<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, 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 JUNE 30, 1999

                                       OR

/ /  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. Employer
incorporation or organization)                            Identification Number)

                        9625 WEST 76TH STREET, SUITE 150
                          EDEN PRAIRIE, MINNESOTA 55344
                    (Address of principal executive offices)

                               -------------------

                                 (612) 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. Yes /X/ No / /


       Common Stock, $0.01 par value                 20,559,775 shares
       -----------------------------           -------------------------------

       (Class)                                 Outstanding as of July 31, 1999


--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               DIGITAL RIVER, INC.

                                    Form 10-Q

                                      Index

<TABLE>
<CAPTION>

PART I.   FINANCIAL INFORMATION                                             PAGE

<S>                                                                         <C>
Item 1.   Financial Statements

          Condensed Consolidated Balance Sheets
          at June 30, 1999 and December 31, 1998.........................     3

          Condensed Consolidated Statements of Operations
          for the three and six months ended June 30, 1999 and 1998......     4

          Condensed Consolidated Statements of Cash Flows
          for the six months ended June 30, 1999 and 1998................     5

          Notes to Condensed Consolidated Financial Statements...........     6

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations......................................     8

Item 3.   Qualitative and Quantitative Disclosure about Market Risk......    13


PART II. OTHER INFORMATION

Item 2.   Changes in Securities and Use of Proceeds......................    14

Item 4.   Submission of Matters to a Vote of Security Holders............    15

Item 6.   Exhibits and Reports on Form 8-K...............................    16

SIGNATURES ..............................................................    17

EXHIBIT INDEX ...........................................................    18
</TABLE>


                                       2.
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                               DIGITAL RIVER, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                        June 30,        December 31,
                                                                          1999              1998
                                                                      ------------      ------------
                                                                      (unaudited)
<S>                                                                   <C>               <C>
                                    ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                          $     31,515      $     63,503
   Short-term investments                                                   30,793            10,894
   Accounts receivable, net                                                  1,095             1,487
   Prepaid expenses and other                                                  433               420
                                                                      ------------      ------------
               Total current assets                                         63,836            76,304

PROPERTY AND EQUIPMENT, NET                                                  4,841             3,914

GOODWILL, NET AND OTHER ASSETS                                              22,151               110
                                                                      ------------      ------------
                                                                      $     90,828      $     80,328
                                                                      ============      ============
                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                   $      6,332      $      3,880
   Accrued payroll                                                           1,064               807
   Other current liabilities                                                   907             1,054
                                                                      ------------      ------------
               Total current liabilities                                     8,303             5,741

STOCKHOLDERS' EQUITY:
   Preferred Stock, $.01 par value; 5,000,000 shares
     authorized; no shares issued and outstanding                                -                 -
   Common Stock, $.01 par value; 45,000,000 shares authorized;
     20,531,947 and 19,544,791 shares issued and outstanding                    205               195
   Additional paid-in capital                                              113,447            93,883
   Deferred compensation                                                      (982)           (1,368)
   Accumulated deficit                                                     (30,145)          (18,123)
                                                                      -------------     ------------
               Total stockholders' equity                                   82,525            74,587
                                                                      -------------     ------------
                                                                      $     90,828      $     80,328
                                                                      =============     ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       3.

<PAGE>

                               DIGITAL RIVER, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                (In Thousands, Except Per Share Data; Unaudited)


<TABLE>
<CAPTION>
                                                                   Three Months Ended          Six Months Ended
                                                                        June 30,                   June 30,
                                                                -----------------------   -----------------------
                                                                   1999         1998        1999           1998
                                                                ----------   ----------   ----------   ----------
<S>                                                             <C>          <C>          <C>          <C>
SALES                                                           $   15,814   $    3,476   $   27,521   $    5,746

COST OF SALES                                                       12,832        2,895       22,636        4,791
                                                                ----------   ----------   ----------   ----------
               Gross profit                                          2,982          581        4,885          955
                                                                ----------   ----------   ----------   ----------
OPERATING EXPENSES:
   Sales and marketing                                               4,346        2,373        7,969        3,433
   Product development and operations                                3,726          908        7,290        1,611
   General and administrative                                        1,070        1,205        2,024        1,413
   Amortization of goodwill and other acquisition
      related costs                                                  1,302            -        1,302            -
                                                                ----------   ----------   ----------   ----------
               Total operating expenses                             10,444        4,486       18,585        6,457
                                                                ----------   ----------   ----------   ----------
LOSS FROM OPERATIONS                                                (7,462)      (3,905)     (13,700)      (5,502)

