**SECURITIES AND EXCHANGECOMMISSION****Washington,D.C. 20549**

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******FORM 10-Q**

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| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|----------------------------------------------------------------------------------------------|

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001**

**OR**
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**FOR THE TRANSITION PERIOD FROM _____ TO _____**

**Commission file number 000-24643**

**DIGITAL RIVER, INC.**(Exact name of registrant as specified inits charter)

| **DELAWARE**                                                    | **41-1901640**                           |
|-----------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification Number) |

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

**(952) 253-1234**(Registrant’s telephone number, includingarea code)

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             Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý  No o

             Indicate the number of sharesoutstanding of each of the issuer's classes of common stock, as of the latestpractical date.
| COMMON STOCK, $0.01  PAR VALUE | 24,453,774 SHARES                 |
|--------------------------------|-----------------------------------|
|                                |                                   |
| (Class)                        | Outstanding as of  August 6, 2001 |

DIGITALRIVER, INC.

Form10-Q

Index

| PART  I.      | FINANCIAL  INFORMATION                                                                                      |   |
|---------------|-------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                        |   |
| Item 1.       | Financial Statements                                                                                        |   |
|          |                                                                                                        |   |
|          | Condensed  Consolidated Balance Sheets at June 30, 2001 and December 31, 2000                               |   |
|          |                                                                                                        |   |
|          | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2001 and 2000 |   |
|          |                                                                                                        |   |
|          | Condensed  Consolidated Statements of Cash Flows for the three and six months ended June  30, 2001 and 2000 |   |
|          |                                                                                                        |   |
|          | Notes  to Condensed Consolidated Financial Statements                                                       |   |
|          |                                                                                                        |   |
| Item  2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |   |
|          |                                                                                                        |   |
| Item  3.      | Qualitative  and Quantitative Disclosure about Market Risk                                                  |   |
|          |                                                                                                        |   |
| PART II.      | OTHER  INFORMATION                                                                                          |   |
|          |                                                                                                        |   |
| Item 1.       | Legal  Proceedings                                                                                          |   |
|          |                                                                                                        |   |
| Item  4.      | Submission  of Matters to a Vote of Security Holders                                                        |   |
|          |                                                                                                        |   |
| Item 6.       | Exhibits and Reports  on Form 8-K                                                                           |   |
|          |                                                                                                        |   |
| SIGNATURES    |                                                                                                        |   |
|          |                                                                                                        |   |
| Exhibit Index |                                                                                                        |   |

 

PART I.            FINANCIALINFORMATION

ITEM 1.            FINANCIALSTATEMENTS

DIGITALRIVER, INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(InThousands, Except Share Data)

|                                                  | June 30,                                                                                                              |    | December 31,   |    |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|---------|----------------|---------|
|                                                  | 2001                                                                                                                  |    | 2000           |    |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | (unaudited)                                                                                                           |    |           |    |
| ASSETS                                                |                                                                                                                  |    |           |    |
| CURRENT ASSETS:                                       |                                                                                                                  |    |           |    |
|                                                  | Cash and cash  equivalents                                                                                            | $       | 22,113         |    | $ | 16,920 |   |
|                                                  | Short-term investments                                                                                                | 6,000   |           | 14,977  |   |
|                                                  | Accounts receivable,  net                                                                                             | 6,744   |           | 4,903   |   |
|                                                  | Prepaid expenses and  other                                                                                           | 989     |           | 1,123   |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | Total current assets                                                                                                  | 35,846  |           | 37,923  |   |
| PROPERTY AND  EQUIPMENT, NET                          | 14,849                                                                                                                |    | 13,570         |    |
| GOODWILL AND OTHER  INTANGIBLES, NET AND OTHER ASSETS | 19,936                                                                                                                |    | 17,910         |    |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | $                                                                                                                     | 70,631  |           | $       | 69,403 |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                  |                                                                                                                  |    |           |    |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY            |                                                                                                                  |    |           |    |
| CURRENT LIABILITIES:                                  |                                                                                                                  |    |           |    |
|                                                  | Accounts payable                                                                                                      | $       | 15,935         |    | $ | 14,339 |   |
|                                                  | Accrued payroll                                                                                                       | 2,386   |           | 2,287   |   |
|                                                  | Deferred revenue                                                                                                      | 1,813   |           | 1,833   |   |
|                                                  | Other current  liabilities                                                                                            | 2,547   |           | 2,426   |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | Total current  liabilities                                                                                            | 22,681  |           | 20,885  |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                  |                                                                                                                  |    |           |    |
| STOCKHOLDERS’ EQUITY:                            |                                                                                                                  |    |           |    |
|                                                  | Preferred  Stock, $.01 par value; 5,000,000 shares authorized; no shares issued and  outstanding                      | -       |      | -       |      |
|                                                  | Common  Stock, $.01 par value; 60,000,000 shares authorized; 24,453,774 and  22,275,317 shares issued and outstanding | 245     |      | 223     |      |
|                                                  | Additional paid-in  capital                                                                                           | 142,996 |           | 132,403 |   |
|                                                  | Deferred compensation                                                                                                 | (93     | )              | (194    | ) |
|                                                  | Accumulated deficit                                                                                                   | (95,198 | )              | (83,914 | ) |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | Total stockholders’  equity                                                                                      | 47,950  |           | 48,518  |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                  | $                                                                                                                     | 70,631  |           | $       | 69,403 |   |
|                                                  |                                                                                                                       |    |                |    |
|                                                       |                                                                                                                       |         |                |         |  |  |  |  |

