##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM                     TO
 Commission file number 000-24643
 DIGITAL RIVER, INC.
  DELAWARE
    
    41-1901640(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 9625 WEST 76TH STREET
EDEN PRAIRIE, MINNESOTA 55344
 (952) 253-1234
 
 þ o
  þ o o
 o þ




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##### 



PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Qualitative and Quantitative Disclosure about Market RiskItem 4.
    
    Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 6.
    
    ExhibitsSIGNATURESEXHIBIT INDEXComputation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DIGITAL RIVER, INC.
 
 
 (Unaudited)March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    422,178
    
    
    $
    390,243Short-term investments
    
    
    263,292
    
    
    
    235,699Accounts receivable, net of allowance of $2,467 and $2,339
    
    
    42,039
    
    
    
    52,392Deferred income taxes
    
    
    15,188
    
    
    
    19,687Prepaid expenses and other
    
    
    4,954
    
    
    
    6,025Total current assets
    
    
    747,651
    
    
    
    704,046Property and equipment, net
    
    
    24,806
    
    
    
    24,079Goodwill
    
    
    245,031
    
    
    
    243,799Intangible assets, net of accumulated amortization of $53,018 and $50,092
    
    
    19,217
    
    
    
    21,106Deferred income taxes
    
    
    1,276
    
    
    
    1,276Other assets
    
    
    11,992
    
    
    
    11,957TOTAL ASSETS
    
    $
    1,049,973
    
    
    $
    1,006,263LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    152,111
    
    
    $
    141,386Accrued payroll
    
    
    9,316
    
    
    
    12,097Deferred revenue
    
    
    6,889
    
    
    
    7,040Accrued acquisition costs
    
    
    706
    
    
    
    5,654Other accrued liabilities
    
    
    44,411
    
    
    
    39,982Total current liabilities
    
    
    213,433
    
    
    
    206,159NON-CURRENT LIABILITIES:Convertible senior notes
    
    
    195,000
    
    
    
    195,000Other liabilities
    
    
    4,962
    
    
    
    1,345Total non-current liabilities
    
    
    199,962
    
    
    
    196,345TOTAL LIABILITIES
    
    
    413,395
    
    
    
    402,504COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred Stock, $.01 par value; 5,000,000 shares authorized; no
shares issued or outstanding
    
    
    
    
    
    
    Common Stock, $.01 par value; 120,000,000 shares authorized;
41,334,013 and 40,458,093 shares issued and outstanding
    
    
    413
    
    
    
    404Additional paid-in capital
    
    
    556,712
    
    
    
    546,758Retained earnings
    
    
    65,611
    
    
    
    44,989Accumulated other comprehensive income
    
    
    13,842
    
    
    
    11,608Total stockholders equity
    
    
    636,578
    
    
    
    603,759TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,049,973
    
    
    $
    1,006,263
  3




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##### Table of Contents



DIGITAL RIVER, INC.
 
 
 Three Months EndedMarch 31,2007
    
    
    2006Revenue
    
    $
    91,631
    
    
    $
    78,014Costs and expenses:Direct cost of services
    
    
    2,563
    
    
    
    1,863Network and infrastructure
    
    
    7,495
    
    
    
    7,443Sales and marketing
    
    
    34,189
    
    
    
    26,939Product research and development
    
    
    8,652
    
    
    
    7,602General and administrative
    
    
    10,113
    
    
    
    8,250Depreciation and amortization
    
    
    2,858
    
    
    
    2,253Amortization of acquisition-related intangibles
    
    
    2,746
    
    
    
    2,840Total costs and expenses
    
    
    68,616
    
    
    
    57,190Income from operations
    
    
    23,015
    
    
    
    20,824Other income, net
    
    
    6,993
    
    
    
    2,935Income before income tax expense
    
    
    30,008
    
    
    
    23,759Income tax expense
    
    
    9,302
    
    
    
    7,382Net income
    
    $
    20,706
    
    
    $
    16,377Net income per share  basic
    
    $
    0.51
    
    
    $
    0.46Net income per share  diluted
    
    $
    0.46
    
    
    $
    0.41Shares used in per-share calculation  basic
    
    
    40,492
    
    
    
    35,301Shares used in per-share calculation  diluted
    
    
    46,348
    
    
    
    41,154
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##### Table of Contents



DIGITAL RIVER, INC.
 