INTEREST INCOME                                                        784          108        1,678          150
                                                                ----------   ----------   ----------   ----------
               Net loss                                         $   (6,678)  $   (3,797)  $  (12,022)  $   (5,352)
                                                                ==========   ==========   ==========   ==========
Basic and diluted net loss per share                            $    (0.33)  $    (0.30)  $    (0.60)  $    (0.47)
                                                                ----------   ----------   ----------   ----------
Basic and diluted weighted average common shares outstanding        20,169       12,632       19,900       11,279
                                                                ==========   ==========   ==========   ==========

</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       4.

<PAGE>

                               DIGITAL RIVER, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                            (In Thousands; Unaudited)

<TABLE>
<CAPTION>
                                                                                                    Six Months Ended
                                                                                                        June 30,
                                                                                          ---------------------------------
                                                                                                1999              1998
                                                                                          ---------------   ---------------
<S>                                                                                       <C>               <C>
OPERATING ACTIVITIES:
   Net loss                                                                               $  (12,022)       $  (5,352)
   Adjustments to reconcile net loss to net cash used in operating activities:
         Amortization of goodwill and other acquisition related costs                          1,302                -
         Depreciation and other amortization                                                     748              259
         Deferred compensation expense                                                           496              689
         Changes in assets and liabilities:
            Accounts receivable and prepaid expenses                                             572             (383)
            Accounts payable                                                                     885            1,124
            Other current liabilities                                                             94              214
                                                                                           ----------         ---------
               Net cash used in operating activities                                          (7,925)          (3,449)
                                                                                           ----------         ---------

INVESTING ACTIVITIES:
   Purchases of short-term investments                                                       (59,899)          (4,894)
   Proceeds from sales of investments                                                         40,000                -
   Acquisitions, net of cash received                                                         (3,320)               -
   Purchases of equipment                                                                     (1,569)          (1,578)
   Patent acquisition costs                                                                      (26)             (23)
                                                                                           ---------         ---------
                Net cash used in investing activities                                        (24,814)          (6,495)
                                                                                           ---------         ---------

FINANCING ACTIVITIES:
   Sales of Common Stock                                                                         751           12,617
   Payment of debt issuance costs and other                                                        -              (44)
                                                                                           ---------         ---------
                Net cash provided by financing activities                                        751           12,573
                                                                                           ---------         ---------
               Net increase (decrease) in cash and cash equivalents                          (31,988)           2,629
                                                                                           ---------         ---------

CASH AND CASH EQUIVALENTS, beginning of period                                                63,503            2,126
                                                                                           ---------         ---------
CASH AND CASH EQUIVALENTS, end of period                                                   $  31,515         $  4,755
                                                                                           =========         =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Issuance of Common Stock in connection with acquisitions and purchase of assets         $  18,713         $      -
                                                                                           =========         =========

</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       5.

<PAGE>

                               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, 1998 as
filed with the Securities and Exchange Commission. The results of operations for
the period ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999. The December 31, 1998 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 six months ended June 30,
1999 and 1998, 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:

<TABLE>
<CAPTION>
                                          June 30, 1999       June 30, 1998
                                          -------------       -------------
<S>                                       <C>                 <C>
            Preferred Stock                           -           1,000,000
            Common Stock warrants               388,513             803,008
            Common Stock options              2,712,766           1,532,087
</TABLE>

4.   ACQUISITIONS AND PURCHASES OF ASSETS:

     In April 1999, pursuant to an Agreement and Plan of Merger by and among the
Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"), and
Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and into the
Company (the "Merger"). At the effective time of the Merger, Mr. Maaghul's
shares of Maagnum common stock converted into the right to receive from the
Company $2.5 million in cash, 88,809 shares of Common Stock of the Company, and
up to an additional 320,161 shares of Common Stock that may be earned by Mr.
Maaghul upon the achievement of certain business goals over the 24-month period
following the closing date of the Merger. In addition, pursuant to a Stock
Purchase Agreement dated April 1, 1999 by and between the Company and Meiman
Kentjana,
                                       6.
<PAGE>

a key employee of Maagnum, in consideration for Mr. Kentjana's agreement to
waive certain rights with respect to Maagnum, the Company issued to
Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock
and gave him the right to receive up to an additional 192,374 shares of Common
Stock that may be earned by Mr. Kentjana upon the achievement of certain
business goals over the 24-month period following the closing date of the
Merger.