See accompanying notes to condensedconsolidated financial statements.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands, Except Per Share Data; Unaudited)

|                                                                                              | Three Months Ended                                                              |           | Six Months Ended |           |
|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|----------------|------------------|----------------|
|                                                                                              | June 30,                                                                        |           | June 30,         |           |
|                                                                                              |                                                                                 |           |                  |           |
|                                                                                              | 2001                                                                            |           | 2000             |           | 2001 |   | 2000 |   |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
| REVENUE                                                                                           | $                                                                               | 13,055         |             | $              | 6,635 |   | $ | 26,102 |   | $ | 13,518 |   |
|                                                                                              |                                                                            |           |             |           |   |   |   |   |
| COSTS  AND EXPENSES (exclusive of depreciation and amortization  expense shown separately below): |                                                                            |      |             |      |   |      |   |      |
|                                                                                              | Direct cost of  services                                                        | 655            |             | 275            |   | 1,212 |   | 570 |   |
|                                                                                              | Network and  infrastructure                                                     | 2,494          |             | 1,957          |   | 5,458 |   | 3,747 |   |
|                                                                                              | Sales and marketing                                                             | 6,480          |             | 6,965          |   | 13,265 |   | 13,444 |   |
|                                                                                              | Product research and  development                                               | 2,729          |             | 4,429          |   | 5,198 |   | 8,093 |   |
|                                                                                              | General and  administrative                                                     | 1,005          |             | 1,222          |   | 2,102 |   | 2,456 |   |
|                                                                                              | Depreciation and  amortization                                                  | 1,177          |             | 640            |   | 2,297 |   | 1,343 |   |
|                                                                                              | Amortization  of goodwill and other intangibles and acquisition   related costs | 3,839          |        | 4,334          |      | 8,483 |      | 9,728 |      |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
|                                                                                              | Total costs and  expenses                                                       | 18,379         |             | 19,822         |   | 38,015 |   | 39,381 |   |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
| LOSS FROM OPERATIONS                                                                              | (5,324                                                                          | )              | (13,187          | )              | (11,913 | ) | (25,863 | ) |
|                                                                                              |                                                                            |           |             |           |   |   |   |   |
| INTEREST INCOME                                                                                   | 262                                                                             |           | 554              |           | 610 |   | 1,239 |   |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
|                                                                                              | Net loss                                                                        | $              | (5,062           | )              | $ | (12,633 | ) | $ | (11,303 | ) | $ | (24,624 | ) |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
| Basic and diluted net  loss per share                                                             | $                                                                               | (0.21          | )                | $              | (0.60 | ) | $ | (0.48 | ) | $ | (1.18 | ) |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
| Basic and diluted  weighted average common shares outstanding                                     | 24,383                                                                          |      | 21,100           |      | 23,432 |      | 20,937 |   |
|                                                                                              |                                                                                 |           |                  |           |  |   |  |   |
|                                                                                                   |                                                                                 |                |                  |                |  |  |  |  |  |  |  |  |  |  |

             See accompanying notes to condensedconsolidated financial statements.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(InThousands; Unaudited)

|                                            | Six Months Ended                                                                        |   |
|-------------------------------------------------|-----------------------------------------------------------------------------------------|--------|
|                                            | June 30,                                                                                |   |
|                                            |                                                                                         |   |
|                                            |                                                                                    |   |   |   |
|                                            | 2001                                                                                    |   | 2000 |   |
|                                            |                                                                                         |   |  |   |
| OPERATING ACTIVITIES:                           |                                                                                    |   |   |   |
|                                            | Net loss                                                                                | $      | (11,303 | ) | $ | (24,624 | ) |
|                                            | Adjustments to  reconcile net loss to net cash used in operating activities:            |   |   |   |   |
|                                            | Goodwill and other  intangibles amortization and acquisition related costs              | 8,483  |   | 7,695 |   |
|                                            | Depreciation and  amortization                                                          | 2,297  |   | 1,343 |   |
|                                            | Deferred compensation  expense                                                          | 101    |   | 255 |   |
|                                            | Changes in assets and  liabilities:                                                     |   |   |   |   |
|                                            | Accounts receivable  and prepaid expense                                                | (1,707 | ) | (651 | ) |
|                                            | Accounts payable                                                                        | 1,596  |   | (843 | ) |
|                                            | Other current  liabilities and deferred revenue                                         | (55    | ) | 4,731 |   |
|                                            |                                                                                         |   |  |   |
|                                            | Net cash used in  operating activities                                                  | (588   | ) | (12,094 | ) |
|                                            |                                                                                         |   |  |   |
| INVESTING ACTIVITIES:                           |                                                                                    |   |   |   |
|                                            | Purchases of  investments                                                               | — |   | (12,065 | ) |
|                                            | Proceeds from sales of  investments                                                     | 9,000  |   | 36,449 |   |
|                                            | Purchases of equipment                                                                  | (3,140 | ) | (6,601 | ) |
|                                            | Acquisitions, net of  cash received                                                     | (307   | ) | — |   |
|                                            | Patent acquisition  costs                                                               | (7     | ) | (21 | ) |
|                                            |                                                                                         |   |  |   |
|                                            | Net cash provided by  investing activities                                              | 5,546  |   | 17,762 |   |
|                                            |                                                                                         |   |  |   |
| FINANCING ACTIVITIES:                           |                                                                                    |   |   |   |
|                                            | Sales of Common Stock                                                                   | 460    |   | 3,538 |   |
|                                            | Repurchase of Common  Stock                                                             | (225   | ) | — |   |
|                                            |                                                                                         |   |  |   |
|                                            | Net cash provided by  financing activities                                              | 235    |   | 3,538 |   |
|                                            |                                                                                         |   |  |   |
|                                            | Net increase in cash  and cash equivalents                                              | 5,193  |   | 9,206 |   |
| CASH AND CASH  EQUIVALENTS, beginning of period | 16,920                                                                                  |   | 15,120 |   |
|                                            |                                                                                         |   |  |   |
| CASH AND CASH  EQUIVALENTS, end of period       | $                                                                                       | 22,113 |   | $ | 24,326 |   |
|                                            |                                                                                         |   |  |   |
| SUPPLEMENTAL CASH FLOW  DISCLOSURE:             |                                                                                    |   |   |   |
|                                            | Issuance of Common  Stock in connection with acquisitions and related earn-out payments | $      | 10,386 |      | $ | 3,093 |   |
|                                            |                                                                                         |   |  |   |
|                                                 |                                                                                         |        |  |  |  |  |  |  |  |

             See accompanying notes to condensedconsolidated financial statements.

