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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934     
|           |  | For the fiscal year ended December 31, 2005.                                                 
|           |  | OR                                                                                           
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 000-24643


DIGITAL RIVER, INC.


(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                   
|-------------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE(State or other jurisdiction of
    Incorporation or organization) |  | 41-1901640(I.R.S. Employer
    Identification No.)

9625 WEST 76TH STREET


EDEN PRAIRIE, MINNESOTA 55344


(Address of principal executive offices)


(952) 253-1234


(Registrants telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock $0.01 par value


þ o


o þ


þ o


S-K 10-K 10-K. o


12b-2)


þ o o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K










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TABLE OF CONTENTS




|                                                         |  |                                                                                                                       |  |  |    | 
|-------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                                              |  |  | 3  | 
|Item 1A.                                                 |  | Risk Factors                                                                                                          |  |  | 13 | 
|Item 1B.                                                 |  | Unresolved Staff Comments                                                                                             |  |  | 25 | 
|Item 2.                                                  |  | Properties                                                                                                            |  |  | 25 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                                     |  |  | 26 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of Security
    Holders                                                               |  |  | 26 | 
|                                                        
|PART II                                                 
|Item 5.                                                  |  | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuer Purchases of Equity
    Securities |  |  | 26 | 
|Item 6.                                                  |  | Selected Financial Data                                                                                               |  |  | 28 | 
|Item 7.                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                             |  |  | 29 | 
|Item 7A.                                                 |  | Qualitative and Quantitative Disclosures
    about Market Risk                                                        |  |  | 38 | 
|Item 8.                                                  |  | Financial Statements and Supplementary
    Data                                                                       |  |  | 40 | 
|Item 9.                                                  |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                              |  |  | 40 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                                               |  |  | 40 | 
|Item 9B.                                                 |  | Other Information                                                                                                     |  |  | 44 | 
|                                                        
|PART III                                                
|Item 10.                                                 |  | Directors and Executive Officers of the
    Registrant                                                                |  |  | 44 | 
|Item 11.                                                 |  | Executive Compensation                                                                                                |  |  | 44 | 
|Item 12.                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                    |  |  | 44 | 
|Item 13.                                                 |  | Certain Relationships and Related
    Transactions                                                                    |  |  | 44 | 
|Item 14.                                                 |  | Principal Accountant Fees and Services                                                                                |  |  | 44 | 
|                                                        
|PART IV                                                 
|Item 15.                                                 |  | Exhibits and Financial Statement
    Schedules                                                                        |  |  | 45 | 
|Computation of Ratio of Earnings to Fixed Charges       
|Subsidiaries                                            
|Consent of Independent Registered Public Accounting Firm
|Certification of CEO Pursuant to Section 302            
|Certification of CFO Pursuant to Section 302            
|Certification of CEO and CFO Pursuant to Section 906    



2



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PART I







|        |          
|------- | ---------
|ITEM 1. | BUSINESS.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995


10-K, 10-K. 10-K.


Overview


e-commerce e-mail


e-commerce


e-mail




10-K, 10-Q 8-K,


3



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Industry Background


Growth of the Internet and
E-Commerce. e-commerce e-commerce:


Opportunities for Outsourced
E-Commerce. e-commerce e-commerce


e-commerce e-commerce


Shift from Physical to Electronic Delivery.


The Digital River Solution


e-commerce e-commerce e-commerce e-commerce e-commerce e-mail


4



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e-commerce




| |                    
| | -------------------
| | Benefits to Clients



| |                                         
| | ----------------------------------------
| | Reduced Total Cost of Ownership and Risk

e-commerce e-commerce e-commerce e-commerce e-commerce




| |               
| | --------------
| | Revenue Growth





tm




| |                 
| | ----------------
| | Deployment Speed

e-commerce e-commerce




| |                         
| | ------------------------
| | Focus on Core Competency

e-commerce e-commerce e-commerce


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| |                   
| | ------------------
| | Benefits to Buyers

e-commerce


Strategy


e-commerce


Attract New Clients and Expand Relationships with Existing
Clients.


e-commerce e-commerce


Expand the Digital River oneNetwork Marketplace. e-commerce


e-commerce


Expand International Sales.


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Provide Clients with Strategic Marketing Services. e-mail return-on


Maintain Technology Leadership. e-commerce return-on


Continue to Seek Strategic Acquisitions.


Services




Store Development and Hosting. e-commerce e-mail e-mail


e-commerce back-up


Store Merchandising.


7



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Order Management and Fraud Screening. e-commerce




Digital and Physical Fulfillment Services. e-commerce


e-commerce


Customer Service. e-mail


Advanced Reporting and Analytics.


8



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Strategic Marketing Services. e-mail


Clients


e-commerce


Sales and Marketing


e-commerce return-on


e-marketing e-mail e-mail


e-commerce


9



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Technology


e-commerce e-commerce


Architecture. e-commerce




E-Commerce System Maintenance. e-commerce e-commerce e-commerce e-commerce e-commerce


Security. e-commerce


Data Center Operations.




10



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e-commerce


Product Research and Development




e-commerce,


Competition


e-commerce e-commerce e-commerce




| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, asknet Inc.
    and eSellerate, 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.

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Intellectual Property




Employees




Executive Officers




|                   |  |     |    |  |          |  |                         |  |  | 
|------------------ |  | --- | -- |  | -------- |  | ----------------------- |  |  | 
|Name               |  | Age |    |  | Position |  |                         | 
|                   |  |     |    |  |          |  |                         | 
|Joel A. Ronning    |  |     | 49 |  |          |  | Chief Executive Officer |  |  | 
|Thomas M. Donnelly |  |     | 42 |  |          |  | Chief Financial Officer |  |  | 





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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 annual 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.


We have a limited profitable operating history.


e-commerce


A loss of any client that accounts for a large portion of our
revenue would cause our revenue to decline.




Failure to properly manage and sustain our expansion efforts
could strain our management and other resources.




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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.




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e-commerce,


We could be liable for fraudulent, improper or illegal uses
of our platforms.


e-commerce e-commerce


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.




15



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Implementing our acquisition strategy could result in
dilution and operating difficulties leading to a decline in
revenue and operating profit.


e-commerce


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.




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.


quarter-to year-to


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| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                               



quarter-to


Security breaches could hinder our ability to securely
transmit confidential information.


e-commerce end-user




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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.


time-to


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.




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


e-commerce e-commerce


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| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, asknet Inc.
    and eSellerate, 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.

e-commerce e-commerce


e-commerce


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;

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| |   |                                  
| | - | ---------------------------------
| |  | Export compliance;               
|
| |  | Pricing and taxation;            
|
| |  | Fraud;                           
|
| |  | Advertising;                     
|
| |  | Intellectual property rights;    
|
| |  | Information security; and        
|
| |  | Quality of products and services.