     Also in April 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially all
of the assets and assumed certain liabilities of Seller in exchange for an
aggregate of 161,842 shares of Common Stock of the Company.

     In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow Merger").
At the effective time of the RegNow Merger, the Stockholders received from the
Company $2.0 million in cash and 306,884 shares of Common Stock of the Company
in exchange for all outstanding RegNow shares. In addition, the Stockholders may
receive additional shares of Common Stock upon the achievement of certain
revenue goals over the 12-month period following the closing date of the RegNow
Merger. In addition, certain individuals who are Stockholders are also eligible
to receive up to an additional $2 million in cash if they remain employees of
the Company for a period of 12 months following the closing date of the RegNow
Merger.

     Each of the above transactions was accounted for using the purchase method.
The purchase price in each transaction was allocated substantially to goodwill,
which is being amortized over three years. If any earn-out payments, as listed
above, are earned, they will be recognized as compensation expense in the period
in which the required milestones are achieved.

     The following unaudited pro forma condensed results of operations for the
six months ended June 30, 1999 and 1998 have been prepared as if each of the
three transactions had occurred on January 1, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
                                                      Six Months Ended
                                                          June 30,
                                               --------------------------
                                                  1999            1998
                                               ----------       ---------
                                                     (In Thousands)
         <S>                                   <C>              <C>
         Sales                                 $31,509          $ 8,464
         Loss from operations                  (16,103)          (9,294)
         Net loss                              (14,526)          (9,265)
         Basic and diluted loss per share      $ (0.71)         $ (0.78)

</TABLE>

     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,
1999 and 1998 or any future results that may in fact be realized.

5.   SUBSEQUENT EVENT:

     In July 1999, the Company entered into a definitive agreement with Tech
Squared Inc., an owner of approximately 15% of the Company's Common Stock,
whereby the Company will purchase certain Tech Squared's assets consisting of
3.0 million shares of the Company's Common Stock and $1.2 million of

                                       7.
<PAGE>

cash in exchange for 2.65 million shares of the Company's Common Stock, thus
resulting in a net 350,000 shares being retired from outstanding shares. The
transaction will be accounted for as a tax-free reorganization. The transaction
is subject to approval by the shareholders of Tech Squared and other
pre-closing conditions including the sale or liquidation of the operations of
Tech Squared. The Company may, under certain circumstances prior to closing,
cancel the transaction. The closing of this transaction is anticipated to take
place in the Company's fourth quarter of 1999.

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,
1998.

OVERVIEW

     The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. 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 building its inventory of software products through
contracts with software publishers and in 1997, the Company began to develop
distribution relationships through contracts with online retailers. In the
second quarter of 1999 the Company added approximately 3,000 software publisher
clients through its acquisition of three commerce outsourcing providers to the
shareware publishing industry, Maagnum Internet Group, Public Software Library
and Universal Commerce, Incorporated. As of June 30, 1999, the Company had
approximately 4,800 software publisher clients and 1,200 online retailer
clients.

     The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either delivery through electronic
software delivery ("ESD") or shipment of the physical product to the end-user.
The amount payable to the software publisher or online retailer is reported as
cost of sales. The Company bears full credit risk with respect to substantially
all sales. In late 1998, the Company began development of a transaction fee
based e-commerce service for products other than third-party software and began
offering this service in early 1999. There can be no assurance that the Company
will derive any significant revenue from this service.

                                       8.
<PAGE>

     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 June 30, 1999, had an accumulated deficit of
approximately $30.1 million. The Company intends to expend significant 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. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales 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 and online
retailers, 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 sales. Sales 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 sales 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 sales 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.




                                       9.