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.          BASIS OF PRESENTATION:

             The unaudited condensedconsolidated financial statements included herein reflect all adjustments,consisting only of normal recurring adjustments, which in the opinion ofmanagement are necessary to fairly state the Company’s consolidated financialposition, results of operations and cash flows for the periods presented.  These condensed consolidated financialstatements should be read in conjunction with the Company’s auditedconsolidated financial statements included in the Company’s Form 10-K for theyear ended December 31, 2000 as filed with the Securities and ExchangeCommission.  The results of operationsfor the three and six  months ended June30, 2001 are not necessarily indicative of the results to be expected for anysubsequent quarter or for the entire fiscal year ending December 31, 2001.  The December 31, 2000 balance sheet wasderived from audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.

2.          PRINCIPLES OF CONSOLIDATION:

             The condensed consolidatedfinancial statements include the accounts of Digital River, Inc. and its whollyowned subsidiaries.  All intercompanybalances and transactions have been eliminated.

3.          RECENT ACCOUNTING PRONOUNCEMENTS:

             On June 29, 2001, the FinancialAccounting Standards Board approved for issuance Statement of FinancialAccounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwilland Intangible Assets. Major provisions of these Statements are as follows: allbusiness combinations initiated after June 30, 2001 must use the purchasemethod of accounting; the pooling of interest method of accounting isprohibited except for transactions initiated before July 1, 2001; intangibleassets acquired in a business combination must be recorded separately fromgoodwill if they arise from contractual or other legal rights or are separablefrom the acquired entity and can be sold, transferred, licensed, rented orexchanged, either individually or as part of a related contract, asset orliability; goodwill and intangible assets with indefinite lives are notamortized but tested for impairment annually, except in certain circumstances,and whenever there is an impairment indicator; all acquired goodwill must beassigned to reporting units for purposes of impairment testing and segmentreporting; effective January 1, 2002, goodwill will no longer be subject toamortization. Management is currently reviewing the provisions of theseStatements and their impact on the Company's results of operations.

4.          NET LOSS PER SHARE:

             Basic loss per share is computedusing the weighted-average number of common shares outstanding excludingcontingently issuable or returnable shares, and diluted loss per share iscomputed using the weighted-average number of common shares outstanding anddilutive potential common shares outstanding. As a result of the losses incurred by the Company for the three and sixmonths ended June 30, 2001 and 2000, all potential common shares wereanti-dilutive and were excluded from the diluted net loss per sharecalculations.

             The following table summarizessecurities outstanding as of each period end which were not included in thecalculation of diluted net loss per share since their inclusion would beanti-dilutive:

|                  |      June 30, |   |      June 30, |   |
|-----------------------|-----------------------------------|--------|-----------------------------------|--------|
|                  |      2001     |   |      2000     |   |
|                  |                                   |   |                                   |   |
| Common Stock warrants | 356,087                           |   | 356,087                           |   |
| Common Stock options  | 7,181,976                         |   | 3,479,032                         |   |

 

5.             ACQUISITIONS AND EARN-OUTARRANGEMENTS:

                In March 2001, the Company purchased the Market Makerassets of Calico Commerce, Inc. (Calico) in exchange for 1,630,368 shares ofCommon Stock valued at $8,468,000 plus direct expenses.  The value of the Common Stock was determinedby taking the average of the closing market price for the five days before andfive days after the acquisition terms were agreed to and announced.  The assets purchased consisted of equipment,intellectual property and non-competition agreements.  The Company will amortize goodwill, other intangibles andnon-competition agreements over a three-year period.  Under the agreement, Calico also has an earn-out arrangementwhereby it can earn up to an additional 2,971,347 shares of Common Stock uponattaining certain business goals for a period of 13 months following theacquisition.

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

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

             The following unaudited pro formacondensed results of operations for the six months ended June 30, 2001 and 2000have been prepared as if each of the acquisitions occurred on January 1, 2000:

|                              | Six Months Ended                    |   |
|-----------------------------------|-------------------------------------|--------|
|                              | June 30,                            |   |
|                              |                                     |   |
|                              |                                |   |   |   |
|                              |       2001 |   |       2000 |   |
|                              |                                     |   |  |   |
|                              | (In Thousands )                     |
| Revenue                           | $                                   | 28,067 |   | $ | 19,332 |   |
| Loss from operations              | (14,538                             | )      | (35,469 | ) |
| Net loss                          | (13,928                             | )      | (34,230 | ) |
| Basic and diluted loss  per share | $                                   | (0.58  | ) | $ | (1.45 | ) |

             This financial information does notpurport to represent results that would actually have been obtained if thetransactions had been in effect on January 1, 2000 or any future results thatmay in fact be realized.

6.          SHARE REPURCHASE PROGRAM

             In April 2001, the Companyannounced a share repurchase program of up to $5.0 million of its outstandingshares of Common Stock.  Repurchaseswill be at the Company’s discretion based on ongoing assessments of the capitalneeds of the business and the market price of its shares.  No time limit was set for completion of therepurchase program.

