
results of operations and cash flows for the periods presented.  These condensed consolidated financial
statements should be read in conjunction with the Companys audited
consolidated financial statements included in the Companys Form 10-K for the
year ended December 31, 2000 as filed with the Securities and Exchange
Commission.  The results of operations
for the period ended March 31, 2001 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire fiscal year
ending December 31, 2001.  The December
31, 2000 balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.

2.PRINCIPLES
OF CONSOLIDATION:

The condensed
consolidated financial statements include the accounts of Digital River, Inc.
and its wholly owned subsidiaries.  All
intercompany balances and transactions have been eliminated.

3.NET
LOSS PER SHARE:

Basic loss per share is
computed using the weighted-average number of common shares outstanding
excluding contingently issuable or returnable shares, and diluted loss per
share is computed using the weighted-average number of common shares
outstanding and dilutive potential common shares outstanding.  As a result of the losses incurred by the
Company for the three months ended March 31, 2001 and 2000, respectively, all
potential common shares were anti-dilutive and were excluded from the diluted
net loss per share calculations.

The following table
summarizes securities outstanding as of each period end which were not included
in the calculation of diluted net loss per share since their inclusion would be
anti-dilutive:

March 31,
  March 31,2001
  2000Common Stock warrants
  356,087
  357,753Common Stock options
  7,165,665
  3,685,2514.ACQUISITIONS
AND EARN-OUT ARRANGEMENTS:

In March 2001, the
Company purchased the Market Maker assets of Calico Commerce, Inc.
("Calico") in exchange for 1,630,368 shares of Common Stock valued at
$8,468,000 plus direct expenses.  The
assets purchased consisted of equipment, intellectual property and
non-competition agreements.  The Company
will amortize goodwill and non-competition agreements over a three year
period.  Under the agreement, Calico
also has an earn-out arrangement whereby it can earn up to an additional
2,971,347 shares of Common Stock upon attaining certain business goals for a
period of 13 months following the acquisition.

NetSales, Inc., from
whom the Company purchased certain assets in August 2000, received an earn-out
payment of 84,000 shares of Common Stock valued at $404,000 in March 2001.  The Company recorded such amount as
additional goodwill and will amortize this amount on a straight-line basis
through August 2002.

The former owners of
Maagnum Internet Group, Inc., a company purchased by the Company in April 1999,
received earn-out payments of 314,531 shares of Common Stock valued at
$1,514,000 in March 2001 and 124,349 shares of Common Stock valued at
$3,093,000 in March 2000.  The Company
charged such amount to compensation expense and this is included as amortization
of goodwill and acquisition related costs in the accompanying Condensed
Consolidated Statements of Operations. 
This amount would have increased general and administrative expense had
it been reported outside of that caption.

The following unaudited
pro forma condensed results of operations for the three months ended March 31,
2001 and 2000 has been prepared as if each of the acquisitions had occurred on
January 1, 2000:

Three Months Ended
  March 31,2001
  2000(in thousands)Revenue
  $15,012
  $9,931Loss from operations
  (9,217)
  (21,265)Net loss
  (8,869)
  (20,580)Basic and diluted loss
  per share
  $(0.37)
  $(0.88)This financial
information does not purport to represent results that would actually have been
obtained if the transactions had been in effect on January 1, 2000 or any future
results that may in fact be realized.

5.SEGMENT
INFORMATION:

The Company has two
operating segments, Software and Digital Commerce Services and E-Business
Services, which have been identified as components of the Company that are
reviewed regularly by management to determine resource allocation and assess
performance.  Unallocated corporate
items consist of depreciation, goodwill amortization, acquisition-related costs
and interest income for operational results and consist of certain cash,
investments and goodwill for total assets. 
Segment information is as follows:

Software and Digital
  E-Business
  UnallocatedTHREE MONTHS ENDED
  Commerce
  Services
  Services
  CorporateMARCH 31, 2001:
  Division
  Division
  Items
  Consolidated(in thousands)Revenue
  $10,512
  $2,535
  $
  $13,047Gross profit
  7,803
  1,723
  
  9,526Income (loss) from
  operations
  1,649
  (2,474)
  (5,764)
  (6,589)Net income (loss)
  1,649
  (2,474)
  (5,416)
  (6,241)Total assets
  17,539
  8,012
  52,962
  78,513Software and Digital
  E-Business
  UnallocatedTHREE MONTHS ENDED
  Commerce
  Services
  Services
  CorporateMARCH 31, 2000:
  Division
  Division
  Items
  Consolidated(in thousands)Revenue
  $6,130
  $753
  $
  $6,883Gross profit
  4,467
  331
  