Failure to develop our technology to accommodate increased
traffic could reduce demand for our services and impair the
growth of our business.




e-commerce e-commerce


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System failures could reduce the attractiveness of our
service offerings.


time-to






| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                        



We may become liable to clients who are dissatisfied with our
services.


e-commerce


We depend on key personnel.






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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.




The listing of our network addresses on anti-SPAM lists could
harm our ability to service our clients and deliver goods over
the Internet.


time-to


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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.








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We are exposed to foreign currency exchange risk.




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.




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;

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| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.









|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |            
|------- | -----------
|ITEM 2. | PROPERTIES.



|                               |  |                                                        |  |                   |         |  |                   |  |                   | 
|------------------------------ |  | ------------------------------------------------------ |  | ----------------- | ------- |  | ----------------- |  | ----------------- | 
|Description of Use             |  | Primary Locations                                      |  | Square Footage(1) |         |  | Lease Expirations | 
|                               |  |                                                        |  |                   |         |  |                   | 
|Corporate Office Facilities    |  | Minnesota                                              |  |                   | 133,000 |  |                   |  | From 2006 to 2008 | 
|Other U.S. Office Facilities   |  | California, Colorado, Illinois, Ohio, Utah, Washington |  |                   | 40,100  |  |                   |  | From 2006 to 2010 | 
|Non-U.S. Office Facilities     |  | Germany, Ireland, Japan, Korea, Taiwan, United Kingdom |  |                   | 47,600  |  |                   |  | From 2006 to 2010 | 
|Off Site U.S. Data Centers     |  | California, Minnesota                                  |  |                   | 700     |  |                   |  | From 2006 to 2007 | 
|Off Site non U.S. Data Centers |  | Germany, Ireland, United Kindom                        |  |                   | 200     |  |                   |  | From 2006 to 2008 | 






|    |                           
|--- | --------------------------
|(1) | Includes sub-leased space.



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|        |                   
|------- | ------------------
|ITEM 3. | LEGAL PROCEEDINGS.



time-to







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






PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES.

Price Range of Common Stock


over-the


|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |       | 
|First Quarter  |  | $    | 27.11 |  |     | $ | 19.38 | 
|Second Quarter |  | $    | 34.83 |  |     | $ | 22.44 | 
|Third Quarter  |  | $    | 33.55 |  |     | $ | 22.75 | 
|Fourth Quarter |  | $    | 44.51 |  |     | $ | 28.83 | 
|              
|2005           |  |      |       |  |     |   |       | 
|First Quarter  |  | $    | 41.82 |  |     | $ | 28.16 | 
|Second Quarter |  | $    | 33.73 |  |     | $ | 22.43 | 
|Third Quarter  |  | $    | 41.75 |  |     | $ | 31.30 | 
|Fourth Quarter |  | $    | 39.39 |  |     | $ | 23.64 | 



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Dividend Policy




Issuer Purchases of Equity Securities






|                               |  |                  |         |                  |                |                 |                     |                    |                 |                 |                     |  |  |   |      | 
|------------------------------ |  | ---------------- | ------- | ---------------- | -------------- | --------------- | ------------------- | ------------------ | --------------- | --------------- | ------------------- |  |  | - | ---- | 
|                               |  |                  |         |                  |                |                 |                     | Approximate Dollar |                
|                               |  |                  |         |                  |                | Total Number of |                     |                    | Value of Shares |                
|                               |  |                  |         | Weighted Average |                |                 | Shares Purchased as |                    |                 | That May yet be |                    
|                               |  | Total Number of  |         |                  | Price Paid Per |                 |                     | Part of Publicly   |                 |                 | Purchased Under the | 
|Period                         |  | Shares Purchased |         |                  | Share          |                 |                     | Announced Plan     |                 |                 | Plan (In millions)  | 
|                               |  |                  |         |                  |                |                 |                     |                    |                 |                 |                     | 
|October 1  October 31, 2005   |  |                  |        |                  |                |                 |                    |                    |                 |                 |                    |  |  | $ | 46.5 | 
|November 1  November 30, 2005 |  |                  |        |                  |                |                 |                    |                    |                 |                 |                    |  |  | $ | 46.5 | 
|December 1  December 31, 2005 |  |                  | 347,371 |                  |                | $               | 28.62               |                    |                 |                 | 347,371             |  |  | $ | 36.6 | 
|                               |  |                  |         |                  |                |                 |                     |                    |                 |                 |                     | 
|Total                          |  |                  | 347,371 |                  |                |                 |                     |                    |                 |                 | 347,371             |  |  |   |      | 
|                               |  |                  |         |                  |                |                 |                     |                    |                 |                 |                     | 

Securities Authorized for Issuance under Equity Compensation
Plans




27



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|        |                         
|------- | ------------------------
|ITEM 6. | SELECTED FINANCIAL DATA.

10-K.