<PAGE>

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.
<TABLE>
<CAPTION>

                                                                  Three Months Ended             Six Months Ended
                                                                       June 30,                     June 30,
                                                                 --------------------          -------------------
                                                                   1999         1998            1999         1998
                                                                 -------      -------          -------      ------
<S>                                                              <C>          <C>              <C>          <C>

Sales                                                             100.0%        100.0%          100.0%      100.0%
Cost of sales                                                      81.1          83.3            82.2        83.4
                                                                  ------       -------          ------      ------
   Gross profit                                                    18.9          16.7            17.8        16.6
                                                                  ------       -------          ------      ------
Operating expenses:
   Sales and marketing                                             27.5          68.2            29.0        59.8
   Product development and operations                              23.6          26.1            26.5        28.0
   General and administrative                                       6.8          34.7             7.4        24.6
   Amortization of goodwill and other acquisition
      related costs                                                 8.2           -               4.7         -
                                                                  ------       -------          ------      ------
Total operating expenses (1)                                       66.1         129.0            67.6       112.4
                                                                  ------       -------          ------      ------
Loss from operations                                              (47.2)       (112.3)          (49.8)      (95.8)
                                                                  ------       -------          ------      ------
Interest income, net                                                5.0           3.1             6.1         2.7
                                                                  ------       -------          ------      ------
Net loss                                                          (42.2)%      (109.2)%         (43.7)%     (93.1)%
                                                                  ======       =======          ======      ======

</TABLE>


(1)  Operating expenses include non-cash employee stock compensation charges of
     $284,000 and $689,000 (1.8% and 19.8% of sales, respectively) for the three
     months ended June 30, 1999 and 1998, respectively, and non-cash employee
     stock compensation charges of $496,000 and $689,000 (1.8% and 12.0% of
     sales, respectively) for the six months ended June 30, 1999 and 1998,
     respectively

SALES

     Sales increased to $15.8 million for the quarter ended June 30, 1999, up
from $3.5 million for the quarter ended June 30, 1998. The increase was
primarily 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
ESD. International sales represented approximately 25% and 33% of sales for the
six months ended June 30, 1999 and 1998, respectively.

GROSS PROFIT

     Cost of sales increased to $12.8 million in the quarter ended June 30, 1999
from $2.9 million in the quarter ended June 30, 1998. This increase reflects the
Company's growth in sales. The Company's gross profit margin increased to 18.9%
in the quarter ended June 30, 1999 versus 16.7% in the quarter ended June 30,
1998. This increase was due mainly to the increase in the number of higher
margin, fee based orders that the Company processed during the most recent
quarter. The Company believes that Internet commerce and related services will
become more competitive in the near future. Accordingly, the Company may reduce
or alter its pricing structure and policies in the future and any such change
could reduce gross margins.

                                       10.
<PAGE>

SALES AND MARKETING

     Sales and marketing expense increased to $4.3 million in the quarter ended
June 30, 1999 from $2.4 million in the quarter ended June 30, 1998. This
increase resulted from expanding the sales and marketing infrastructure required
to increase the number of and provide support to the Company's software
publisher and online retailer clients and variable expenses which increase in
relation to sales. The primary components of this increase for the comparable
quarters ended June 30 were an increase in wages and benefits of $691,000 and an
increase in credit card fees and chargeback costs of $711,000. As a percentage
of sales, sales and marketing expense decreased to 27.5% in the quarter ended
June 30, 1999 from 68.2% in the quarter ended June 30, 1998, primarily
reflecting the Company's increased sales 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 to develop
marketing programs.

PRODUCT DEVELOPMENT AND OPERATIONS

     Product development and operations expense increased to $3.7 million in the
quarter ended June 30, 1999 from $908,000 in the quarter ended June 30, 1998.
The increase was primarily related to increased personnel and consulting costs
related to developing, enhancing and maintaining the Company's CNS and related
facilities and customer service related personnel costs. The primary components
of this increase for the comparable quarters ended June 30, were an increase in
consulting costs of $1.4 million, an increase in wages and benefits of $679,000
and an increase in depreciation expense of $201,000. As a percentage of sales,
product development and operations expense decreased to 23.6% in the quarter
ended June 30, 1999 from 26.1% in the quarter ended June 30, 1998. The Company
believes that continued investment in product development and operations is
critical to attaining its strategic objectives and, and as a result, expects
product development and operations expenses will continue to increase in
absolute dollars. As a percentage of sales, these expenses are expected to
decrease as sales increase.