7.          SEGMENT INFORMATION:

             The Company has two operatingsegments, Software and Digital Commerce Services and E-Business Services, whichhave been identified as components of the Company that are reviewed regularlyby management to determine resource allocation and assess performance.  Unallocated corporate items consist ofdepreciation, amortization of goodwill and other intangibles and acquisitionrelated costs, and interest income for operational results and consist ofcertain cash, investments and goodwill and other intangibles for totalassets.  Segment information is asfollows:

|                                                            | Software and Digital |           | E-Business |           | Unallocated |           |         |           |
|-----------------------------------------------------------------|----------------------|----------------|------------|----------------|-------------|----------------|--------------|----------------|
| THREE MONTHS ENDED                                              | Commerce Services    |           | Services   |           | Corporate   |           |         |           |
| JUNE 30, 2001:                                                  | Division             |           | Division   |           | Items       |           | Consolidated |           |
|                                                            |                      |           |            |           |             |           |              |           |
|                                                            | (in thousands)       |
| Revenue                                                         | $                    | 9,461          |       | $              | 3,594       |           | $            | —         |   | $ | 13,055 |   |
| Gross  profit (excludes depreciation and  amortization expense) | 7,368                |      | 2,539      |      | —      |      | 9,907        |      |
| Income (loss) from  operations                                  | 1,551                |           | (1,859     | )              | (5,016      | )              | (5,324       | )              |
| Net income (loss)                                               | 1,551                |           | (1,859     | )              | (4,754      | )              | (5,062       | )              |
| Total assets                                                    | 18,141               |           | 8,277      |           | 44,213      |           | 70,631       |           |
|                                                                 |                      |                |            |                |             |                |              |                |  |  |  |  |

 

|                                                            | Software and Digital |           | E-Business |           | Unallocated |           |         |           |
|-----------------------------------------------------------------|----------------------|----------------|------------|----------------|-------------|----------------|--------------|----------------|
| THREE MONTHS ENDED                                              | Commerce Services    |           | Services   |           | Corporate   |           |         |           |
| JUNE 30, 2000:                                                  | Division             |           | Division   |           | Items       |           | Consolidated |           |
|                                                            |                      |           |            |           |             |           |              |           |
|                                                            | (in thousands)       |
| Revenue                                                         | $                    | 5,478          |       | $              | 1,157       |           | $            | —         |   | $ | 6,635 |   |
| Gross  profit (excludes depreciation and  amortization expense) | 3,730                |      | 673        |      | —      |      | 4,403        |      |
| Loss from operations                                            | (2,551               | )              | (5,662     | )              | (4,974      | )              | (13,187      | )              |
| Net loss                                                        | (2,551               | )              | (5,662     | )              | (4,420      | )              | (12,633      | )              |
| Total assets                                                    | 14,109               |           | 5,304      |           | 54,041      |           | 73,454       |           |
|                                                                 |                      |                |            |                |             |                |              |                |  |  |  |  |

 

|                                                            | Software and Digital |           | E-Business |           | Unallocated |           |         |           |
|-----------------------------------------------------------------|----------------------|----------------|------------|----------------|-------------|----------------|--------------|----------------|
| SIX MONTHS ENDED                                                | Commerce Services    |           | Services   |           | Corporate   |           |         |           |
| JUNE 30, 2001:                                                  | Division             |           | Division   |           | Items       |           | Consolidated |           |
|                                                            |                      |           |            |           |             |           |              |           |
|                                                            | (in thousands)       |
| Revenue                                                         | $                    | 19,973         |       | $              | 6,129       |           | $            | —         |   | $ | 26,102 |   |
| Gross  profit (excludes depreciation and  amortization expense) | 15,171               |      | 4,261      |      | —      |      | 19,432       |      |
| Income (loss) from  operations                                  | 3,200                |           | (4,333     | )              | (10,780     | )              | (11,913      | )              |
| Net income (loss)                                               | 3,200                |           | (4,333     | )              | (10,170     | )              | (11,303      | )              |
|                                                                 |                      |                |            |                |             |                |              |                |  |  |  |  |

 

|                                                            | Software and Digital |           | E-Business |           | Unallocated |           |         |           |
|-----------------------------------------------------------------|----------------------|----------------|------------|----------------|-------------|----------------|--------------|----------------|
| SIX MONTHS ENDED                                                | Commerce Services    |           | Services   |           | Corporate   |           |         |           |
| JUNE 30, 2000:                                                  | Division             |           | Division   |           | Items       |           | Consolidated |           |
|                                                            |                      |           |            |           |             |           |              |           |
|                                                            | (in thousands)       |           |
| Revenue                                                         | $                    | 11,608         |       | $              | 1,910       |           | $            | —         |   | $ | 13,518 |   |
| Gross  profit (excludes depreciation and  amortization expense) | 8,197                |      | 1,003      |      | —      |      | 9,200        |      |
| Loss from operations                                            | (4,306               | )              | (10,486    | )              | (11,071     | )              | (25,863      | )              |
| Net loss                                                        | (4,306               | )              | (10,486    | )              | (9,832      | )              | (24,624      | )              |
|                                                                 |                      |                |            |                |             |                |              |                |  |  |  |  |

ITEM 2.            MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             THE COMPANY NOTES THAT, EXCEPT FORTHE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED BELOWCONTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS,UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCEOR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENTFROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BYSUCH FORWARD-LOOKING STATEMENTS.  THECOMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION ORPUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATEOF THIS REPORT.  SUCH FACTORS INCLUDE,AMONG OTHERS:  THE COMPANY’S LIMITEDOPERATING HISTORY AND VARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURELOSSES, RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THEINTERNET AND GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTUREDEVELOPMENT, DEPENDENCE ON SOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS,SYSTEM DEVELOPMENT AND ELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICALCHANGES, COMPETITION IN THE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OFATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANY’S GROWTH,INTEGRATION OF ACQUIRED COMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISKFACTORS REFERENCED IN THE COMPANY’S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,2000.