 
 Three Months EndedMarch 31,2007
    
    
    2006OPERATING ACTIVITES:Net income
    
    $
    20,706
    
    
    $
    16,377Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of acquisition-related intangibles
    
    
    2,746
    
    
    
    2,840Change in accounts receivable allowance, net of
acquisitions
    
    
    119
    
    
    
    94Depreciation and amortization
    
    
    2,858
    
    
    
    2,253Stock-based compensation expense related to stock-based
compensation plans
    
    
    3,476
    
    
    
    3,413Excess tax benefits from stock-based compensation
    
    
    (8,496
    )
    
    
    (1,488
    )Deferred and other income taxes
    
    
    4,500
    
    
    
    6,377Change in operating assets and liabilities (net of
acquisitions):Accounts receivable
    
    
    10,055
    
    
    
    6,172Prepaid and other assets
    
    
    985
    
    
    
    94Accounts payable
    
    
    9,981
    
    
    
    5,184Deferred revenue
    
    
    (197
    )
    
    
    344Income tax payable
    
    
    4,760
    
    
    
    898Other accrued liabilities
    
    
    (72
    )
    
    
    (2,026
    )Net cash provided by operating activities
    
    
    51,421
    
    
    
    40,532INVESTING ACTIVITIES:Purchases of investments
    
    
    (79,341
    )
    
    
    (66,310
    )Sales of investments
    
    
    52,075
    
    
    
    51,263Cash paid for acquisitions, net of cash received
    
    
    (4,344
    )
    
    
    (16,470
    )Purchases of equipment and capitalized software
    
    
    (3,445
    )
    
    
    (4,002
    )Net cash used in investing activities
    
    
    (35,055
    )
    
    
    (35,519
    )FINANCING ACTIVITIES:Proceeds from sales of common stock
    
    
    
    
    
    
    172,700Exercise of stock options
    
    
    5,639
    
    
    
    6,117Repurchase of restricted stock to satisfy tax witholding
obligation
    
    
    (224
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    8,496
    
    
    
    1,488Net cash provided by financing activities
    
    
    13,911
    
    
    
    180,305EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    1,658
    
    
    
    707NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    31,935
    
    
    
    186,025CASH AND CASH EQUIVALENTS, beginning of period
    
    
    390,243
    
    
    
    131,770CASH AND CASH EQUIVALENTS, end of period
    
    $
    422,178
    
    
    $
    317,795SUPPLEMENTAL DISCLOSURES:Cash paid for interest on Convertible Senior Notes
    
    $
    1,219
    
    
    $
    1,219Cash paid for income taxes
    
    $
    52
    
    
    $
    155Noncash investing and financing activities:Common stock issued in acquisitions and earn-outs
    
    $
    986
    
    
    $
    684
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DIGITAL RIVER, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  Summary of Significant Accounting Policies
  Foreign Currency Translation
  Research and Development and Software Development
  Stock-Based Compensation Expense
 
  6




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##### Table of Contents



DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Recent Accounting Pronouncements
 ,
    1A. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
   2. NET INCOME PER SHARE
  7




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DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedMarch 31,2007
    
    
    2006Earnings per share  basicNet income  basic
    
    $
    20,706
    
    
    $
    16,377Weighted average shares outstanding  basic
    
    
    40,492
    
    
    
    35,301Earnings per share  basic
    
    $
    0.51
    
    
    $
    0.46Earnings per share  dilutedNet income  basic
    
    $
    20,706
    
    
    $
    16,377Exclude: Interest expense and amortized
financing cost of convertible senior notes,
net of tax benefit
    
    
    435
    
    
    
    435Net income  diluted
    
    $
    21,141
    
    
    $
    16,812Weighted average shares outstanding  basic
    
    
    40,492
    
    
    
    35,301Dilutive impact of non-vested stock and options outstanding
    
    
    1,431
    
    
    
    1,428Dilutive impact of convertible senior notes
    
    
    4,425
    
    
    
    4,425Weighted average shares outstanding  diluted
    
    
    46,348
    
    
    