GENERAL AND ADMINISTRATIVE

     General and administrative expense decreased to $1,070,000 in the quarter
ended June 30, 1999 from $1,205,000 in the quarter ended June 30, 1998. The
decrease was primarily due to a decline in deferred compensation expense of
$405,000. Offsetting this decline were increased personnel and related expenses,
legal expenses and investor relations expenses. As a percentage of sales,
general and administrative expense decreased to 6.8% in the quarter ended June
30, 1999 from 34.7% in the quarter ended June 30, 1998, primarily reflecting the
Company's growth in sales. The Company expects general and administrative
expense, excluding the impact of deferred compensation 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 sales, these expenses are expected to decrease as
sales increase.

INTEREST INCOME

     Interest income consists of earnings on the Company's cash, cash
equivalents and short-term investments. The increase over the prior period was
attributable to interest received on higher average cash and cash equivalent
balances resulting from the sales of Common Stock in the latter half of 1998.
The Company expects interest income to decrease in the future as cash is used to
fund operations and is used for investments in infrastructure.

                                       11.

<PAGE>

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 June 30, 1999, the
Company had approximately $34.2 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 six months of 1999, the Company used $7.9 million of cash to
fund operations and made additions of equipment and software totaling $1.6
million. The Company used $3.3 million for the acquisition of Maagnum Internet
Group, Public Software Library Ltd. and Universal Commerce, Incorporated, net of
cash received from the acquisitions completed during the quarter. The Company
also purchased $59.9 million in short-term investments which were partially
offset by $40.0 million in sales of investments.

     As of June 30, 1999 the Company had approximately $31.5 million of cash and
cash equivalents and $30.8 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 an increase in the rate of capital expenditures
consistent with its anticipated growth in operations, infrastructure and
personnel. The Company anticipates that it will expend approximately $8.0
million over the next 18 months on capital expenditures based on the Company's
current anticipated growth rate. The Company further anticipates that it will
expend approximately $15.0 million over the next 18 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 significant 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 will provide adequate cash to fund its
operations for at least the next 18 months.

YEAR 2000 COMPLIANCE

     Like many other companies, Year 2000 computer issues create certain risks
for the Company. If the Company's internal management information systems and
external electronic commerce information systems do not correctly recognize and
process date information beyond the Year 1999, there could be an adverse impact
on the Company's operations. To address these Year 2000 issues with its internal
and external systems, the Company has evaluated such systems. The Company
believes it has completed all activities to remediate Year 2000 issues as of
June 30, 1999, although it will continue testing throughout the year. These
activities are intended to encompass all major categories of systems used by the
Company, including electronic commerce, sales processing, sales and financial
systems. The costs incurred to date related to these programs have been less
than $25,000. The total cost does not include potential costs related to any
customer or other claims or the cost of internal software and hardware replaced
in the normal course of business. The total cost is subject to change should
events arise that indicate a Year 2000 issue.

     The Company is also working with key suppliers of products and services to
determine that their operations and products are Year 2000 Compliant or to
monitor their progress toward Year 2000

                                       12.

<PAGE>

Compliance, as appropriate. The failure of a major supplier to become Year 2000
Compliant on a timely basis, or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition the
Company's business, financial condition and results of operations may be
materially adversely affected to the extent its end-users are unable to use
their credit cards due to the Year 2000 issues that are not rectified by their
credit card vendors.

     In addition, the Company has begun internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1999 with the goal of appropriately resolving all material
internal and external systems and third party issues.

     As used by the Company, "Year 2000 Compliant" shall mean software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the twenty
first century when used in accordance with the documentation relating to such
software, including being able to, before, on and after January 1, 2000
substantially conform to the following: (i) use logic pertaining to dates which
allow users to identify and/or use the century portion of any date fields
without special processing; and (ii) respond to all date elements and date input
so as to resolve any ambiguity as to century in a disclosed, defined and
pre-determined manner and provide date information in ways which are unambiguous
as to century, either by permitting or requiring the century to be specified or
where the data element is represented without a century, the correct century is
unambiguous for all manipulations involving that element. Based on currently
available information, the Company does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers will
have a material adverse impact on the its financial condition or overall trends
in results of operations; however, it is still uncertain to what extent the
Company may be affected by such matters. In addition, customers may delay
purchase decisions because of uncertainty about Year 2000 issues. There also can
be no assurance that the failure to ensure Year 2000 Compliance by a supplier or
another third party would not have a material adverse effect on the Company.

