<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 SEPTEMBER 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            20,741,918 SHARES
    -----------------------------      ----------------------------------------
    (Class)                            Outstanding as of November 5, 1999


<PAGE>

                               DIGITAL RIVER, INC.

                                    Form 10-Q

                                      Index

<TABLE>

<S>           <C>                                                                                              <C>
PART I.        FINANCIAL INFORMATION                                                                             PAGE

Item 1.        Financial Statements

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


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


               Condensed Consolidated Statements of Cash Flows
               for the nine months ended September 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 6.        Exhibits and Reports on Form 8-K...........................................................       15


SIGNATURES................................................................................................       16

EXHIBIT INDEX.............................................................................................       17
</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>
                                                                                  September 30,
                                                                                       1999         December 31, 1998
                                                                                 ---------------    -----------------
                                                                                   (unaudited)
<S>                                                                             <C>                <C>
                                    ASSETS

CURRENT ASSETS:

   Cash and cash equivalents                                                          $10,730            $63,503
   Short-term investments                                                              47,537             10,894
   Accounts receivable, net                                                             2,091              1,487
   Prepaid expenses and other                                                             637                420
                                                                                    ---------           --------
               Total current assets                                                    60,995             76,304

PROPERTY AND EQUIPMENT, NET                                                             5,338              3,914

GOODWILL, NET AND OTHER ASSETS                                                         20,752                110
                                                                                    ---------           --------
                                                                                      $87,085            $80,328
                                                                                    ---------           --------
                                                                                    ---------           --------

                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

   Accounts payable                                                                    $8,839             $3,880
   Accrued payroll                                                                      1,633                807
   Other current liabilities                                                            1,169              1,054
                                                                                    ---------           --------
               Total current liabilities                                               11,641              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;
    20,730,250 and 19,544,791 shares issued and outstanding                               207                195
   Additional paid-in capital                                                         114,877             93,883
   Deferred compensation                                                                 (806)            (1,368)
   Accumulated deficit                                                                (38,834)           (18,123)
                                                                                    ---------           --------
               Total stockholders' equity                                              75,444             74,587
                                                                                    ---------           --------
                                                                                      $87,085            $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         Nine Months Ended
                                                                       September 30,              September 30,
                                                                 ------------------------   -----------------------
                                                                     1999          1998         1999         1998
                                                                 -----------    ---------   -----------   ----------
<S>                                                               <C>             <C>         <C>          <C>
SALES                                                              $20,068         $5,758      $47,589      $11,504

COST OF SALES                                                       16,253          4,819       38,889        9,610
                                                                 -----------    ---------   -----------   ----------
               Gross profit                                          3,815            939        8,700        1,894
                                                                 -----------    ---------   -----------   ----------
OPERATING EXPENSES:
   Sales and marketing                                               4,857          3,105       12,826        6,538
   Product development and operations                                4,025          1,292       11,315        2,903
   General and administrative                                        1,098            751        3,123        2,164

   Amortization of goodwill and other acquisition related
      costs                                                          3,275             -         4,577            -
                                                                 -----------    ---------   -----------   ----------
               Total operating expenses                             13,255          5,148       31,841       11,605
                                                                 -----------    ---------   -----------   ----------
LOSS FROM OPERATIONS                                                (9,440)        (4,209)     (23,141)      (9,711)

INTEREST INCOME                                                        752            269        2,430          419
                                                                 -----------    ---------   -----------   ----------
               Net loss                                            $(8,688)       $(3,940)    $(20,711)     $(9,292)
                                                                 -----------    ---------   -----------   ----------
                                                                 -----------    ---------   -----------   ----------
Basic and diluted net loss per share                                $(0.42)        $(0.26)      $(1.03)      $(0.74)
                                                                 -----------    ---------   -----------   ----------
                                                                 -----------    ---------   -----------   ----------
Basic and diluted weighted average common shares outstanding        20,604         14,894       20,137       12,484
                                                                 -----------    ---------   -----------   ----------
                                                                 -----------    ---------   -----------   ----------
</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>
                                                                                                   Nine Months Ended
                                                                                                     September 30,
                                                                                               ----------------------
                                                                                                   1999        1998
                                                                                               ------------  --------
<S>                                                                                            <C>          <C>
OPERATING ACTIVITIES:
   Net loss                                                                                     $(20,711)    $(9,292)
   Adjustments to reconcile net loss to net cash used in operating activities:

         Amortization of goodwill and other acquisition related costs                              4,296            -
         Depreciation and other amortization                                                       1,238         439
         Deferred compensation expense                                                               672         959
         Changes in assets and liabilities:
            Accounts receivable and prepaid expenses                                                (628)     (1,278)
            Accounts payable                                                                       3,392       1,935
            Other current liabilities                                                                925         605
                                                                                               ------------  --------
               Net cash used in operating activities                                             (10,816)     (6,632)
                                                                                               ------------  --------

INVESTING ACTIVITIES:

   Purchases of short-term investments                                                           (94,643)    (10,840)
   Proceeds from sales of investments                                                             58,000       2,000
   Acquisitions, net of cash received                                                             (3,320)           -
   Purchases of equipment                                                                         (2,526)     (2,548)
   Patent acquisition costs                                                                         (209)        (44)
                                                                                               ------------  --------
               Net cash used in investing activities                                             (42,698)    (11,432)
                                                                                               ------------  --------
FINANCING ACTIVITIES:

   Sales of Common Stock                                                                           1,137      35,393
   Payment of deferred costs and other                                                              (396)        (44)
                                                                                               ------------  --------
               Net cash provided by financing activities                                             741      35,349
                                                                                               ------------  --------
               Net increase (decrease) in cash and cash equivalents                              (52,773)     17,285

CASH AND CASH EQUIVALENTS, beginning of period                                                    63,503       2,126
                                                                                               ------------  --------
CASH AND CASH EQUIVALENTS, end of period                                                         $10,730     $19,411
                                                                                               ------------  --------
                                                                                               ------------  --------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Issuance of Common Stock in connection with acquisitions and purchase of assets               $18,713          $ -
                                                                                               ------------  --------
                                                                                               ------------  --------
   Issuance of Common Stock in connection with earn-out payments                                  $1,046          $ -
                                                                                               ------------  --------
                                                                                               ------------  --------
</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 September 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 nine
months ended September 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>

                                                            September 30, 1999         September 30, 1998
                                                           --------------------       --------------------
           <S>                                             <C>                        <C>
            Common Stock warrants                                371,086                   803,008
            Common Stock options                               3,460,985                 2,321,093
</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, a key employee of Maagnum, in consideration for
Mr. Kentjana's agreement to waive certain rights with


                                       6.

<PAGE>

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.

     In the quarter ended September 30, 1999, Messrs. Maaghul and Kentjana of
Maagnum collectively received earn-out payments of 48,095 shares of Common
Stock valued at $1,046,000. The Company charged to expense this amount and
such amount is included in the Condensed Consolidated Statements of
Operations.

     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 and other intangibles, which are 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 nine months ended September 30, 1999 and 1998 have been prepared as if
each of the above three transactions had occurred on January 1, 1999 and
1998, respectively:

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                       September 30,
                                                                   ---------------------
                                                                      1999       1998
                                                                   ----------  ---------
                                                                      (In Thousands)
<S>                                                                <C>          <C>
         Sales                                                       $51,557     $16,293
         Loss from operations                                        (25,544)    (15,332)
         Net loss                                                    (23,215)    (15,081)
         Basic and diluted loss per share                             $(1.13)     $(1.15)
</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.


                                       7.

<PAGE>

     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 assets consisting of
3.0 million shares of the Company's Common Stock and $1.2 million of 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.

5.   STOCK OPTIONS:

     In August, 1999, the Board of Directors adopted the 1999 Non-Officer
Stock Option Plan (the "Non-Officer Plan"). The Non-Officer Plan provides for
the issuance of nonstatutory stock options to selected employees and
consultants to purchase up to 1,300,000 shares of Common Stock. Terms and
conditions of the Non-Officer Plan are generally similar to the Company's
1998 Stock Option Plan.