    41,154Net income per share  diluted
    
    $
    0.46
    
    
    $
    0.41
  3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
 Acquisitions completed in 2006
   Acquisitions completed in 2005
  8




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##### Table of Contents



DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Pro Forma Operating Results (Unaudited)
  Three Months EndedMarch 31,2007
    
    2006Revenue
    
    $
    91,631
    
    
    $
    80,166Income from operations
    
    
    23,015
    
    
    
    20,635Net income
    
    
    20,706
    
    
    
    15,955Basic net income per share
    
    $
    0.51
    
    
    $
    0.45Diluted net income per share
    
    $
    0.46
    
    
    $
    0.40
  Goodwill and Other Intangible Assets
   9




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##### Table of Contents



DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  As of March 31, 2007Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    43,168
    
    
    $
    30,379
    
    
    $
    12,789Non-compete agreements
    
    
    5,261
    
    
    
    5,167
    
    
    
    94Technology/tradename
    
    
    23,806
    
    
    
    17,472
    
    
    
    6,334Total
    
    $
    72,235
    
    
    $
    53,018
    
    
    $
    19,217
 As of December 31, 2006Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    43,072
    
    
    $
    28,890
    
    
    $
    14,182Non-compete agreements
    
    
    5,251
    
    
    
    5,017
    
    
    
    234Technology/tradename
    
    
    22,875
    
    
    
    16,185
    
    
    
    6,690Total
    
    $
    71,198
    
    
    $
    50,092
    
    
    $
    21,106
  Year2007
    
    $
    4,1952008
    
    
    4,4782009
    
    
    3,5682010
    
    
    1,8602011
    
    
    1,2862012
    
    
    1,236Thereafter
    
    
    2,594Total
    
    $
    19,217
 4. STOCK-BASED COMPENSATION PLANS
 Option and Restricted Stock Awards
    10




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DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  WeightedShares
    
    
    
    
    
    
    Options
    
    
    AverageAvailable
    
    
    Options
    
    
    Price
    
    
    Pricefor Grant
    
    
    Outstanding
    
    
    Per Share
    
    
    Per ShareBalance, December 31, 2005
    
    
    1,928,584
    
    
    
    4,523,385
    
    
    $
    2.59-$31.13
    
    
    $
    16.69Granted
    
    
    (395,000
    )
    
    
    395,000
    
    
    
    29.75-  57.36
    
    
    
    38.64Restricted stock effect
on shares available for
grant
    
    
    (134,250
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (1,219,736
    )
    
    
    2.59-  45.24
    
    
    
    17.31Canceled/expired
    
    
    140,866
    
    
    
    (140,866
    )
    
    
    2.59-  30.69
    
    
    
    22.57Balance, December 31, 2006
    
    
    1,540,200
    
    
    
    3,557,783
    
    
    $
    2.59-$57.36
    
    
    $
    18.68Granted
    
    
    (485,920
    )
    
    
    485,920
    
    
    
    55.39-  56.61
    
    
    
    55.40Restricted stock effect
on shares available for
grant
    
    
    (232,238
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (745,487
    )
    
    
    2.59-  45.24
    
    
    
    7.57Canceled/expired
    
    
    29,552
    
    
    
    (29,552
    )
    
    
    4.56-  55.39
    
    
    
    32.39Balance, March 31, 2007
    
    
    851,594
    
    
    
    3,268,664
    
    
    $
    2.59-$57.36
    
    
    $
    26.55
   Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Weighted
    
    
    AggregateNumber
    
    
    Average
    
    
    Average
    
    
    Intrinsic
    
    
    Number
    
    
    Average
    
    
    IntrinsicExercise Price
    
    
    Outstanding
    
    
    Life Remaining
    
    
    Price
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    Value$
    2.59- $ 3.88
    
    
    
    20,162
    
    
    3.8 years
    
    $
    2.74
    
    
    $
    1,058,627
    
    
    
    20,162
    
    
    $
    2.74
    
    
    $
    1,058,6274.56-    7.55
    
    
    
    296,603
    
    
    4.1 years
    
    
    5.48
    
    
    
    14,761,113
    
    
    
    296,603
    
    
    
    5.48
    
    
    
    14,761,1139.12-  13.92
    
    
    