  4,798Loss from operations
  (1,755)
  (4,824)
  (6,097)
  (12,676)Net loss
  (1,755)
  (4,824)
  (5,412)
  (11,991)Total assets
  11,879
  4,176
  67,539
  83,5946.          SUBSEQUENT EVENTS

In April 2001, the Company announced a share repurchase
program of up to $5.0 million of its outstanding shares of Common Stock.  Repurchases will be at the Company's
discretion, based on ongoing assessments of the capital needs of the business
and the market price of its shares of Common Stock. No time limit was set for
completion of the repurchase program.



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

THE COMPANY NOTES THAT,
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS.  THE
COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION OR
PUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
OF THIS REPORT.  SUCH FACTORS INCLUDE,
AMONG OTHERS:  THE COMPANYS LIMITED
OPERATING HISTORY AND VARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURE
LOSSES, RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THE
INTERNET AND GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE
DEVELOPMENT, DEPENDENCE ON SOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS,
SYSTEM DEVELOPMENT AND ELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL
CHANGES, COMPETITION IN THE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF
ATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANYS GROWTH,
INTEGRATION OF ACQUIRED COMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK
FACTORS REFERENCED IN THE COMPANYS FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
2000.

OVERVIEW

The Company is a leading
provider of comprehensive electronic commerce outsourcing solutions.  The Company was incorporated in February
1994 and commenced offering products for sale through its clients Web stores
in August 1996.  From inception through
August 1996, the Company had no sales, and its activities related primarily to
the development of its Commerce Network Server (CNS) technology related to
electronic commerce.  In 1996, the
Company began to focus its business development efforts on the software
industry, building its inventory of software products through contracts with
software publishers.  In 1997, the
Company began to develop software distribution relationships through contracts
with online retailers.  As of March 31,
2001, the Company had approximately 8,000 software publisher clients and online
retailer clients that are served by the Software and Digital Commerce Services
Division.  In late 1998, the Company
began to offer its comprehensive electronic commerce outsourcing services in
the form of a transaction fee-based e-commerce service to clients outside of
the software industry.  As of March 31,
2001, the Company had 53 client contracts under its E-Business Services
Division.

The Company derives its
revenue primarily from transaction and service fees associated with the
e-commerce services that the Company provides to its clients.  These services include Web commerce hosting,
transaction processing, digital and physical fulfillment services, fraud
screening, customer service and merchandising and analytical marketing
services.  The Company acts as the
merchant of record on the majority of the transactions processed and has
contractual relationships with its clients, primarily software publishers and
online retailers, which obligate the Company to pay to the client a specified
percentage of each sale.  The Company
retains its transaction fee and also charges for various service fees.  The Company also derives revenue from
licensing, integration, development and consulting services provided to its
clients.  This revenue is recognized as
services are performed, except for licensing and certain integration and
development fees which are recognized evenly over the term of the contract.

The Company has a
limited operating history upon which investors may evaluate its business and
prospects.  Since inception, the Company
has incurred significant losses, and as of March 31, 2001, had an accumulated
deficit of approximately $90.1 million. 
The Company intends to expend financial and management resources on the
development of additional services, sales and marketing, technology and
operations to support larger-scale operations and greater service offerings,
particularly with respect to the E-Business Services division.  As a result, the Company expects to incur
additional losses and continued negative cash flow from operations for at least
the next two quarters.  There can be no
assurance that the Companys revenue will increase or even continue at their
current level or that the Company will achieve or maintain profitability or
generate cash from operations in future periods.  The Companys prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets such as electronic commerce.  To
address these risks, the Company must, among other things, maintain existing
and develop new relationships with software publishers, online retailers and
E-Business Services clients, implement and successfully execute its business
and marketing strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel.  There can
be no assurance that the Company will be successful in addressing such risks,
and the failure to do so would have a material adverse effect on the Companys
business, financial condition and results of operations.  The Companys current and future expense levels
are based largely on its planned operations and estimates of future
revenue.  Revenue and operating results
generally depend on the volume and timing of orders received, which are
difficult to forecast.  The Company may
be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. 
Accordingly, any significant shortfall in revenue would have an
immediate adverse effect on the Companys business, financial condition and
results of operations.  In view of the
rapidly evolving nature of the Companys business and its limited operating
history, the Company is unable to accurately forecast its revenue and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.