|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |         |        | 
|-------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ |  | ---- | ------ | ------ |  | - | ------- | ------ | 
|                                                                                                                           |                                                    | Year Ended December 31,               |        
|                                                                                                                           |                                                    |                                       |        
|                                                                                                                           |                                                    | 2005                                  |         |         | 2004 |   |         | 2003    |  |   | 2002    |        |  | 2001 |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                                                                                           |                                                    | (In thousands, except per share data) |        
|Statement of Operations Data:                                                                                              |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |         |       
|Revenue                                                                                                                    |                                                    | $                                     | 220,408 |         |      | $ | 154,130 |         |  | $ | 101,201 |        |  | $    | 77,783 |        |  | $ | 57,825  |       
|Costs and expenses (exclusive of depreciation and amortization
    expense shown separately below) Direct cost of services |                                                    |                                       | 5,013   |         |      |   | 5,013   |         |  |   | 3,585   |        |  |      | 2,357  |        |  |   | 2,710   |       
|                                                                                                                           | Network and infrastructure                         |                                       |         | 19,814  |      |   |         | 15,143  |  |   |         | 12,253 |  |      |        | 11,405 |  |   |         | 10,200 | 
|                                                                                                                           | Sales and marketing                                |                                       |         | 69,256  |      |   |         | 51,749  |  |   |         | 37,220 |  |      |        | 32,437 |  |   |         | 27,489 | 
|                                                                                                                           | Product research and development                   |                                       |         | 20,575  |      |   |         | 14,097  |  |   |         | 9,962  |  |      |        | 11,454 |  |   |         | 11,192 | 
|                                                                                                                           | General and administrative                         |                                       |         | 21,474  |      |   |         | 16,894  |  |   |         | 9,228  |  |      |        | 9,299  |  |   |         | 4,701  | 
|                                                                                                                           | Depreciation and amortization                      |                                       |         | 8,833   |      |   |         | 8,203   |  |   |         | 7,275  |  |      |        | 6,009  |  |   |         | 4,627  | 
|                                                                                                                           | Amortization of acquisition related intangibles(a) |                                       |         | 8,730   |      |   |         | 8,269   |  |   |         | 5,380  |  |      |        | 5,738  |  |   |         | 17,009 | 
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                                                                                           | Total costs and expenses                           |                                       |         | 153,695 |      |   |         | 119,368 |  |   |         | 84,903 |  |      |        | 78,699 |  |   |         | 77,928 | 
|Income (loss) from operations                                                                                              |                                                    |                                       | 66,713  |         |      |   | 34,762  |         |  |   | 16,298  |        |  |      | (916   | )      |  |   | (20,103 | )     
|Other income, net                                                                                                          |                                                    |                                       | 4,967   |         |      |   | 1,641   |         |  |   | 838     |        |  |      | 406    |        |  |   | 881     |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|Income (loss) before income tax expense                                                                                    |                                                    |                                       | 71,680  |         |      |   | 36,403  |         |  |   | 17,136  |        |  |      | (510   | )      |  |   | (19,222 | )     
|Income tax expense                                                                                                         |                                                    |                                       | 17,337  |         |      |   | 1,079   |         |  |   |        |        |  |      |       |        |  |   |        |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|Net income (loss)                                                                                                          |                                                    | $                                     | 54,343  |         |      | $ | 35,324  |         |  | $ | 17,136  |        |  | $    | (510   | )      |  | $ | (19,222 | )     
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  | $ |         |       
|Net income (loss) per share  basic                                                                                        |                                                    | $                                     | 1.57    |         |      |   | 1.09    |         |  | $ | 0.58    |        |  | $    | (0.02  | )      |  | $ | (0.79   | )     
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  | $ |         |       
|Net income (loss) per share  diluted                                                                                      |                                                    | $                                     | 1.36    |         |      |   | 0.96    |         |  | $ | 0.52    |        |  | $    | (0.02  | )      |  | $ | (0.79   | )     
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|Shares used in per-share calculation  basic                                                                               |                                                    |                                       | 34,536  |         |      |   | 32,328  |         |  |   | 29,398  |        |  |      | 26,791 |        |  |   | 24,285  |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       
|Shares used in per-share calculation  diluted                                                                             |                                                    |                                       | 41,448  |         |      |   | 38,532  |         |  |   | 33,051  |        |  |      | 26,791 |        |  |   | 24,285  |       
|                                                                                                                           |                                                    |                                       |         |         |      |   |         |         |  |   |         |        |  |      |       

|                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |          |  
|-------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------- | - |  | - | -------- | -
|                           |  | December 31,   |        
|                           |  |                |        
|                           |  | 2005           |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |         
|                           |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         
|                           |  | (In thousands) |        
|Balance Sheet Data:        |  |                |         |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |          |  
|Cash and cash equivalents  |  | $              | 131,770 |   |      | $ | 127,734 |      |  | $ | 72,885  |   |  | $    | 40,801   |   |  | $ | 21,677   |  
|Short-term investments     |  |                | 220,569 |   |      |   | 164,402 |      |  |   | 59,037  |   |  |      |         |   |  |   | 9,978    |  
|Working capital            |  |                | 244,238 |   |      |   | 198,747 |      |  |   | 85,011  |   |  |      | 14,498   |   |  |   | 14,024   |  
|Total assets               |  |                | 669,140 |   |      |   | 504,521 |      |  |   | 189,658 |   |  |      | 96,534   |   |  |   | 78,780   |  
|Long-term obligations      |  |                | 195,022 |   |      |   | 195,000 |      |  |   |        |   |  |      |         |   |  |   |         |  
|Accumulated deficit        |  |                | (6,324  | ) |      |   | (51,164 | )    |  |   | (86,488 | ) |  |      | (103,624 | ) |  |   | (103,114 | )
|Total stockholders equity |  | $              | 305,142 |   |      | $ | 192,769 |      |  | $ | 131,852 |   |  | $    | 57,186   |   |  | $ | 50,422   |  






|    |  |                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2002, upon adoption of SFAS No. 142, Goodwill
    and Other Intangible Assets, we discontinued the
    amortization of goodwill. In 2001, prior to the adoption of
    SFAS No. 142, we amortized $10.8 million of
    goodwill.

28



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATION.

The discussion in this Annual 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 elsewhere in this Annual 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


e-commerce e-mail




| |                                           
| | ------------------------------------------
| | Acquisitions and Comparability of Results.



Critical Accounting Policies




Revenue Recognition. (


e-commerce


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Allowance for Doubtful Accounts.


Credit Card Chargeback Reserve.


Goodwill, Intangibles and Other Long-Lived Assets.


Income Taxes and Deferred Taxes. paid-in


30



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step-up


Results of Operations




|                                 |                                           |      |       |      |      |  |       |      |  |  |       |      | 
|-------------------------------- | ----------------------------------------- | ---- | ----- | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | 
|                                 |                                           | 2005 |       |      | 2004 |  |       | 2003 | 
|                                 |                                           |      |       |      |      |  |       |      | 
|Revenue                          |                                           |      | 100.0 | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|Costs and expenses:              |                                           |      |       |      |      |  |       |      |  |  |       |     
|                                 | Direct cost of services                   |      |       | 2.3  |      |  |       | 3.3  |  |  |       | 3.6  | 
|                                 | Network and infrastructure                |      |       | 9.0  |      |  |       | 9.8  |  |  |       | 12.1 | 
|                                 | Sales and marketing                       |      |       | 31.4 |      |  |       | 33.6 |  |  |       | 36.8 | 
|                                 | Product research and development          |      |       | 9.3  |      |  |       | 9.1  |  |  |       | 9.8  | 
|                                 | General and administrative                |      |       | 9.7  |      |  |       | 11.0 |  |  |       | 9.1  | 
|                                 | Depreciation and amortization             |      |       | 4.0  |      |  |       | 5.3  |  |  |       | 7.2  | 
|                                 | Amortization of acquisition-related costs |      |       | 4.0  |      |  |       | 5.4  |  |  |       | 5.3  | 
|                                 |                                           |      |       |      |      |  |       |      | 
|Total costs and expenses         |                                           |      | 69.7  |      |      |  | 77.5  |      |  |  | 83.9  |     
|                                 |                                           |      |       |      |      |  |       |      | 
|Income from operations           |                                           |      | 30.3  |      |      |  | 22.5  |      |  |  | 16.1  |     
|Other income, net                |                                           |      | 2.2   |      |      |  | 1.1   |      |  |  | 0.8   |     
|                                 |                                           |      |       |      |      |  |       |      | 
|Income before income tax expense |                                           |      | 32.5  |      |      |  | 23.6  |      |  |  | 16.9  |     
|Income tax expense               |                                           |      | 7.8   |      |      |  | 0.7   |      |  |  |      |     
|                                 |                                           |      |       |      |      |  |       |      | 
|Net income                       |                                           |      | 24.7  | %    |      |  | 22.9  | %    |  |  | 16.9  | %   
|                                 |                                           |      |       |      |      |  |       |      | 

Revenue.


31



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e-commerce


Direct Cost of Services. back-up




Network and Infrastructure.