    688,967
    
    
    5.6 years
    
    
    11.68
    
    
    
    30,017,588
    
    
    
    584,519
    
    
    
    11.82
    
    
    
    25,385,31916.72-  22.98
    
    
    
    579,942
    
    
    6.6 years
    
    
    22.30
    
    
    
    19,111,064
    
    
    
    454,077
    
    
    
    22.63
    
    
    
    14,813,10923.01-  30.69
    
    
    
    862,833
    
    
    7.7 years
    
    
    27.73
    
    
    
    23,747,542
    
    
    
    256,150
    
    
    
    27.99
    
    
    
    6,983,72833.58-  57.36
    
    
    
    820,157
    
    
    9.4 years
    
    
    49.00
    
    
    
    5,125,838
    
    
    
    56,034
    
    
    
    35.30
    
    
    
    1,117,664$
    2.59- $57.36
    
    
    
    3,268,664
    
    
    7.1 years
    
    $
    26.55
    
    
    $
    93,821,772
    
    
    
    1,667,545
    
    
    $
    16.80
    
    
    $
    64,119,560
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DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  WeightedRestricted
    
    
    AverageStock
    
    
    Intrinsic ValueNon-Vested Balance, December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    89,500
    
    
    
    39.96Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-Vested Balance, December 31,
2006
    
    
    89,500
    
    
    $
    39.96Granted
    
    
    154,825
    
    
    
    55.39Vested
    
    
    (14,252
    )
    
    
    35.11Forfeited
    
    
    (1,512
    )
    
    
    55.39Non-Vested Balance, March 31, 2007
    
    
    228,561
    
    
    $
    50.61
 Employee Stock Purchase Plan
  Inducement Equity Incentive Plan
  Expense Information under SFAS 123(R)
  Three Months EndedMarch 31,2007
    
    
    2006Costs and expensesDirect cost of services
    
    $
    195
    
    
    $
    214Network and infrastructure
    
    
    72
    
    
    
    86Sales and marketing
    
    
    1,268
    
    
    
    1,289Product research and development
    
    
    552
    
    
    
    585General and administrative
    
    
    1,389
    
    
    
    1,239Stock-based compensation included in
costs and expenses
    
    
    3,476
    
    
    
    3,413Tax benefit
    
    
    (1,047
    )
    
    
    (1,200
    )Stock-based
compensation expense, net of tax
    
    $
    2,429
    
    
    $
    2,213
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DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Valuation Information under SFAS 123(R)
  Three Months EndedMarch 31,2007
    
    2006Risk-free interest rate
    
    
    4.5
    %
    
    
    4.6
    %Expected life (years)
    
    
    3.5
    
    
    
    3.1Volatility factor
    
    
    0.51
    
    
    
    0.61Expected dividends
    
    
    
    
    
    
    
    5. INCOME TAXES
      13




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DIGITAL RIVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 6. LONG-TERM DEBT
    7. LITIGATION
  14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The discussion in this Quarterly Report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed below. Additional
factors that could cause or contribute to such differences include, but are not limited to, those
identified below, and those discussed in the section entitled Risk Factors, included in Item 1A
of Part II of this Quarterly Report. When used in this document, the words believes, expects,
anticipates, intends, plans, and similar expressions, are intended to identify certain of
these forward-looking statements. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all related forward-looking
statements wherever they appear in this document.
 Overview
       Critical Accounting Policies
 
 15




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Results of Operations
  Three Months EndedMarch 31,2007
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of Revenue (exclusive of depreciation
and amortization expense shown separately
below):Direct cost of services
    
    
    2.8
    
    
    
    2.4Network and infrastructure
    
    
    8.2
    
    
    
    9.6Sales and marketing
    
    
    37.3
    
    
    
    34.5Product research and development
    
    
    9.4
    
    
    
    9.7General and administrative
    
    
    11.0
    
    
    
    10.6Depreciation and amortization
    
    
    3.1
    
    
    
    2.9Amortization of acquisition-related costs
    
    
    3.1
    
    
    
    3.6Total costs and expenses
    
    
    74.9
    
    
    
    73.3Income from operations
    
    
    25.1
    
    
    
    26.7Other income/(expense), net
    
    
    7.6
    
    
    