OVERVIEW

             The Company is a leading providerof comprehensive electronic commerce outsourcing solutions.  The Company was incorporated in February1994 and commenced offering products for sale through its clients’ Web storesin August 1996.  From inception throughAugust 1996, the Company had no sales, and its activities related primarily tothe development of its Commerce Network Server (“CNS”) technology related toelectronic commerce.  In 1996, theCompany began to focus its business development efforts on the softwareindustry, building its inventory of software products through contracts withsoftware publishers.  In 1997, theCompany began to develop software distribution relationships through contractswith online retailers.  As of June 30,2001, the Company had approximately 8,000 software publisher clients and onlineretailer clients that are served by the Software and Digital Commerce ServicesDivision.  In late 1998, the Companybegan to offer its comprehensive electronic commerce outsourcing services inthe form of a transaction fee-based e-commerce service to clients outside ofthe software industry.  As of June 30,2001, the Company had 92 individual client contracts, plus multiple sitesresulting from single contracts and Market Maker installations under itsE-Business Services Division.

             The Company derives its revenueprimarily from transaction and service fees associated with the e-commerceservices that the Company provides to its clients.  These services include Web commerce hosting, transactionprocessing, digital and physical fulfillment services, fraud screening,customer service and merchandising and analytical marketing services.  The Company acts as the merchant of recordon the majority of the transactions processed and has contractual relationshipswith its clients, primarily software publishers and online retailers, whichobligate the Company to pay to the client a specified percentage of eachsale.  The Company retains itstransaction fee and also charges for various service fees.  The Company also derives revenue from feescharged to use its software, integration, development and consulting servicesprovided to its clients.  This revenueis recognized as services are performed, except for software usage fee andcertain integration and development fees, which are recognized evenly over theterm of the contract.

             The Company has a limited operatinghistory upon which investors may evaluate its business and prospects.  Since inception, the Company has incurredsignificant losses, and as of June 30, 2001, had an accumulated deficit of approximately$95.2 million.  The Company intends toexpend financial and management resources on the development of additionalservices, sales and marketing, technology and operations to supportlarger-scale operations and greater service offerings, particularly withrespect to the E-Business Services division. As a result, the Company expects to incur additional losses andcontinued negative cash flow from operations for at least the nextquarter.  There can be no assurance thatthe Company’s revenue will increase or even continue at their current level orthat the Company will achieve or maintain profitability or generate cash fromoperations in future periods.  TheCompany’s prospects must be considered in light of the risks, expenses anddifficulties frequently encountered by companies in their early stage ofdevelopment, particularly companies in new and rapidly evolving markets such aselectronic commerce.  To address theserisks, the Company must, among other things, maintain existing and develop new relationshipswith software publishers, online retailers and E-Business Services clients,implement and successfully execute its business and marketing strategy,continue to develop and upgrade its technology and transaction-processingsystems, provide superior customer service and order fulfillment, respond tocompetitive developments, and attract, retain and motivate qualifiedpersonnel.  There can be no assurancethat the Company will be successful in addressing such risks, and the failureto 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 itsplanned operations and estimates of future revenue.  Revenue and operating results generally depend on the volume andtiming of orders received, which are difficult to forecast.  The Company may be unable to adjust spendingin a timely manner to compensate for any unexpected revenue shortfall.  Accordingly, any significant shortfall inrevenue would have an immediate adverse effect on the Company’s business,financial condition and results of operations. The Company is also likely to continue to see revenue in it’s Softwareand Digital Commerce Services Division fluctuate on a seasonal basis that istypical for the software publishing market in general.  The Company believes that its fiscal firstand fourth quarters are seasonally stronger than its second and third quartersdue to the timing of demand for tax preparation software and the Christmasselling period.  In addition, it is theCompany’s belief that software publishers avoid new product releases in thesummer months.  In view of the rapidlyevolving nature of the Company’s business and its limited operating history,the Company is unable to accurately forecast its revenue and believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance.

 

RESULTSOF OPERATIONS

             The following table sets forthcertain items from the Company’s condensed consolidated statements ofoperations as a percentage of total revenue for the periods indicated.

|                                                                                              | Three Months Ended                                                            |           | Six Months Ended |           |
|---------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|----------------|------------------|----------------|
|                                                                                              | June 30,                                                                      |           | June 30,         |           |
|                                                                                              |                                                                               |           |                  |           |
|                                                                                              | 2001                                                                          |           | 2000             |           | 2001 |   | 2000 |   |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |
| Revenue                                                                                           | 100.0                                                                         | %              | 100.0            | %              | 100.0 | % | 100.0 | % |
|                                                                                              |                                                                          |           |             |           |   |   |   |   |
| Costs  and expenses (exclusive of depreciation and amortization expense shown  separately below): |                                                                          |      |             |      |   |      |   |      |
|                                                                                              | Direct cost of  services                                                      | 5.0            |             | 4.1            |   | 4.6 |   | 4.2 |   |
|                                                                                              | Network and  infrastructure                                                   | 19.1           |             | 29.5           |   | 20.9 |   | 27.7 |   |
|                                                                                              | Sales and marketing                                                           | 49.6           |             | 105.0          |   | 50.8 |   | 99.4 |   |
|                                                                                              | Product research and  development                                             | 20.9           |             | 66.8           |   | 19.9 |   | 59.9 |   |
|                                                                                              | General and  administrative                                                   | 7.7            |             | 18.4           |   | 8.1 |   | 18.2 |   |
|                                                                                              | Depreciation                                                                  | 9.0            |             | 9.6            |   | 8.8 |   | 9.9 |   |
|                                                                                              | Amortization  of goodwill and other intangibles and acquisition related costs | 29.5           |        | 65.3           |      | 32.5 |      | 72.0 |   |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |
| Total costs and  expenses                                                                         | 140.8                                                                         |           | 298.7            |           | 145.6 |   | 291.3 |   |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |
| Loss from operations                                                                              | (40.8                                                                         | )              | (198.7           | )              | (45.6 | ) | (191.3 | ) |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |
| Interest income                                                                                   | 2.0                                                                           |           | 8.3              |           | 2.3 |   | 9.2 |   |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |
| Net loss                                                                                          | (38.8                                                                         | )%             | (190.4           | )%             | (43.3 | )% | (182.1 | )% |
|                                                                                              |                                                                               |           |                  |           |  |   |  |   |