Sales and Marketing.


32



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Product Research and Development. e-marketing


e-marketing




General and Administrative.




33



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Depreciation and Amortization.


Amortization of Acquisition Related Intangibles.


Income from Operations.


Other Income, Net.


Income Taxes.






34



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Comprehensive Income.




Liquidity and Capital Resources






e-commerce


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Liquidity and Capital Resource Requirements




Contractual Obligations




|                            |  |                       |         |  |      |   |          |           |  |   |           |  |  |            |       |  |  |   |         | 
|--------------------------- |  | --------------------- | ------- |  | ---- | - | -------- | --------- |  | - | --------- |  |  | ---------- | ----- |  |  | - | ------- | 
|                            |  | Payment Due by Period |        
|                            |  |                       |        
|                            |  | Total Amount          |         |  |      |   | 2011 and |          
|Contractual Obligations     |  | Committed             |         |  | 2006 |   |          | 2007-2008 |  |   | 2009-2010 |  |  | Thereafter |      
|                            |  |                       |         |  |      |   |          |           |  |   |           |  |  |            |      
|                            |  | (In thousands)        |        
|Operating Lease Obligations |  | $                     | 7,761   |  |      | $ | 2,921    |           |  | $ | 3,999     |  |  | $          | 841   |  |  | $ | 0       | 
|Convertible Senior Notes    |  | $                     | 238,875 |  |      | $ | 2,438    |           |  | $ | 4,875     |  |  | $          | 4,875 |  |  | $ | 226,687 | 
|Total                       |  | $                     | 246,636 |  |      | $ | 5,359    |           |  | $ | 8,874     |  |  | $          | 5,716 |  |  | $ | 226,687 | 



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2006 Outlook




New Accounting Standards






03-01,


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Off Balance Sheet Arrangements









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
    RISK.

Interest Rate Risk




Foreign Currency Risk






| |                     
| | --------------------
| | Transaction Exposure



38



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|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |        |  |  |   |       |  |  |   |         | 
|-------------------------------- |  | ---------------------------- | ------- |  | ---------------------------- | - | ------ | ---------------------------- |  | -------- | -------- |  | -------- | --------- | ------- |  | -------- | -------- | ----- | -------- | -------- | - | --------- |  |  | -------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                 |  | Year Ended December 31, 2005 |         |  | Year Ended December 31, 2004 |   |        | Year Ended December 31, 2003 | 
|                                 |  |                              |         |  |                              |   |        |                              | 
|                                 |  | At Prior                     |         |  | Exchange                     |   |        |                              |  | At Prior |          |  | Exchange |           |         |  |          | At Prior |       |          | Exchange |   |           | 
|                                 |  | Year                         |         |  | Rate                         |   |        | As                           |  |          | Year     |  |          | Rate      |         |  | As       |          |       | Year     |          |   | Rate      |  |  | As       |       
|                                 |  | Rates(1)                     |         |  | Effect(2)                    |   |        | Reported                     |  |          | Rates(1) |  |          | Effect(2) |         |  | Reported |          |       | Rates(1) |          |   | Effect(2) |  |  | Reported |       
|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |       
|Revenue                          |  | $                            | 220,625 |  |                              | $ | (217   | )                            |  | $        | 220,408  |  |          | $         | 150,182 |  |          | $        | 3,948 |          |          | $ | 154,130   |  |  | $        | 97,872 |  |  | $ | 3,329 |  |  | $ | 101,201 | 
|Costs and expenses               |  |                              | 153,688 |  |                              |   | 7      |                              |  |          | 153,695  |  |          |           | 117,736 |  |          |          | 1,632 |          |          |   | 119,368   |  |  |          | 84,726 |  |  |   | 177   |  |  |   | 84,903  | 
|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |       
|Income from operations           |  |                              | 66,937  |  |                              |   | (224   | )                            |  |          | 66,713   |  |          |           | 32,446  |  |          |          | 2,316 |          |          |   | 34,762    |  |  |          | 13,146 |  |  |   | 3,152 |  |  |   | 16,298  | 
|Other income, net                |  |                              | 7,210   |  |                              |   | (2,243 | )                            |  |          | 4,967    |  |          |           | 1,611   |  |          |          | 30    |          |          |   | 1,641     |  |  |          | 707    |  |  |   | 131   |  |  |   | 838     | 
|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |       
|Income before income tax expense |  |                              | 74,147  |  |                              |   | (2,467 | )                            |  |          | 71,680   |  |          |           | 34,057  |  |          |          | 2,346 |          |          |   | 36,403    |  |  |          | 13,853 |  |  |   | 3,283 |  |  |   | 17,136  | 
|Income tax expense               |  |                              | 17,337  |  |                              |   |       |                              |  |          | 17,337   |  |          |           | 1,079   |  |          |          |      |          |          |   | 1,079     |  |  |          |       |  |  |   |      |  |  |   |        | 
|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |       
|Net income                       |  | $                            | 56,810  |  |                              | $ | (2,467 | )                            |  | $        | 54,343   |  |          | $         | 32,978  |  |          | $        | 2,346 |          |          | $ | 35,324    |  |  | $        | 13,853 |  |  | $ | 3,283 |  |  | $ | 17,136  | 
|                                 |  |                              |         |  |                              |   |        |                              |  |          |          |  |          |           |         |  |          |          |       |          |          |   |           |  |  |          |       






|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the outcome that would have resulted had exchange
    rates in the current period been the same as those in effect in
    the comparable prior-year period for operating results.
|   
|(2) | Represents the increase (decrease) in reported amounts resulting
    from changes in exchange rates from those in effect in the
    comparable prior-year period for operating results.     



| |                     
| | --------------------
| | Translation Exposure



39



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|        |                                             
|------- | --------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



QUARTERLY FINANCIAL DATA (UNAUDITED)


|                                  |  |                                       |        |  |         |   |        |              |  |   |             |  |  |   |        | 
|--------------------------------- |  | ------------------------------------- | ------ |  | ------- | - | ------ | ------------ |  | - | ----------- |  |  | - | ------ | 
|                                  |  | Quarter Ended                         |       
|                                  |  |                                       |       
|                                  |  | March 31                              |        |  | June 30 |   |        | September 30 |  |   | December 31 | 
|                                  |  |                                       |        |  |         |   |        |              |  |   |             | 
|                                  |  | (In thousands, except per share data) |       
|2005                              |  |                                       |        |  |         |   |        |              |  |   |             |  |  |   |        | 
|Revenue                           |  | $                                     | 54,529 |  |         | $ | 51,143 |              |  | $ | 53,179      |  |  | $ | 61,557 | 
|Income from operations(a)         |  |                                       | 17,782 |  |         |   | 14,565 |              |  |   | 15,532      |  |  |   | 18,834 | 
|Net income                        |  |                                       | 14,037 |  |         |   | 10,226 |              |  |   | 12,358      |  |  |   | 17,722 | 
|Net income per share  basic      |  | $                                     | 0.41   |  |         | $ | 0.30   |              |  | $ | 0.35        |  |  | $ | 0.50   | 
|Net income per share  diluted(b) |  | $                                     | 0.35   |  |         | $ | 0.26   |              |  | $ | 0.31        |  |  | $ | 0.44   | 