    3.8Income before income tax expense
    
    
    32.7
    
    
    
    30.5Income tax expense
    
    
    10.1
    
    
    
    9.5Net income
    
    
    22.6
    %
    
    
    21.0
    %
  REVENUE.
 16




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DIRECT COST OF SERVICES.
 NETWORK AND INFRASTRUCTURE.
 SALES AND MARKETING.
 PRODUCT RESEARCH AND DEVELOPMENT.
 GENERAL AND ADMINISTRATIVE.
 17




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DEPRECIATION AND AMORTIZATION.
 AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES.
 OTHER INCOME, NET.
 INCOME TAXES.
     Off Balance Sheet Arrangements
  18




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Liquidity and Capital Resources
      Payment due by period (in thousands)Total Amount
    
    Apr-Dec
    
    
    
    
    
    
    
    
    
    2012 andContractual Obligations
    
    Committed
    
    2007
    2008-2009


    2010-2011
    

    ThereafterOperating Lease Obligations
    
    $
    14,773
    
    
    $
    3,241
    
    
    $
    4,711
    
    
    $
    1,360
    
    
    $
    5,461Convertible Senior Notes
    
    $
    236,438
    
    
    $
    1,219
    
    
    $
    4,875
    
    
    $
    4,875
    
    
    $
    225,469Total
    
    $
    251,211
    
    
    $
    4,460
    
    
    $
    9,586
    
    
    $
    6,235
    
    
    $
    230,930
  19




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20




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Item 3. Qualitative and Quantitative Disclosure About Market Risk
 Interest Rate Risk
   Foreign Currency Risk
   Transaction Exposure
  Translation Exposure
  21




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Item 4. Controls and Procedures
 Special Committee Review into Stock Option Grant Practices and Restatement
 Restatement of Consolidated Financial Statements, Restatement of Consolidated
Financial Statements
  (a)
    
    Our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31, 2007. Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
promulgated under the Securities Exchange Act of 1934) were effective in providing reasonable
assurance that material information required to be disclosed by us in this Form 10-Q was
recorded, processed, summarized and reported in a timely manner.(b)
    
    During the quarter ended March 31, 2007, there was no change in our internal control over
financial reporting that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
 Limitations on the Effectiveness of Controls
  22




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
        23




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Item 1A. Risk Factors
 The risks described below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial also may impair our business operations. Our
business financial condition or results of operations could be materially adversely affected by any
of these risks and the value of our common stock could decline due to any of these risks. This
quarterly report also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including the risks faced by us described below and elsewhere in
this report.
 A loss of any client that accounts for a large portion of our revenue would cause our revenue to
decline.
  We have a limited profitable operating history.
  Failure to properly manage and sustain our expansion efforts could strain our management and other
resources.
  24




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We intend to continue to expand our international operations and these efforts may not be
successful in generating additional revenue.


§
    
    Changes in regulatory requirements and tariffs;§
    
    Uncertainty of application of local commercial, tax, privacy and other laws and regulations;§
    
    Reduced protection of intellectual property rights;§
    
    Difficulties in physical distribution for international sales;§
    
    Higher incidences of credit card fraud and difficulties in accounts receivable collection;§
    
    The burden and cost of complying with a variety of foreign laws;§
    
    The possibility of unionization of our workforce outside the United States, particularly in Europe; and§
    
    Political or economic constraints on international trade or instability.
   Our operating results are subject to fluctuations in demand for products and services offered by us
or our clients.
  New obligations to collect or pay transaction taxes could substantially increase the cost to us of
doing business.
  We could be liable for fraudulent, improper or illegal uses of our platforms.
  25




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Loss of our credit card acceptance privileges would seriously hamper our ability to process the
sale of
merchandise.
  Our failure to attract and retain software and digital products publishers, manufacturers, online
retailers and online channel partners as clients would cause our revenue and operating profits to
decline.
  26




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The matters relating to the investigation by the Special Committee of the Board of Directors and
the restatement of our consolidated financial statements may result in additional litigation and
governmental enforcement actions.
  Activities related to our internal review of historical stock option practices have required us to
incur substantial expenses for legal, accounting, tax and other professional services, have
diverted managements attention from our business, and could in the future harm our business,
financial condition, results of operations and cash flows.
   Implementing our acquisition strategy could result in dilution and operating difficulties leading
to a decline in revenue and operating profit.
  We may need to raise additional capital to achieve our business objectives, which could result in
dilution to existing investors or increase our debt obligations.
  27