6.   SUBSEQUENT EVENT:

     In October 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Walnut Creek CDROM, Inc. ("Walnut Creek"), and the sole
shareholder of Walnut Creek, the Company purchased certain assets of Walnut
Creek in exchange for $1 million in cash and 143,885 shares of Common Stock
of the Company.

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


                                       8.

<PAGE>

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 September
30, 1999, the Company had approximately 4,400 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 early 1999, the
Company began formally offering a transaction fee based e-commerce service,
CommerceBridge, for products other than third-party software. There can be no
assurance that the Company will derive any significant revenue from this
service.

     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 September 30, 1999, had an accumulated
deficit of approximately $38.8 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            Nine Months Ended
                                                                    September 30,                 September 30,
                                                                ------------------------     -----------------------
                                                                   1999          1998           1999         1998
                                                                ----------   -----------     -----------  ----------
<S>                                                             <C>          <C>             <C>          <C>
Sales                                                             100.0%        100.0%          100.0%      100.0%
Cost of sales                                                      81.0          83.7            81.7         83.5
                                                                ----------   -----------     -----------  ----------
   Gross profit                                                    19.0          16.3            18.3         16.5
                                                                ----------   -----------     -----------  ----------
Operating expenses:

   Sales and marketing                                             24.2          53.9            27.0         56.9
   Product development and operations                              20.1          22.5            23.8         25.2
   General and administrative                                       5.5          13.0             6.5         18.8

   Amortization of goodwill and other acquisition related
      costs                                                        16.3             -             9.6            -
                                                                ----------   -----------     -----------  ----------
Total operating expenses (1)                                       66.1          89.4            66.9        100.9
                                                                ----------   -----------     -----------  ----------
Loss from operations                                              (47.1)        (73.1)          (48.6)       (84.4)
                                                                ----------   -----------     -----------  ----------
Interest income, net                                                3.8           4.7             5.1          3.6
                                                                ----------   -----------     -----------  ----------
Net loss                                                          (43.3)%       (68.4)%         (43.5)%     (80.8)%
                                                                ----------   -----------     -----------  ----------
                                                                ----------   -----------     -----------  ----------
</TABLE>

(1)  Operating expenses include non-cash employee stock compensation charges
     of $175,000 and $270,000 (0.9% and 4.7% of sales, respectively) for the
     three months ended September 30, 1999 and 1998, respectively, and
     non-cash employee stock compensation charges of $672,000 and $959,000
     (1.4% and 8.3% of sales, respectively) for the nine months ended
     September 30, 1999 and 1998, respectively.

SALES

     Sales increased to $20.1 million for the quarter ended September 30,
1999 from $5.8 million for the quarter ended September 30, 1998 and increased
to $47.6 million for the nine months ended September 30, 1999, up from $11.5
million for the same period of 1998. The increases were 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 22% and 29% of sales for the
nine months ended September 30, 1999 and 1998, respectively.

GROSS PROFIT

     Cost of sales increased to $16.3 million in the quarter ended September
30, 1999 from $4.8 million in the quarter ended September 30, 1998 and
increased to $38.9 million for the nine months ended September 30, 1999 from
$9.6 million for the same period of 1998. The increases reflect the Company's
growth in sales. The Company's gross profit margin increased to 19.0% in the
quarter ended September 30, 1999 versus 16.3% in the quarter ended September
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


                                       10.

<PAGE>

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.