|                                  |  |                                       |        |  |         |   |        |              |  |   |             |  |  |   |        | 
|--------------------------------- |  | ------------------------------------- | ------ |  | ------- | - | ------ | ------------ |  | - | ----------- |  |  | - | ------ | 
|                                  |  | Quarter Ended                         |       
|                                  |  |                                       |       
|                                  |  | March 31                              |        |  | June 30 |   |        | September 30 |  |   | December 31 | 
|                                  |  |                                       |        |  |         |   |        |              |  |   |             | 
|                                  |  | (In thousands, except per share data) |       
|2004                              |  |                                       |        |  |         |   |        |              |  |   |             |  |  |   |        | 
|Revenue                           |  | $                                     | 31,855 |  |         | $ | 34,877 |              |  | $ | 39,439      |  |  | $ | 47,959 | 
|Income from operations(a)         |  |                                       | 7,518  |  |         |   | 6,888  |              |  |   | 7,809       |  |  |   | 12,547 | 
|Net income                        |  |                                       | 7,615  |  |         |   | 6,756  |              |  |   | 8,126       |  |  |   | 12,828 | 
|Net income per share  basic      |  | $                                     | 0.24   |  |         | $ | 0.21   |              |  | $ | 0.25        |  |  | $ | 0.39   | 
|Net income per share  diluted(b) |  | $                                     | 0.22   |  |         | $ | 0.19   |              |  | $ | 0.22        |  |  | $ | 0.33   | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Income from operations includes amortization of
    acquisition-related intangibles of $2,396, $2,110, $2,089 and
    $2,135 in the quarters ended March 31, June 30,
    September 30, and December 31, 2005, respectively, and
    $1,579, $2,267, $2,434, and $1,989 in the quarters ended
    March 31, June 30, September 30, and
    December 31, 2004, respectively.
|   
|(b) |  | In accordance with the Emerging Issues Task Force (EITF), Issue
    No. 04-8, the unissued shares underlying contingent
    convertible notes are treated as if such shares were issued and
    outstanding for the purposes of calculating GAAP diluted
    earnings per share beginning with the issuance of our
    1.25% convertible senior notes on June 1, 2004.     






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE.








|         |                         
|-------- | ------------------------
|ITEM 9A. | CONTROLS AND PROCEDURES.



|    |                                   
|--- | ----------------------------------
|(a) | Disclosure Controls and Procedures

13a-15(e) 15d-15(e) 10-K 10-K.


40



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|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(b) | Managements Annual Report on Internal Control Over
    Financial Reporting







|    |                                                     
|--- | ----------------------------------------------------
|(c) | Changes in Internal Control over Financial Reporting



41



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|    |                                                        
|--- | -------------------------------------------------------
|(d) | Report of Independent Registered Public Accounting Firm

















42



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/s/ Ernst & Young LLP






43



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|         |                   
|-------- | ------------------
|ITEM 9B. | OTHER INFORMATION.






PART III









|         |                                                    
|-------- | ---------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



www.digitalriver.com







|         |                        
|-------- | -----------------------
|ITEM 11. | EXECUTIVE COMPENSATION.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS.








|         |                                                
|-------- | -----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.








|         |                                        
|-------- | ---------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.



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PART IV







|         |                                            
|-------- | -------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.





| |                          
| | -------------------------
| | (1) Financial Statements.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements required by this item are
    submitted in a separate section beginning on page 49 of
    this report.

|                                                            |  |  |    | 
|----------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public
    Accounting Firm |  |  | 49 | 
|Consolidated Balance Sheets                                 |  |  | 50 | 
|Consolidated Statements of Operations                       |  |  | 51 | 
|Consolidated Statements of
    Stockholders Equity         |  |  | 52 | 
|Consolidated Statements of Cash Flows                       |  |  | 53 | 
|Notes to Consolidated Financial
    Statements              |  |  | 54 | 



| |                                   
| | ----------------------------------
| | (2) Financial Statement Schedules.



| |                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules for which provision is made in the applicable
    accounting regulations of the SEC have been omitted as not
    required or not applicable, or the information required has been
    included elsewhere by reference in the financial statements and
    related notes, except for Schedule II, which is included
    with this
    Form 10-K, as
    filed with the SEC.



| |              
| | -------------
| | (3) Exhibits.

|        |    |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 2  | .1(1)                   |  | Stock Purchase Agreement, dated as of April 17, 2004, by
    and among Digital River, Inc., Blitz F03-1424 GmbH, a company
    organized under the laws of Germany and a wholly owned
    subsidiary of Digital River, and the selling shareholders of
    element 5 Informationstechnologien und 
    dienstleistungen Aktiengesellschaft, a company organized under
    the laws of Germany.
|       
|        | 2  | .2(2)                   |  | Amended and Restated Asset Purchase Agreement dated
    February 9, 2002, by and between the Registrant and
    Beyond.com.                                                                                                                                                                                                                                                                    
|       
|        | 2  | .3(3)                   |  | First Amendment to the Amended and Restated Asset Purchase
    Agreement dated as of March 15, 2002, by and between the
    Registrant and Beyond.com.                                                                                                                                                                                                                                         
|       
|        | 2  | .4(3)                   |  | Post-Closing Amendment to the Amended and Restated Asset
    Purchase Agreement dated as of March 31, 2002, by and
    between the Registrant and Beyond.com.                                                                                                                                                                                                                                  
|       
|        | 3  | .1(4)                   |  | Amended and Restated Certificate of Incorporation of the
    Registrant, as currently in effect.                                                                                                                                                                                                                                                                                               
|       
|        | 3  | .2(6)                   |  | Amended and Restated Bylaws of the Registrant, as currently in
    effect.                                                                                                                                                                                                                                                                                                                     
|       
|        | 3  | .3(4)                   |  | Certificate of Amendment of Amended and Restated Certificate of
    Incorporation (amending Exhibit 3.1).                                                                                                                                                                                                                                                                                      
|       
|        | 4  | .1(7)                   |  | Specimen Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 4  | .2(4)                   |  | Form of Senior Debt Indenture.                                                                                                                                                                                                                                                                                                                                                                 
|       
|        | 4  | .3(4)                   |  | Form of Subordinated Debt Indenture.                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 4  | .4                      |  | References are hereby made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                                                                                                                                                                                                                                       
|       
|        | 4  | .5(13)                  |  | 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.                                                                                                                                                                                                                                         
|       
|        | 10 | .1(7)                   |  | Form of Indemnity Agreement between Registrant and each of its
    directors and executive officers.                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .3(7)                   |  | Consent to Assignment and Assumption of Lease dated
    April 22, 1998, by and between CSM Investors, Inc.,
    IntraNet Integration Group, Inc. and Registrant.                                                                                                                                                                                                                               
|       
|        | 10 | .4(5)                   |  | Assignment of Lease dated April 21, 1998, by and between
    Intranet Integration Group, Inc. and Registrant.                                                                                                                                                                                                                                                                                  