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Our operating results have fluctuated in the past and are likely to continue to do so, which could
cause the price of our common stock to be volatile.
  §
    
    The addition of new clients or loss of current clients;§
    
    The introduction by us of new websites, web stores or services that may require a substantial
investment of our resources;§
    
    The introduction by others of competitive websites, web stores or services or products;§
    
    Our ability to continue to upgrade and develop our systems and infrastructure to meet emerging
market needs and remain competitive in our service offerings;§
    
    Economic conditions, particularly those affecting e-commerce;§
    
    Client decisions to delay new product launches or to invest in e-commerce initiatives;§
    
    The performance of our newly acquired assets or companies;§
    
    Slower than anticipated growth of the online market as a vehicle for the purchase of software
products;§
    
    The cost of compliance with U.S. and foreign regulations relating to our business; and§
    
    Our ability to retain and attract personnel commensurate with our business needs.
   Security breaches could hinder our ability to securely transmit confidential information.
  28




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Claims of infringement of other parties intellectual property rights could require us to expend
significant resources, enter into unfavorable licenses or require us to change our business plans.
  Claims against us related to the software products that we deliver electronically and the tangible
goods that we deliver physically could require us to expend significant resources.
  The growth of the market for our services depends on the development and maintenance of the
Internet infrastructure.
  29




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Because the e-commerce industry is highly competitive and has low barriers to entry, we may be
unable to compete effectively.


§
    
    In-house development of e-commerce capabilities using tools or applications from
companies, such as Art Technology Group, Inc. and IBM Corporation;§
    
    E-Commerce capabilities custom-developed by companies, such as IBM Global Services and
Accenture, Inc.;§
    
    Other providers of outsourced e-commerce solutions, such as GSI Commerce, Inc.,
Macrovision Corporation, and asknet Inc.;§
    
    Companies that provide technologies, services or products that support a portion of the
e-commerce process, such as payment processing, including CyberSource Corporation and
PayPal Corp.;§
    
    Companies that offer various online marketing services, technologies and products,
including ValueClick, Inc. and aQuantive, Inc.;§
    
    High-traffic, branded websites that generate a substantial portion of their revenue from
e-commerce and may offer or provide to others the means to offer their products for sale,
such as Amazon.com, Inc.; and§
    
    Web hosting, web services and infrastructure companies that offer portions of our
solution and are seeking to expand the range of their offering, such as Network Solutions,
LLC, Akamai Technologies, Inc., Yahoo! Inc., eBay Inc. and Hostopia.com Inc.
   Changes in government regulation could limit our Internet activities or result in additional costs
of doing business over the Internet.
  §
    
    User privacy with respect to adults and minors;§
    
    Our ability to collect and/or share necessary information that allows us to conduct
business on the Internet;§
    
    Export compliance;§
    
    Pricing and taxation;§
    
    Fraud;§
    
    Advertising;§
    
    Intellectual property rights;§
    
    Information security; and§
    
    Quality of products and services.
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Failure to develop our technology to accommodate increased traffic could reduce demand for our
services and impair the growth of our business.
   System failures could reduce the attractiveness of our service offerings.
   §
    
    Fire, flood and other natural disasters;§
    
    Operator negligence, improper operation by, or supervision of, employees, physical and
electronic break-ins, misappropriation, computer viruses and similar events; and§
    
    Power loss, computer systems failures, and Internet and telecommunications failure.
  31




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We may become liable to clients who are dissatisfied with our services.
  We depend on key personnel.
   Protecting our intellectual property is critical to our success.
   Our clients sales cycles are lengthy, which may cause us to incur substantial expenses and expend
management time without generating corresponding consumer revenue, which would impair our cash
flow.
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The listing of our network addresses on anti-SPAM lists could harm our ability to service our
clients and deliver goods over the Internet.
  We are subject to regulations relating to consumer privacy.
    Compliance with future laws imposed on e-commerce may substantially increase our costs of doing
business or otherwise adversely affect our ability to offer our services.
   33