REVENUE

             Revenue increased to $13.1 millionfor the quarter ended June 30, 2001 from $6.6 million for the quarter endedJune 30, 2000 and increased to $26.1 million for the six months ended June 30,2001, up from $13.5 million for the same period of 2000.  Revenue for the Software and DigitalCommerce Services division increased to $9.5 million for the quarter ended June30, 2001 from $5.5 million for the quarter ended June 30, 2000 and increased to$20.0 million for the six months ended June 30, 2001, up from $11.6 million forthe same period of 2000.  The increasein both the quarter and six-month periods was primarily a result of significantgrowth in the number of the Company’s software publisher and online retailerclients as well as increasing market acceptance of electronic softwaredelivery.  Revenue for the E-BusinessServices division increased to $3.6 million for the quarter ended June 30, 2001from $1.2 million for the quarter ended June 30, 2000 and increased to $6.1million for the six months ended June 30, 2001, up from $1.9 million for thesame period of 2000.  This increaseresulted from the addition of new clients contracted and ongoing fees earned onexisting clients.

             International saleswithin the Software and Digital Commerce Services division representedapproximately 23% and 24% of divisional revenue for the quarters ended June 30,2001 and 2000, respectively, and 22% and 24% of total revenue for the six-monthperiods ended June 30, 2001 and 2000, respectively.  International sales within the E-Business Services divisionrepresented approximately 21% and 12% of divisional revenue for the quarter andsix months ended June 30, 2001.  Therewas no international revenue in the E-Business Services division during 2000.

GROSSPROFIT

             Cost of revenue, which consists ofdirect cost of services and network and infrastructure costs (both shownexclusive of depreciation and amortization expense), increased to $3.1 millionin the quarter ended June 30, 2001 from $2.2 million in the quarter ended June30, 2000 and increased to $6.7 million for the six months ended June 30, 2001,up from $4.3 million for the same period of 2000.  The gross profit margin for the Software and Digital CommerceServices division rose in the quarter ended June 30, 2001 to 77.9% from 68.1%for the quarter ended June 30, 2000 and rose in the six months ended June 30,2001 to 76.0% from 70.6% for the same period of 2000.  The gross profit margin for the E-Business Services divisionincreased in the quarter ended June 30, 2001 to 70.6% from 58.2% for thequarter ended June 30, 2000 and increased in the six months ended June 30, 2001to 69.5% from 52.5% for the same period of 2000.  The increase in margin in both divisions in the current yearquarter and six month periods is due in part to leveraging the fixed costinfrastructure and better margins on service fees for implementing clientcontracts.  The Company believes thatInternet commerce and related services could become more competitive in thefuture.  Accordingly, the Company mayreduce or alter its pricing structure and policies in the future and any suchchange could reduce gross margins.

SALESAND MARKETING

             Sales and marketing expensedecreased to $6.5 million in the quarter ended June 30, 2001 from $7.0 millionin the quarter ended June 30, 2000 and decreased to $13.3 million in the sixmonths ended June 30, 2001, from $13.4 million in the same period of 2000.  Sales and marketing expense for the Softwareand Digital Commerce Services division increased to $3.9 million in the quarterended June 30, 2001 from $3.8 million for the quarter ended June 30, 2000 andincreased to $8.3 million in the six months ended June 30, 2001, from $7.5 millionin the same period of 2000.  The maincomponent of the increase in the current year quarter and six month periods wasan increase in credit card fees, corresponding to the increase in revenue,partially offset by a decrease in advertising and marketing expense.  Sales and marketing expense for theE-Business Services division decreased to $2.6 million in the quarter endedJune 30, 2001 from $3.2 million for the quarter ended June 30, 2000 anddecreased to $5.0 million for the six months ended June 30, 2001, from $5.9million in the same period of 2000. This decrease in the current year quarter and six month periods resultedprimarily from a decrease in advertising and marketing expense, partiallyoffset by an increase in personnel costs. As a percentage of revenue, sales and marketing expense was 49.6% and50.8% in the quarter and six month periods ended June 30, 2001, respectively,compared to 105.0% and 99.4% for the same periods of 2000. The decrease as apercentage of revenue in the current year periods primarily reflects theCompany’s increased revenue volume in 2001 over 2000.  The Company expects that sales and marketing expense willincrease in absolute dollars over time as the Company continues to build itssales and marketing infrastructure and develop marketing programs.

PRODUCTRESEARCH AND DEVELOPMENT

             Product research and developmentexpense decreased to $2.7 million in the quarter ended June 30, 2001 from $4.4million in the quarter ended June 30, 2000 and decreased to $5.2 million in thesix months ended June 30, 2001, compared to $8.1 million in the same period of2000.  Product research and developmentexpense for the Software and Digital Commerce Services division decreased to$1.2 million in the quarter ended June 30, 2001 from $1.6 million for thequarter ended June 30, 2000 and decreased to $2.2 million in the six monthsended June 30, 2001, compared to $3.3 million in the same period of 2000.  Product research and development expense forthe E-Business Services division decreased to $1.5 million in the quarter endedJune 30, 2001 from $2.8 million for the quarter ended June 30, 2000 anddecreased to $3.0 million in the six months ended June 30, 2001, compared to$4.8 million for the same period of 2000. The decrease in product research and development expenses in bothdivisions in the current year quarter and six month periods is primarily due toa significant decrease in consulting fees. As a percentage of revenue, product research and development expense was20.9% and 19.9% in the quarter and six month periods ended June 30, 2001,respectively, compared to 66.8% and 59.9% for the same periods of 2000,primarily reflecting the Company’s increased revenue volume and decreasedconsulting expense.  The Company expectsthat product research and development expense will increase in absolute dollarsover time as the Company invests in projects critical to attaining itsstrategic objectives.