45



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|        |    |                         |  |                                                                                                                                                                                                                                                                                                
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|       
|        | 10 | .5(5)                   |  | Lease Agreement dated January 18, 2000, between Property
    Reserve, Inc. and Registrant.                                                                                                                                                                                                     
|       
|        | 10 | .6(6)                   |  | First Amendment of Lease dated January 31, 2001, to that
    certain Lease dated April 24, 1996, between CSM Investors,
    Inc. and Registrant (as assignee of Intranet Integration Group,
    Inc.).                                                                                         
|       
|        | 10 | .7(8)                   |  | 1998 Stock Option Plan, as amended and superseded by
    Exhibit 10.19.*                                                                                                                                                                                                                       
|       
|        | 10 | .8(9)                   |  | 1999 Stock Option Plan, formerly known as the 1999 Non-Officer
    Stock Option Plan, as amended and superseded by
    Exhibit 10.19.*                                                                                                                                                         
|       
|        | 10 | .9(8)                   |  | 2000 Employee Stock Purchase Plan, as amended, and offering.*                                                                                                                                                                                                                                  
|       
|        | 10 | .11(10)                 |  | Second Amendment of Lease dated April 22, 2002, to that
    certain Lease dated April 24, 1996, between CSM Investors,
    Inc. and Registrant (as assignee of Intranet Integration Group,
    Inc.) as amended.                                                                               
|       
|        | 10 | .12(10)                 |  | Second Amendment of Lease dated April 28, 2003, to that
    certain Lease dated January 18, 2000, between Property
    Reserve Inc. and Registrant.                                                                                                                                            
|       
|        | 10 | .13(11)                 |  | Employment Agreement with Jay Kerutis.*                                                                                                                                                                                                                                                        
|       
|        | 10 | .14(12)                 |  | Employment Agreement with Gary Howorka.*                                                                                                                                                                                                                                                       
|       
|        | 10 | .15(13)                 |  | Registration Rights Agreement dated as of June 1, 2004,
    between Digital River, Inc. and the initial purchasers of Senior
    Convertible Notes due January 1, 2024.                                                                                                                        
|       
|        | 10 | .16(14)                 |  | Supplemental Agreement and Settlement Agreement, by and among
    Digital River, Inc., Digital River GmBH, element 5 AG,
    Messrs. Clemens Roth, Christopher Reimold, Gerrit Schumann,
    Stephan Naujoks and various other former element
    5 shareholders, dated as of January 18, 2005.
|       
|        | 10 | .17(15)                 |  | Summary of Compensation Program for Non-Employee Directors.                                                                                                                                                                                                                                    
|       
|        | 10 | .18(16)                 |  | Amended and Restated Authorized Symantec Electronic Reseller for
    Shop Symantec Agreement by and among Symantec Corporation,
    Symantec Limited and Digital River, Inc. dated as of
    July 1, 2003, including Amendments 2 through 10
    thereto.                                     
|       
|        | 10 | .19(17)                 |  | 1998 Equity Incentive Plan (formerly known as 1998 Stock Option
    Plan).*                                                                                                                                                                                                                    
|       
|        | 10 | .20(18)                 |  | Employment Agreement between Digital River, Inc. and Carter D.
    Hicks.*                                                                                                                                                                                                                     
|       
|        | 10 | .21(18)                 |  | Employment Offer Letter between Digital River, Inc. and Thomas
    M. Donnelly.*                                                                                                                                                                                                               
|       
|        | 10 | .22(19)                 |  | Amendment number 11 to the Amended and Restated Authorized
    Symantec Electronic Reseller for Shop Symantec Agreement by and
    among Symantec Corporation, Symantec Limited and Digital River,
    Inc. dated as of June 15, 2005.                                                        
|       
|        | 10 | .23(19)                 |  | Employment Agreement between Digital River, Inc. and Joel A.
    Ronning.*                                                                                                                                                                                                                     
|       
|        | 10 | .24(19)                 |  | Form of Amendment to Non-Qualified Stock Option Agreement.*                                                                                                                                                                                                                                    
|       
|        | 10 | .25(20)                 |  | Inducement Equity Incentive Plan.*                                                                                                                                                                                                                                                             
|       
|        | 12 | .1                      |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                             
|       
|        | 21 | .1                      |  | Subsidiaries of Digital River, Inc.                                                                                                                                                                                                                                                            
|       
|        | 23 | .1                      |  | Consent of Independent Registered Public Accounting Firm, dated
    March 14, 2006.                                                                                                                                                                                                            
|       
|        | 24 | .1                      |  | Power of Attorney, pursuant to which amendments to this Annual
    Report on Form 10-K may be filed, is included on the
    signature pages of this Annual Report on Form 10-K.                                                                                                                
|       
|        | 31 | .1                      |  | Certification of Digital River, Inc.s Chief Executive
    Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                             
|       
|        | 31 | .2                      |  | Certification of Digital River, Inc.s Chief Financial
    Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                             
|       
|        | 32 |                         |  | Certification of Digital River, Inc.s Chief Executive
    Officer and Chief Financial Officer pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                                                                  

46



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##### Table of Contents








| |   |                                          
| | - | -----------------------------------------
| | * | Management contract or compensatory plan.



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been requested for portions of this
    agreement, which portions have been filed  separately with
    the SEC.



| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed May 4, 2004.                                                         
|
| | (2) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed February 11, 2002.                                                   
|
| | (3) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed April 15, 2002.                                                      
|
| | (4) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-3 (File
    No. 333-81626),
    declared effective on February 12, 2002.
|
| | (5) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 1999, filed on March 30,
    2000.            
|
| | (6) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 2000, filed on March 27,
    2001.            
|
| | (7) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1 (File
    No. 333-56787),
    declared effective on August 11, 1998.  
|
| | (8) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-8 (File
    No. 333-105864)
    filed on June 5, 2003.                  
|
| | (9) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended June 30, 2003, filed on August 14, 2003.         