RESULTS
OF OPERATIONS

The following table sets
forth certain items from the Companys consolidated condensed statements of
operations as a percentage of total revenues for the periods indicated.

Three Months Ended 
  March 31,2001
  2000Revenue
  100.0%
  100.0%Operating expenses:Direct cost of services
  4.3
  4.3Network and infrastructure
  22.7
  26.0Sales and marketing
  52.0
  94.1Product research and development
  18.9
  53.3General and administrative
  8.4
  17.9Depreciation and
  amortization
  8.6
  10.2Amortization of goodwill
  and other acquisition related costs
  35.6
  78.4Total operating
  expenses
  150.5
  284.2Loss from operations
  (50.5)
  (184.2)Interest income, net
  2.7
  10.0Net loss
  (47.8)%
  (174.2)%REVENUE

Revenue increased to
$13.0 million for the quarter ended March 31, 2001 from $6.9 million for the
quarter ended March 31, 2000.  Revenue
for the Software and Digital Commerce Services segment increased to $10.5
million for the quarter ended March 31, 2001 from $6.1 million for the quarter
ended March 31, 2000.  The increase was
a result of significant growth in the number of the Companys software
publisher and online retailer clients as well as increasing market acceptance
of electronic software delivery. 
Revenue for the E-Business Services segment increased to $2.5 million
for the quarter ended March 31, 2001 from $753,000 for the quarter ended March
31, 2000.  This increase resulted from
the addition of new clients contracted and ongoing fees earned on existing
clients.  International sales within the
Software and Digital Commerce Services segment represented approximately 21% of
revenue for each of the three months ended March 31, 2001 and 2000.  There was no international revenue in the
E-Business Services segment.

GROSS
PROFIT

Cost of revenue, which
consists of direct cost of services and network and infrastructure (both shown
net of depreciation expense), increased to $3.5 million in the quarter
ended March 31, 2001 from $2.1 million in the quarter ended March 31,
2000.  The gross profit margin for the
Software and Digital Commerce Services segment rose slightly in the quarter
ended March 31, 2001 to 74.2% from 72.9% for the quarter ended March 31,
2000.  The gross profit margin for the
E-Business Services segment increased in the quarter ended March 31, 2001 to
67.9% from 44.0% for the quarter ended March 31, 2000 due in part to leveraging
fixed cost infrastructure and better margins on service fees for implementing
client contracts.  The Company believes
that Internet commerce and related services could become more competitive in
the future.  Accordingly, the Company
may reduce or alter its pricing structure and policies in the future and any
such change could reduce gross margins.

SALES
AND MARKETING

Sales and marketing
expense increased to $6.8 million in the quarter ended March 31, 2001 from
$6.5 million in the quarter ended March 31, 2000.  The sales and marketing expense for the
Software and Digital Commerce Services segment increased to $4.4 million in the
quarter ended March 31, 2001 from $3.8 million for the quarter ended March 31,
2000.  The increase resulted from an
increase in credit card fees and chargeback costs of $1.0 million which were
partially offset by a decrease in advertising and marketing expense.  The sales and marketing expense for the
E-Business Services segment decreased to $2.4 million in the quarter ended
March 31, 2001 from $2.7 million for the quarter ended March 31, 2000.  This decrease resulted from a decrease in
advertising and marketing expense of $611,000 which was partially offset by an
increase in personnel costs.  As a
percentage of revenue, sales and marketing expense decreased to 52.0% in the
quarter ended March 31, 2001 from 94.1% in the quarter ended March 31, 2000,
primarily reflecting the Companys increased revenue volume.  The Company expects that sales and marketing
expense will continue to increase in absolute dollars as the Company continues
to build its sales and marketing infrastructure and develop marketing programs.