GENERALAND ADMINISTRATIVE

             General and administrative expensedecreased to $1.0 million in the quarter ended June 30, 2001 from $1.2 millionin the quarter ended June 30, 2000 and decreased to $2.1 million in the sixmonths ended June 30, 2001, compared to $2.5 million in the same period of2000.  As a percentage of revenue,general and administrative expense was 7.7% and 8.1% in the quarter and sixmonth periods ended June 30, 2001, respectively, compared to 18.4% and 18.2%for the same periods of 2000, primarily reflecting the Company’s revenuegrowth.  The Company expects general andadministrative expense to increase in absolute dollars in the future,particularly as the Company continues to build infrastructure to support itsgrowth.

AMORTIZATIONOF GOODWILL AND OTHER INTANGIBLES AND ACQUISITION RELATED COSTS

             Amortization of goodwill and otherintangibles and acquisition-related costs decreased in the quarter and sixmonth periods ended June 30, 2001 compared to the same periods of 2000primarily due to higher earn-out payments in the prior year offset by increaseddepreciation and intangible asset amortization in the periods ended June 30,2001.

INTERESTINCOME

             Interest income consists ofearnings on the Company’s cash, cash equivalents and investments.  The decrease from the prior period wasattributable to lower cash and investment balances in 2001.  The Company expects interest income todecrease in the future as cash is used to fund operations and is used forinvestments in infrastructure.

INCOMETAXES

             The Company paid no income taxes inany reported period.  The Company hasincurred a net loss for each period since inception.  As of June 30, 2001, the Company had approximately $81.0 millionof net operating loss carryforwards for federal income tax purposes, whichexpire beginning in 2009.  Due to theuncertainty of future profitability, a valuation allowance equal to thedeferred tax asset has been recorded. Certain changes in ownership that resulted from the sales of Common andPreferred Stock will limit the future annual realization of the tax net operatingloss carryforwards to a specified percentage under Section 382 of the InternalRevenue Code.

LIQUIDITYAND CAPITAL RESOURCES

             During the six months ended June30, 2001, the Company’s operations used $600,000 of cash compared to a use of$12.1 million in the same period of the prior year.  The significant improvement is mainly due to the reduction in thenet loss in 2001 compared to 2000.  TheCompany generated cash through the net sales of investments in the six monthsended June 30, 2001, totaling $9.0 million, compared to net sales of $24.4million in the same period of the prior year. Investments in equipment and other businesses totaled $3.4 million inthe current year six-month period, compared to $6.6 million in the same periodof the prior year.

             As of June 30, 2001, the Companyhad $22.1 million of cash and cash equivalents and $6.0 million of short-terminvestments.  The Company’s principalcommitments consisted of obligations outstanding under operating leases.  Although the Company has no materialcommitments for capital expenditures, it anticipates continued capitalexpenditures consistent with its anticipated growth in operations,infrastructure and personnel.  TheCompany anticipates that it will expend approximately $15.0 million over thenext 18 months on capital expenditures based on the Company’s currentanticipated growth rate.  The Companyfurther anticipates that it will expend approximately $15.0 million over thenext 18 months on product development based on the Company’s currentanticipated growth rate in operations.  TheCompany may also use cash to acquire or license technology, products orbusinesses related to the Company’s current business.  The Company also anticipates that it will experience growth inits operating expenses for the foreseeable future and that its operatingexpenses will be a material use of the Company’s cash resources.

             In April, the Company initiated ashare repurchase program of up to $5.0 million of its outstanding shares ofCommon Stock.  Repurchases will be atthe Company’s discretion based on ongoing assessments of the capital needs ofthe business and the market price of its shares.  No time limit was set for completion of the repurchaseprogram.  During the quarter ended June30, 2001, the Company expended approximately $225,000 to repurchase its shares.

             The Company believes that existingsources of liquidity and the results of its operations will provide adequatecash to fund its operations for at least the next 18 months, although theCompany may seek to raise additional capital during that period.

RECENTACCOUNTING PRONOUNCEMENTS

             On June 29, 2001, the FinancialAccounting Standards Board approved for issuance Statement of FinancialAccounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwilland Intangible Assets. Major provisions of these Statements are as follows: allbusiness combinations initiated after June 30, 2001 must use the purchasemethod of accounting; the pooling of interest method of accounting isprohibited except for transactions initiated before July 1, 2001; intangibleassets acquired in a business combination must be recorded separately fromgoodwill if they arise from contractual or other legal rights or are separablefrom the acquired entity and can be sold, transferred, licensed, rented orexchanged, either individually or as part of a related contract, asset orliability; goodwill and intangible assets with indefinite lives are notamortized but tested for impairment annually, except in certain circumstances,and whenever there is an impairment indicator; all acquired goodwill must beassigned to reporting units for purposes of impairment testing and segmentreporting; effective January 1, 2002, goodwill will no longer be subject toamortization. Management is currently reviewing the provisions of theseStatements and their impact on the Company's results of operations.

ITEM 3.            QUALITATIVE AND QUANTITATIVEDISCLOSURE ABOUT MARKET RISK

             The Company does not enter intofinancial instruments for trading or speculative purposes and does notcurrently utilize derivative financial instruments.  The operations of the Company are conducted primarily in theUnited States and as such are not subject to material foreign currency exchangerate risk.  The Company has no long-termdebt.