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended March 31, 2003, filed on May 15, 2003.             
|    
|(11) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended September 30, 2003, filed on
    November 13, 2003.
|    
|(12) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 2003, filed on March 15,
    2004.              
|    
|(13) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on July 13, 2004.                                                         
|    
|(14) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on January 20, 2005.                                                      
|    
|(15) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on February 15, 2005.                                                     
|    
|(16) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on June 15, 2005.                                                         
|    
|(17) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on May 31, 2005.                                                          
|    
|(18) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on July 5, 2005.                                                          
|    
|(19) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended June 30, 2005, filed on August 9, 2005.            
|    
|(20) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on December 20, 2005.                                                     

47



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##### Table of Contents






SIGNATURES


10-K




| |                    
| | -------------------
| | DIGITAL RIVER, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ Joel A. Ronning

| |                        
| | -----------------------
| |                        
| | Joel A. Ronning        
| | Chief Executive Officer

10-K


10-K


|                                         |  |                                                                                            |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                                |  | Title                                                                                      |  | Date          
|                                         |  |                                                                                            |  |               
|                                        
|/s/ Joel A. RonningJoel A. Ronning       |  | Chief Executive Officer and Director (Principal Executive
    Officer)                     |  | March 14, 2006
|                                        
|/s/ Thomas M. DonnellyThomas M. Donnelly |  | Chief Financial Officer and Treasurer (Principal Financial
    and
    Accounting Officer) |  | March 14, 2006
|                                        
|/s/ Perry W. SteinerPerry W. Steiner     |  | Director                                                                                   |  | March 14, 2006
|                                        
|/s/ William LansingWilliam Lansing       |  | Director                                                                                   |  | March 14, 2006
|                                        
|/s/ Thomas F. MadisonThomas F. Madison   |  | Director                                                                                   |  | March 14, 2006
|                                        
|/s/ J. Paul ThorinJ. Paul Thorin         |  | Director                                                                                   |  | March 14, 2006
|                                        
|/s/ Frederic SeegalFrederic Seegal       |  | Director                                                                                   |  | March 14, 2006

48



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##### Table of Contents






Report of Independent Registered Public Accounting Firm
















|                      | 
|--------------------- | 
|/s/ Ernst & Young LLP | 





49



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##### Table of Contents



DIGITAL RIVER, INC.





Consolidated Balance Sheets as of December 31


|                                                                                                                        |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                        |  | 2005 |         |   | 2004 |  
|                                                                                                                        |  |      |         |   |      |  
|ASSETS                                                                                                                 
|CURRENT ASSETS:                                                                                                         |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                                                               |  | $    | 131,770 |   |      | $ | 127,734 |  
|Short-term investments                                                                                                  |  |      | 220,569 |   |      |   | 164,402 |  
|Accounts receivable, net of allowance of $1,023 and $1,146                                                              |  |      | 34,883  |   |      |   | 21,520  |  
|Deferred income taxes                                                                                                   |  |      | 22,251  |   |      |   |        |  
|Prepaid expenses and other                                                                                              |  |      | 3,741   |   |      |   | 1,843   |  
|                                                                                                                        |  |      |         |   |      |  
|Total current assets                                                                                                    |  |      | 413,214 |   |      |   | 315,499 |  
|                                                                                                                        |  |      |         |   |      |  
|Property and equipment, net                                                                                             |  |      | 17,955  |   |      |   | 17,367  |  
|Goodwill                                                                                                                |  |      | 195,299 |   |      |   | 148,086 |  
|Intangible assets, net of accumulated amortization of $36,798
    and $28,245                                           |  |      | 20,054  |   |      |   | 17,297  |  
|Deferred income taxes                                                                                                   |  |      | 10,444  |   |      |   |        |  
|Other assets                                                                                                            |  |      | 12,174  |   |      |   | 6,272   |  
|                                                                                                                        |  |      |         |   |      |  
|TOTAL ASSETS                                                                                                            |  | $    | 669,140 |   |      | $ | 504,521 |  
|                                                                                                                        |  |      |         |   |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   
|CURRENT LIABILITIES                                                                                                     |  |      |         |   |      |   |         |  
|Accounts payable                                                                                                        |  | $    | 127,846 |   |      | $ | 88,052  |  
|Accrued payroll                                                                                                         |  |      | 8,866   |   |      |   | 5,332   |  
|Deferred revenue                                                                                                        |  |      | 5,403   |   |      |   | 3,901   |  
|Accrued acquisition costs                                                                                               |  |      | 5,651   |   |      |   | 6,720   |  
|Other accrued liabilities                                                                                               |  |      | 21,210  |   |      |   | 12,747  |  
|                                                                                                                        |  |      |         |   |      |  
|Total current liabilities                                                                                               |  |      | 168,976 |   |      |   | 116,752 |  
|                                                                                                                        |  |      |         |   |      |  
|NON-CURRENT LIABILITIES                                                                                                 |  |      |         |   |      |   |         |  
|Convertible senior notes                                                                                                |  |      | 195,000 |   |      |   | 195,000 |  
|Deferred income taxes                                                                                                   |  |      | 22      |   |      |   |        |  
|                                                                                                                        |  |      |         |   |      |  
|Total non-current liabilities                                                                                           |  |      | 195,022 |   |      |   | 195,000 |  
|                                                                                                                        |  |      |         |   |      |  
|TOTAL LIABILITIES                                                                                                       |  |      | 363,998 |   |      |   | 311,752 |  
|                                                                                                                        |  |      |         |   |      |  
|COMMITMENTS AND CONTINGENCIES (NOTE 8)                                                                                  |  |      |         |   |      |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                   |  |      |         |   |      |   |         |  
|Preferred Stock, $.01 par value; 5,000,000 shares authorized; no
    shares issued or outstanding                       |  |      |        |   |      |   |        |  
|Common Stock, $.01 par value; 60,000,000 shares authorized;
    35,033,741 and 33,652,149 shares issued and outstanding |  |      | 350     |   |      |   | 337     |  
|Additional paid-in capital                                                                                              |  |      | 315,489 |   |      |   | 243,926 |  
|Deferred compensation                                                                                                   |  |      | (1,942  | ) |      |   |        |  
|Accumulated deficit                                                                                                     |  |      | (6,324  | ) |      |   | (51,164 | )
|Accumulated other comprehensive loss                                                                                    |  |      | (2,431  | ) |      |   | (330    | )
|                                                                                                                        |  |      |         |   |      |  
|Total stockholders equity                                                                                              |  |      | 305,142 |   |      |   | 192,769 |  
|                                                                                                                        |  |      |         |   |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  | $    | 669,140 |   |      | $ | 504,521 |  
|                                                                                                                        |  |      |         |   |      |  



50



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##### Table of Contents



DIGITAL RIVER, INC.