PRODUCT
RESEARCH AND DEVELOPMENT

Product research and
development expense decreased to $2.5 million in the quarter ended March 31,
2001 from $3.7 million in the quarter ended March 31, 2000.  The product research and development expense
for the Software and Digital Commerce Services segment decreased to $1.0
million in the quarter ended March 31, 2001 from $1.8 million for the quarter
ended March 31, 2000.  The decrease
resulted from a decrease in consulting fees of $784,000.  The product research and development expense
for the E-Business Services segment decreased to $1.5 million in the quarter
ended March 31, 2001 from $1.9 million for the quarter ended March 31,
2000.  This decrease resulted from a
decrease in consulting fees of $657,000, which was partially offset by an
increase in personnel costs. As a percentage of revenue, product research and
development expense decreased to 18.9% in the quarter ended March 31, 2001 from
53.3% in the quarter ended March 31, 2000, primarily reflecting the Companys
increased revenue volume and decreased consulting expense.  The Company believes that continued
investment in product research and development is critical to attaining its
strategic objectives and, and as a result, expects product research and
development expenses will continue to increase in absolute dollars.  As a percentage of revenue, these expenses
are expected to decrease as revenue increases.

GENERAL
AND ADMINISTRATIVE

General and
administrative expense decreased to $1.1 million in the quarter ended March 31,
2001 from $1.2 million in the quarter ended March 31, 2000.  As a percentage of sales, general and
administrative expense decreased to 8.4% in the quarter ended March 31, 2001
from 17.9% in the quarter ended March 31, 2000, reflecting the Companys
revenue growth.  The Company expects general
and administrative expense to increase in absolute dollars in the future,
particularly as the Company continues to build infrastructure to support growth
and incurs costs associated with being a public company.  As a percentage of revenue, these expenses
are expected to decrease as revenue increases.

AMORTIZATION
OF GOODWILL AND OTHER ACQUISITION RELATED COSTS

Amortization of goodwill
and other acquisition-related costs decreased in the quarter ended March 31,
2001 from the quarter ended March 31, 2000 primarily due to an earn-out payment
of approximately $3.1 million that occurred in 2000 which was partially
offset by earn-out payments in 2001 of $1.5 million and additional amortization
of goodwill from two acquisitions.

INTEREST INCOME

Interest income consists
of earnings on the Companys cash, cash equivalents and investments.  The decrease from the prior period was
attributable to lower cash and investment balances in 2001.  The Company expects interest income to
decrease in the future as cash is used to fund operations and is used for
investments in infrastructure.

INCOME
TAXES

The Company paid no
income taxes in any reported period. 
The Company has incurred a net loss for each period since
inception.  As of March 31, 2001, the
Company had approximately $80.0 million of net operating loss carryforwards for
federal income tax purposes, which expire beginning in 2009.  Due to the uncertainty of future
profitability, a valuation allowance equal to the deferred tax asset has been
recorded.  Certain changes in ownership
that resulted from the sales of Common and Preferred Stock will limit the
future annual realization of the tax net operating loss carryforwards to a
specified percentage under Section 382 of the Internal Revenue Code.

LIQUIDITY
AND CAPITAL RESOURCES

In the first three months
of 2001, the Companys operations generated $2.4 million of cash due to
payables growth, less receivables growth, exceeding the $420,000 cash loss from
operations.  The Company used $1.9
million to pay for additions of equipment and software and for acquisition
expenses.  The Company sold $9.0 million
in investments.  In the same period for
2000, the Company used $3.5 million of cash to fund operations, $4.0 million
for additions of equipment and software and generated cash by selling $23.5
million in investments, which was partially offset by $12.1 million in
purchases of investments, and through stock and warrant exercises totaling $3.3
million.

As of March 31, 2001,
the Company had $26.7 million of cash and cash equivalents and $6.0 million of
short-term investments.  The Companys
principal commitments consisted of obligations outstanding under operating
leases.  Although the Company has no
material commitments for capital expenditures, it anticipates continued capital
expenditures consistent with its anticipated growth in operations,
infrastructure and personnel.  The
Company anticipates that it will expend approximately $20.0 million over the
next 21 months on capital expenditures based on the Companys current
anticipated growth rate.  The Company further
anticipates that it will expend approximately $17.0 million over the next 21
months on product development based on the Companys current anticipated growth
rate in operations.  The Company may
also use cash to acquire or license technology, products or businesses related
to the Companys current business.  The
Company also anticipates that it will continue to experience growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of the Companys cash resources.

The Company believes
that existing sources of liquidity and the results of its operations will
provide adequate cash to fund its operations for at least the next 21 months,
although the Company may seek to raise additional capital during that period.

ITEM
3.QUALITATIVE
AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not
enter into financial instruments for trading or speculative purposes and does
not currently utilize derivative financial instruments.  The operations of the Company are conducted
primarily in the United States and as such are not subject to material foreign
currency exchange rate risk.  The
Company has no long-term debt.