PART II.           OTHERINFORMATION

ITEM 1.            LEGALPROCEEDINGS

             A complaint captioned Whalen v.Digital River, Inc. et al. was filed in the United States District Court forthe Southern District of New York on August 8, 2001, against the Company,certain of its officers and directors, and certain underwriters of its initialpublic offering.  The action purports tobring suit on behalf of all purchasers of the Company’s common stock betweenAugust 11, 1998 and December 6, 2000. The plaintiffs allege that the Company’s prospectus, incorporated in theRegistration Statement on Form S-1 filed with the Securities and ExchangeCommission in connection with the Company’s initial public offering, wasmaterially false and misleading because it failed to disclose that certain ofthe underwriters (i) received excessive commissions from certain investors inexchange for which they allegedly allocated to those investors materialportions of the stock offering; and (ii) agreed to allocate shares to certaininvestors in exchange for which the investors agreed to purchase additionalshares in the aftermarket at predetermined prices.  The complaint seeks unspecified damages including, but notlimited to, damages suffered as a result of defendants’ alleged violation ofthe federal securities laws, and recission or recissionary damages to membersof the purported class who no longer hold stock in the Company.  The Company believes that it has meritoriousdefenses to these allegations and intends to vigorously defend against them.

ITEM4.            SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

             The Company’s annual meeting ofstockholders was held on May 3, 2001 (the “Annual Meeting”).  The following matters were considered andvoted upon at the Annual Meeting:

             The first matter related to theelection of three director nominees, Joel A. Ronning, Perry W. Steiner, and J.Paul Thorin as directors to serve until the 2004 annual meeting ofstockholders.  The votes cast for andagainst such nominees were as follows:

|   | NAME              | FOR        |   | WITHHELD |   |
|--------|-------------------|------------|--------|----------|--------|
|        |                   |       |        |     |
|   | Joel  A Ronning   | 15,710,928 |   | 504,432  |   |
|   | Perry  W. Steiner | 15,733,486 |   | 481,874  |   |
|   | J.  Paul Thorin   | 15,726,537 |   | 488,823  |   |

 

             Thesecond matter related to the approval of an amendment to the Company’s 1998Stock Option Plan (the “Option Plan”), increasing the number of shares availableunder the Option Plan from 3,283,333 shares to 3,983,333 shares.  13,655,483 votes were cast for approval and2,484,243 votes were cast against approval. There were 75,634 abstentions and no broker non-votes.

             Thethird matter related to the approval of an amendment to the Company’s 2000Employee Stock Purchase Plan (the “Purchase Plan”), increasing the number ofshares available under the Purchase Plan from 200,000 shares to 600,000shares.  15,577,214 votes were cast forapproval and 578,210 votes were cast against approval.  There were 59,935 abstentions and no brokernon-votes.

             The fourth matter related to theratification of the appointment of Arthur Andersen LLP as independent auditorsof the Company for its fiscal year ending December 31, 2001.  16,115,328 votes were cast for approval and49,758 votes were cast against approval. There were 50,274 abstentions and no broker non-votes.

ITEM 6.            EXHIBITSAND REPORTS ON FORM 8-K

(A)       EXHIBITS

| EXHIBIT NUMBER                                                               |   | DESCRIPTION OF  DOCUMENTS                                                                                                                                                    |
|------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                              |   |                                                                                                                                                                              |
| 3.1(1)                                                                       |   | Amended and Restated  Certificate of Incorporation                                                                                                                           |
| 3.2(1)                                                                       |   | Bylaws of the  Registrant                                                                                                                                                    |
| 4.1(1)                                                                       |   | Specimen Common Stock  Certificate                                                                                                                                           |
| 11.1(2)                                                                      |   | Statement of  Computation of Per Share Earnings                                                                                                                              |
|                                                                         |   |                                                                                                                                                                         |
|              (1) |   | 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. |
|                                                                         |   |                                                                                                                                                                         |
|              (2) |   | See Note 4 to  Condensed Consolidated Financial Statements.                                                                                                                  |
|                                                                         |   |                                                                                                                                                                         |

(B)        REPORTS ON FORM 8-K

             The Company filed one currentreport on Form 8-K/A during the quarter ended June 30, 2001, on June 4, 2001,providing certain financial statements of ConnectInc.com, Co., a Delawarecorporation (“ConnectInc”) and a wholly-owned subsidiary of Calico Commerce,Inc., a Delaware corporation, from whom the Company acquired certain assets onMarch 20, 2001.  The Company providedthe audited financial statements of ConnectInc as of December 31, 2000 and 1999and for the period from February 1, 2000 to December 31, 2000, the period fromJanuary 1, 2000 to January 31, 2000, and for the year ended December 31,1999.  The Company also providedunaudited pro forma condensed consolidated financial statements as of and forthe year ended December 31, 2000.

SIGNATURES

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

| Date:  August 14, 2001 | DIGITAL RIVER, INC. |
|-----------------------------|---------------------|
|                        |                |
|                        | By:                 | /s/ Robert E. Strawman |
|                        |                |  |
|                        |                | Robert E. Strawman |
|                        |                | Chief Financial  Officer |
|                        |                | (Principal Financial  and Accounting Officer) |

 

EXHIBIT INDEX

| EXHIBIT NUMBER                                                               |   | DESCRIPTION OF  DOCUMENTS                                                                                                                                                    |
|------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                              |   |                                                                                                                                                                              |
| 3.1(1)                                                                       |   | Amended and Restated  Certificate of Incorporation                                                                                                                           |
| 3.2(1)                                                                       |   | Bylaws of the  Registrant                                                                                                                                                    |
| 4.1(1)                                                                       |   | Specimen Common Stock  Certificate                                                                                                                                           |
| 11.1(2)                                                                      |   | Statement of  Computation of Per Share Earnings                                                                                                                              |
|                                                                         |   |                                                                                                                                                                         |
|              (1) |   | 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. |
|                                                                         |   |                                                                                                                                                                         |
|              (2) |   | See Note 4 to Condensed  Consolidated Financial Statements.                                                                                                                  |