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##### Table of Contents



We are exposed to foreign currency exchange risk.
  Changes in our tax rates could affect our future results.
  Developments in accounting standards may cause us to increase our recorded expenses, which in turn
would jeopardize our ability to demonstrate sustained profitability.
  Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
  34




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##### Table of Contents



Internet-related stock prices are especially volatile and this volatility may depress our stock
price or cause it to fluctuate significantly.
  §
    
    Actual or anticipated variations in quarterly operating results;§
    
    Announcements of technological innovations;§
    
    The ability to sign new clients and the retention of existing clients;§
    
    New products or services that we offer;§
    
    Competitive developments, including new products or services, or new relationships by our competitors;§
    
    Changes that affect our clients or the viability of their product lines;§
    
    Changes in financial estimates by securities analysts;§
    
    Conditions or trends in the Internet and online commerce industries;§
    
    Global unrest and terrorist activities;§
    
    Changes in the economic performance and/or market valuations of other Internet or online
e-commerce companies;§
    
    Required changes in generally accepted accounting principles and disclosures;§
    
    Our announcement of significant acquisitions, strategic partnerships, joint ventures or
capital commitments or results of operations or other developments related to those
acquisitions;§
    
    Additions or departures of key personnel; and§
    
    Sales or other transactions involving our common stock or our convertible notes.
  Provisions of our charter documents, other agreements and Delaware law may inhibit potential
acquisition bids for us.
  35




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total number of
    
    Approximate dollar valueTotal number
    
    Average
    
    shares purchased as
    
    of shares that may yet beof shares
    
    price paid per
    
    part of publicly
    
    purchased under the planPeriod
    
    purchased
    
    share
    
    announced plan
    
    (in millions)January 1, 2007 - January 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    36.6February 1, 2007 - February 28,
2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    36.6March 1, 2007 - March 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    36.6Total
    
    
    
    
    
    
    
    
    
    
    
 36




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##### Table of Contents



Item 6. Exhibits
  EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as amended, as currently in effect.3.2
    
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    
    (3
    )
    
    Specimen of Common Stock Certificate.4.2
    
    
    (1
    )
    
    Form of Senior Debt Indenture.4.3
    
    
    (1
    )
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    
    (4
    )
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank, N.A.
as trustee, including therein the form of the Note.12.1
    
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed as exhibits 3.1 and 3.3 and exhibits 4.5 and 4.6
to our Registration Statement on Form S-3, File No.
333-81626, filed on January 29, 2002, declared effective on
February 12, 2002, and incorporated herein by reference.(2)
    
    Filed as an exhibit to our Annual Report on Form 10-K
for the year ended December 31, 2000, filed on March 27,
2001, and incorporated herein by reference.(3)
    
    Filed as an exhibit to our Registration Statement on
Form S-1, File No. 333-56787, declared effective on August
11, 1998, and incorporated herein by reference.(4)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K,
filed on July 13, 2004 and incorporated herein by reference. 37




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Date: May 10, 2007
    DIGITAL RIVER, INC.By:

/s/ THOMAS M. DONNELLYThomas M. DonnellyChief Financial Officer 
(Principal Financial and Accounting Officer) 38




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as amended, as currently in effect.3.2
    
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    
    (3
    )
    
    Specimen of Common Stock Certificate.4.2
    
    
    (1
    )
    
    Form of Senior Debt Indenture.4.3
    
    
    (1
    )
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    
    (4
    )
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank, N.A.
as trustee, including therein the form of the Note.12.1
    
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.31.1
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed as Exhibits 3.1 and 3.3 and Exhibits 4.5 and 4.6
to our Registration Statement on Form S-3, File No.
333-81626, filed on January 29, 2002, declared effective on
February 12, 2002, and incorporated herein by reference.(2)
    
    Filed as an exhibit to our Annual Report on Form 10-K
for the year ended December 31, 2000, filed on March 27,
2001, and incorporated herein by reference.(3)
    
    Filed as an exhibit to our Registration Statement on
Form S-1, File No. 333-56787, declared effective on August
11, 1998, and incorporated herein by reference.(4)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K,
filed on July 13, 2004 and incorporated herein by reference. 39