SALES AND MARKETING

     Sales and marketing expense increased to $4.9 million in the quarter
ended September 30, 1999 from $3.1 million in the quarter ended September 30,
1998 and increased to $12.9 million for the nine months ended September 30,
1999 from $6.5 million for the same period of 1998. The increases 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 the increase for the comparable quarters
ended September 30 were an increase in wages and benefits of $941,000 and an
increase in credit card fees and chargeback costs of $801,000. As a
percentage of sales, sales and marketing expense decreased to 24.2% in the
quarter ended September 30, 1999 from 53.9% in the quarter ended September
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 $4.0 million in
the quarter ended September 30, 1999 from $1.3 million in the quarter ended
September 30, 1998 and increased to $11.3 million for the nine months ended
September 30, 1999 from $2.9 million for the same period of 1998. The
increases were 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 the increase for the comparable quarters ended September 30,
were an increase in consulting costs of $1.1 million, an increase in wages
and benefits of $834,000 and an increase in depreciation expense of $239,000.
As a percentage of sales, product development and operations expense
decreased to 20.1% in the quarter ended September 30, 1999 from 22.5% in the
quarter ended September 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 increased to $1.1 million in the
quarter ended September 30, 1999 from $751,000 in the quarter ended September
30, 1998 and increased to $3.1 million for the nine months ended September
30, 1999 from $2.2 million for the same period of 1998. The increases were
primarily due to increased personnel and related expenses, legal expenses and
investor relations expenses. As a percentage of sales, general and
administrative expense decreased to 5.5% in the quarter ended September 30,
1999 from 13.0% in the quarter ended September 30, 1998, primarily reflecting
the Company's growth in sales. 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 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


                                       11.

<PAGE>

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.

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 September 30,
1999, the Company had approximately $42 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 nine months of 1999, the Company used $10.8 million of cash
to fund operations and made additions of equipment and software totaling $2.5
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 $94.6 million in short-term investments
which were partially offset by $58.0 million in sales of investments. In the
same period for 1998, the Company used $6.6 million of cash to fund
operations, $2.5 million for addition of equipment and software and $10.8
million to purchase short-term investments which was partially offset by $2.0
million in sales of investments.

     As of September 30, 1999 the Company had approximately $10.7 million of
cash and cash equivalents and $47.5 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 $7.0 million over the next 15 months on capital expenditures
based on the Company's current anticipated growth rate. The Company further
anticipates that it will expend approximately $14.0 million over the next 15
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 15 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 September 30, 1999, although it will continue testing
throughout the next quarter. 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


                                       12.

<PAGE>

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 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 completed 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 the quarter ended September 30, 1999, Messrs. Maaghul and
Kentjana of Maagnum collectively received earn-out payments of 48,095 shares
of unregistered Common Stock valued at $1,046,000.

     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 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 September 30, 1999, the Company has used $4.3 million of the net
proceeds from the IPO to purchase equipment and software, $3.3 million
related to acquisitions and $15.1 million of the net proceeds for working
capital and general corporate purposes. 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.


                                       14.

<PAGE>

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

(a)            EXHIBITS

<TABLE>
<CAPTION>
              EXHIBIT
              NUMBER                                   DESCRIPTION OF DOCUMENTS
            <S>               <C>
             2.5 (1)           Acquisition Agreement, dated as of July 11, 1999, by and among the
                               Registrant and Tech Squared Inc.

             3.1 (2)           Amended and Restated Certificate of Incorporation

             3.2 (2)           Bylaws of the Registrant

             4.1 (2)           Specimen Common Stock Certificate

               10.17           1999 Non-Officer Stock Option Plan

               10.18           Form of Non-Qualified Stock Option Agreement under the 1999
                               Non-Officer Stock Option Plan

            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 July 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 September 30, 1999. The report was filed on July 16, 1999 and reported
the purchase by the Company of substantially all of the assets of Tech
Squared Inc.


                                       15.

<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:  November 9, 1999                          DIGITAL RIVER, INC.



                                                 By:  /S/ ROBERT E. STRAWMAN
                                                      -------------------------
                                                      Robert E. Strawman
                                                      Chief Financial Officer
                                                      (Principal Financial and
                                                       Accounting Officer)


                                       16.

<PAGE>


                                               EXHIBIT INDEX
<TABLE>
<CAPTION>
              EXHIBIT
               NUMBER                                   DESCRIPTION OF DOCUMENTS
            <S>               <C>
             2.5 (1)           Acquisition Agreement, dated as of July 11, 1999, by and among the
                               Registrant and Tech Squared Inc.

             3.1 (2)           Amended and Restated Certificate of Incorporation

             3.2 (2)           Bylaws of the Registrant

             4.1 (2)           Specimen Common Stock Certificate

               10.17           1999 Non-Officer Stock Option Plan

               10.18           Form of Non-Qualified Stock Option Agreement under the 1999
                               Non-Officer Stock Option Plan

            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 July 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.


                                       17.