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.

                                       13.

<PAGE>


PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c)  In April 1999, pursuant to an Agreement and Plan of Merger by and among
the Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"), and
Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and into the
Company (the "Merger"). At the effective time of the Merger, Mr. Maaghul's
shares of Maagnum common stock converted into the right to receive from the
Company $2.5 million in cash, 88,809 shares of Common Stock of the Company, and
up to an additional 320,161 shares of Common Stock that may be earned by Mr.
Maaghul upon the achievement of certain business goals over the 24-month period
following the closing date of the Merger. In addition, pursuant to a Stock
Purchase Agreement dated April 1, 1999 by and between the Company and Meiman
Kentjana, a key employee of Maagnum, in consideration for Mr. Kentjana's
agreement to waive certain rights with respect to Maagnum, the Company issued to
Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock
and gave him the right to receive up to an additional 192,374 shares of Common
Stock that may be earned by Mr. Kentjana upon the achievement of certain
business goals over the 24-month period following the closing date of the
Merger.

     Also in April 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially all
of the assets and assumed certain liabilities of Seller in exchange for an
aggregate of 161,842 shares of Common Stock of the Company.

     In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow Merger").
At the effective time of the RegNow Merger, the Stockholders received from the
Company $2.0 million in cash and 306,884 shares of Common Stock of the Company
in exchange for all outstanding RegNow shares. In addition, the Stockholders may
receive additional shares of Common Stock upon the achievement of certain
revenue goals over the 12-month period following the closing date of the RegNow
Merger. In addition, certain individuals who are Stockholders are also eligible
to receive up to an additional $2 million in cash if they remain employees of
the Company for a period of 12 months following the closing date of the RegNow
Merger.

     The issuance and sale of the Common Stock was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof due
to, among other things, (i) the limited number of persons to whom the Common
Stock was issued, (ii) the distribution of disclosure documents to the investor,
(iii) the fact that such person represented and warranted to the Company, among
other things, that such person was acquiring the Common Stock for investment
only and not with a view to the resale or distribution thereof, and (iv) the
fact that a certificate representing the Common Stock was issued with a legend
to the effect that such Common Stock had not been registered under the
Securities Act or any state securities laws and could not be sold or transferred
in the absence of such registration or an exemption therefrom.

(d)  The effective date of the Company's registration statement, filed on Form
S-1 under the Securities Act (File No. 333-56787), was August 11, 1998 (the
"Registration Statement"). The class of securities registered was Common Stock
and all securities registered were sold in this initial public offering (the
"IPO"). The managing underwriters for the offering were BT Alex. Brown,
BancAmerica

                                       14.

<PAGE>

Robertson Stephens and Bear, Stearns & Co. Inc. Pursuant to the Registration
Statement, the Company sold 3,000,000 shares of its Common Stock for an
aggregate gross offering price of $25.5 million.

     In connection with the IPO, the Company incurred expenses of approximately
$2.8 million, of which approximately $1.8 million represented underwriting
discounts and commissions and approximately $1 million represented other
expenses related to the offering. All such expenses were direct or indirect
payments to others. The net offering proceeds to the Company were $22.7 million.

     Through June 30, 1999, the Company has used $3.3 million of the net
proceeds from the IPO to purchase equipment and software, $3.3 million related
to acquisitions and $12.2 million of the net proceeds for working capital and
general corporate purposes. The Company has invested the net proceeds in
short-term, investment-grade, interest bearing financial instruments. The use of
the proceeds from the offering does not represent a material change in the use
of the proceeds described in the Registration Statement.

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

     The Company's annual meeting of stockholders was held on April 27, 1999
(the "Annual Meeting").

     The following matters were considered and voted upon at the Annual Meeting:

     The first matter related to the election of two director nominees, Thomas
F. Madison and Charles E. Reese, Jr. as directors to serve until the 2002 annual
meeting of stockholders. The votes cast for and against such nominees were as
follows:

<TABLE>
<CAPTION>

                     NAME                FOR                   WITHHELD
         ------------------------------------------------------------------
         <C>                          <S>                       <S>
         Thomas F. Madison            14,422,502                19,235
         Charles E. Reese, Jr.        14,397,202                44,535

</TABLE>

     The second matter related to the approval of an amendment to the Company's
1998 Stock Option Plan to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 950,000 shares. 14,420,126
votes were cast for approval and 13,146 votes were cast against approval. There
were 8,465 abstentions and no broker non-votes.