PART
II.OTHER
INFORMATION

ITEM
2.CHANGES
IN SECURITIES AND USE OF PROCEEDS

(c)On
March 20, 2001, pursuant to an Asset Purchase Agreement dated as of March 20,
2001 (the Purchase Agreement) by and among the Company, Calico Commerce, Inc.
(Calico) and ConnectInc.com, Co., a wholly owned subsidiary of Calico
(ConnectInc), the Company purchased those assets and assumed those
liabilities of ConnectInc related to ConnectIncs Market Maker business, in
exchange for 1,630,368 shares of Common Stock of the Company.  The Purchase Agreement includes a contingent
earnout whereby ConnectInc can receive additional shares of Common Stock of the
Company based upon the revenue generated by the Market Maker product, from
sales by Digital River and Calico, over the 13 months following the closing.

The former owners of Maagnum Internet
Group, Inc., a company purchased by the Company in April 1999, received
earn-out payments of 314,531 shares of Common Stock of the Company valued at
$1,514,000 in March 2001.NetSales, Inc., from whom the Company
purchased certain assets in August 2000, received an earn-out payment of 84,000
shares of Common Stock of the Company valued at $404,000 in March 2001.The issuance and sale of the unregistered
securities in the transactions described above were deemed to be exempt from
the registration and prospectus delivery requirements under the Securities Act
of 1933, as amended (the Securities Act), in reliance upon Section 4(2) of
the Securities Act, Regulation D promulgated thereunder, Regulation S
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities
Act, as transactions by an issuer not involving any public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationship with the Company, to information about Digital River.ITEM 6.EXHIBITS
AND REPORTS ON FORM 8-K

(A)EXHIBITS

EXHIBITNUMBER
  
  DESCRIPTION
  OF DOCUMENTS2.1(1)
  
  Asset
  Purchase Agreement, dated March 20, 2001, by and among the Company, Calico
  Commerce, Inc. and ConnectInc.com, Co.3.1(2)
  
  Amended
  and Restated Certificate of Incorporation, as currently in effect3.2(3)
  
  Amended
  and Restated Bylaws of the Company, as currently in effect4.1(2)
  
  Specimen
  Common Stock Certificate10.1(1)
  
  Voting
  Agreement, dated March 20, 2001, by and among the Company, Calico Commerce,
  Inc. and ConnectInc.com, Co.11.1(4)
  
  Statement
  of Computation of Per Share Earnings(1)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Current Report on Form
  8-K filed on March 26, 2001.(2)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Registration Statement
  on Form S-1, File No. 333-56787, declared effective on August 11, 1998.(3)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Annual Report on Form
  10-K filed on March 27, 2001.(4)
  
  See
  Note 4 to Condensed Consolidated Financial Statements.(B)REPORTS
ON FORM 8-K

The Company filed one
current report on Form 8-K during the quarter ended March 31, 2001.  The report was filed on March 20, 2001.  It reported the Companys acquisition on
March 20, 2001 of the assets and liabilities of ConnectInc related to
ConnectIncs Market Maker business.

SIGNATURES

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

Date:  May 14, 2001
  DIGITAL RIVER, INC.By: /s/ Robert E.
  StrawmanRobert E. StrawmanChief Financial Officer(Principal Financial and
  AccountingOfficer)EXHIBIT INDEX

EXHIBITNUMBER
  
  DESCRIPTION
  OF DOCUMENTS2.1(1)
  
  Asset
  Purchase Agreement, dated March 20, 2001, by and among the Company, Calico
  Commerce, Inc. and ConnectInc.com, Co.3.1(2)
  
  Amended
  and Restated Certificate of Incorporation, as currently in effect3.2(3)
  
  Amended
  and Restated Bylaws of the Company, as currently in effect4.1(2)
  
  Specimen
  Common Stock Certificate10.1(1)
  
  Voting
  Agreement, dated March 20, 2001, by and among the Company, Calico Commerce,
  Inc. and ConnectInc.com, Co.11.1(4)
  
  Statement
  of Computation of Per Share Earnings(1)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Current Report on Form
  8-K filed on March 26, 2001.(2)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Registration Statement
  on Form S-1, File No. 333-56787, declared effective on August 11, 1998.(3)
  
  Incorporated
  by reference to the indicated exhibit in the Companys Annual Report on Form
  10-K filed on March 27, 2001.(4)
  
  See
  Note 4 to Condensed Consolidated Financial Statements.