     The third matter related to the ratification of the appointment of Arthur
Andersen LLP as independent auditors of the Company for its fiscal year ending
December 31, 1999. 14,420,126 votes were cast for ratification and 13,146 votes
were cast against ratification. There were 8,465 abstentions and no broker
non-votes.

     Based on these voting results, each of the directors nominated was elected
and the second and third matters were approved.


                                       15.

<PAGE>



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  EXHIBITS

<TABLE>
<CAPTION>
             EXHIBIT
             NUMBER                     DESCRIPTION OF DOCUMENTS
             -------                    ------------------------
             <S>              <C>
             2.1 (1)          Agreement and Plan of Merger, dated April 1,
                              1999, by and among the Registrant, Maagnum and Mr.
                              Maaghul

             2.2 (1)          Stock Purchase Agreement, dated April 1, 1999, by
                              and among the Registrant and Mr. Kentjana

             2.3 (1)          Asset Purchase Agreement, dated as of April 15,
                              1999, by and among the Registrant, Public Software
                              Library Ltd. and the partners of Public Software
                              Library Ltd.

             2.4              Agreement and Plan of Merger and Reorganization,
                              dated June 11, 1999, by and among the Registrant,
                              Universal Commerce, Incorporated and certain
                              stockholders of Universal Commerce, Incorporated

             3.1 (2)          Amended and Restated Certificate of Incorporation

             3.2 (2)          Bylaws of the Registrant

             4.1 (2)          Specimen Common Stock Certificate

            11.1 (3)          Statement of Computation of Per Share Earnings

                27.1          Financial Data Schedule

</TABLE>

     (1)  Filed as an exhibit to the Company's current report on Form 8-K filed
          by the Company on April 16, 1999, incorporated herein by reference.

     (2)  Filed as an exhibit to the Company's Registration Statement on Form
          S-1, File No. 333-56787, declared effective on August 11, 1998,
          incorporated herein by reference.

     (3)  See Note 3 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
June 30, 1999. The report was filed on April 16, 1999 and reported the Company's
acquisition of Maagnum Internet Group and the purchase by the Company of
substantially all of the assets and assumption of certain liabilities of Public
Software Library Ltd.

                                       16.

<PAGE>

                                   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:  August 11, 1999        DIGITAL RIVER, INC.



                              By: /s/ Robert E. Strawman
                                  ______________________

                                  Robert E. Strawman
                                  Chief Financial Officer
                                  (Principal Financial and Accounting Officer)


                                       17.

<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

              EXHIBIT
              NUMBER                    DESCRIPTION OF DOCUMENTS
              ------                    ------------------------
             <S>              <C>
             2.1 (1)          Agreement and Plan of Merger, dated April 1, 1999,
                              by and among the Registrant, Maagnum and Mr.
                              Maaghul

             2.2 (1)          Stock Purchase Agreement, dated April 1, 1999, by
                              and among the Registrant and Mr. Kentjana

             2.3 (1)          Asset Purchase Agreement, dated as of April 15,
                              1999, by and among the Registrant, Public Software
                              Library Ltd. and the partners of Public Software
                              Library Ltd.

             2.4              Agreement and Plan of Merger and Reorganization,
                              dated June 11, 1999, by and among the Registrant,
                              Universal Commerce, Incorporated and certain
                              stockholders of Universal Commerce, Incorporated

             3.1 (2)          Amended and Restated Certificate of Incorporation

             3.2 (2)          Bylaws of the Registrant

             4.1 (2)          Specimen Common Stock Certificate

            11.1 (3)          Statement of Computation of Per Share Earnings

                27.1          Financial Data Schedule

</TABLE>

     (1)  Filed as an exhibit to the Company's current report on Form 8-K filed
          by the Company on April 16, 1999, incorporated herein by reference.

     (2)  Filed as an exhibit to the Company's Registration Statement on Form
          S-1, File No. 333-56787, declared effective on August 11, 1998,
          incorporated herein by reference.

     (3)  See Note 3 to Condensed Consolidated Financial Statements.


                                       18.