Consolidated Statements of Operations for the Years Ended
December 31


|                                               |                                                 |                                       |         |         |      |   |         |         |  |   |         |        | 
|---------------------------------------------- | ----------------------------------------------- | ------------------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ | 
|                                               |                                                 | 2005                                  |         |         | 2004 |   |         | 2003    | 
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|                                               |                                                 | (In thousands, except per share data) |        
|Revenue                                        |                                                 | $                                     | 220,408 |         |      | $ | 154,130 |         |  | $ | 101,201 |       
|Costs and expenses                             |                                                 |                                       |         |         |      |   |         |         |  |   |         |       
|                                               | Direct cost of services                         |                                       |         | 5,013   |      |   |         | 5,013   |  |   |         | 3,585  | 
|                                               | Network and infrastructure                      |                                       |         | 19,814  |      |   |         | 15,143  |  |   |         | 12,253 | 
|                                               | Sales and marketing                             |                                       |         | 69,256  |      |   |         | 51,749  |  |   |         | 37,220 | 
|                                               | Product research and development                |                                       |         | 20,575  |      |   |         | 14,097  |  |   |         | 9,962  | 
|                                               | General and administrative                      |                                       |         | 21,474  |      |   |         | 16,894  |  |   |         | 9,228  | 
|                                               | Depreciation and amortization                   |                                       |         | 8,833   |      |   |         | 8,203   |  |   |         | 7,275  | 
|                                               | Amortization of acquisition-related intangibles |                                       |         | 8,730   |      |   |         | 8,269   |  |   |         | 5,380  | 
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|                                               | Total costs and expenses                        |                                       |         | 153,695 |      |   |         | 119,368 |  |   |         | 84,903 | 
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Income from operations                         |                                                 |                                       | 66,713  |         |      |   | 34,762  |         |  |   | 16,298  |       
|Other income, net                              |                                                 |                                       | 4,967   |         |      |   | 1,641   |         |  |   | 838     |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Income before income tax expense               |                                                 |                                       | 71,680  |         |      |   | 36,403  |         |  |   | 17,136  |       
|Income tax expense                             |                                                 |                                       | 17,337  |         |      |   | 1,079   |         |  |   |        |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Net income                                     |                                                 | $                                     | 54,343  |         |      | $ | 35,324  |         |  | $ | 17,136  |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Net income per share  basic                   |                                                 | $                                     | 1.57    |         |      | $ | 1.09    |         |  | $ | 0.58    |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Net income per share  diluted                 |                                                 | $                                     | 1.36    |         |      | $ | 0.96    |         |  | $ | 0.52    |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Shares used in per-share calculation  basic   |                                                 |                                       | 34,536  |         |      |   | 32,328  |         |  |   | 29,398  |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 
|Shares used in per-share calculation  diluted |                                                 |                                       | 41,448  |         |      |   | 38,532  |         |  |   | 33,051  |       
|                                               |                                                 |                                       |         |         |      |   |         |         | 



51



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##### Table of Contents



DIGITAL RIVER, INC.





Consolidated Statements of Stockholders Equity


|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------ | ------ | - | ---------- | - | --- | -------- |  | ----------- | ------------- | - |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | - |  | - | ------ | -
|                                                               |  | Common Stock |        |   | Additional |   |     |          |  | Accumulated |               |   |  |               | Total  |   |               |  
|                                                               |  |              |        |   | Paid-In    |   |     | Deferred |  |             | Comprehensive |   |  | Accumulated   |        |   | Stockholders |   |        | Comprehensive | 
|                                                               |  | Shares       |        |   | Amount     |   |     | Capital  |  |             | Compensation  |   |  | Income (Loss) |        |   | Deficit       |   |        | Equity        |  |   | Income (Loss) |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|BALANCE, December 31, 2002                                     |  |              | 27,537 |   |            | $ | 275 |          |  | $           | 160,535       |   |  | $             |       |   |               | $ |       |               |  | $ | (103,624      | ) |  | $ | 57,186  |   |  | $ | (510   | )
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|Net income                                                     |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   |       |               |  |   | 17,136        |   |  |   | 17,136  |   |  |   | 17,136 |  
|Unrealized gain on investments                                 |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   | 44     |               |  |   |              |   |  |   | 44      |   |  |   | 44     |  
|Sales of common stock                                          |  |              | 2,100  |   |            |   | 21  |          |  |             | 43,385        |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 43,406  |   |  |   |        |  
|Common stock issued for acquisitions and earn-out arrangements |  |              | 88     |   |            |   | 1   |          |  |             | 1,024         |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 1,025   |   |  |   |        |  
|Exercise of stock options                                      |  |              | 1,680  |   |            |   | 17  |          |  |             | 12,238        |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 12,255  |   |  |   |        |  
|Common stock issued under the Employee Stock Purchase Plan     |  |              | 93     |   |            |   | 1   |          |  |             | 799           |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 800     |   |  |   |        |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|BALANCE, December 31, 2003                                     |  |              | 31,498 |   |            |   | 315 |          |  |             | 217,981       |   |  |               |       |   |               |   | 44     |               |  |   | (86,488       | ) |  |   | 131,852 |   |  |   | 17,180 |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|Net income                                                     |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   |       |               |  |   | 35,324        |   |  |   | 35,324  |   |  |   | 35,324 |  
|Unrealized (loss) on investments                               |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   | (275   | )             |  |   |              |   |  |   | (275    | ) |  |   | (275   | )
|Foreign currency translation (loss)                            |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   | (99    | )             |  |   |              |   |  |   | (99     | ) |  |   | (99    | )
|Common stock issued for acquisitions                           |  |              | 160    |   |            |   | 2   |          |  |             | 5,342         |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 5,344   |   |  |   |        |  
|Exercise of stock options                                      |  |              | 1,943  |   |            |   | 19  |          |  |             | 19,700        |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 19,719  |   |  |   |        |  
|Common stock issued under the Employee Stock Purchase Plan     |  |              | 51     |   |            |   | 1   |          |  |             | 903           |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 904     |   |  |   |        |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|BALANCE, December 31, 2004                                     |  |              | 33,652 |   |            |   | 337 |          |  |             | 243,926       |   |  |               |       |   |               |   | (330   | )             |  |   | (51,164       | ) |  |   | 192,769 |   |  |   | 34,950 |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|Net income                                                     |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   |       |               |  |   | 54,343        |   |  |   | 54,343  |   |  |   | 54,343 |  
|Unrealized (loss) on investments                               |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   | (776   | )             |  |   |              |   |  |   | (776    | ) |  |   | (776   | )
|Foreign currency translation (loss)                            |  |              |       |   |            |   |    |          |  |             |              |   |  |               |       |   |               |   | (1,325 | )             |  |   |              |   |  |   | (1,325  | ) |  |   | (1,325 | )
|Repurchase of common stock                                     |  |              | (483   | ) |            |   | (5  | )        |  |             | (3,637        | ) |  |               |       |   |               |   |       |               |  |   | (9,503        | ) |  |   | (13,145 | ) |  |   |        |  
|Exercise of stock options                                      |  |              | 1,718  |   |            |   | 17  |          |  |             | 23,182        |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 23,199  |   |  |   |        |  
|Inducement Equity Incentive Plan                               |  |              | 64     |   |            |   | 1   |          |  |             | 1,971         |   |  |               | (1,942 | ) |               |   |       |               |  |   |              |   |  |   | 30      |   |  |   |        |  
|Tax benefit of stock-based compensation                        |  |              |       |   |            |   |    |          |  |             | 47,848        |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 47,848  |   |  |   |        |  
|Common stock issued under the Employee Stock Purchase Plan     |  |              | 83     |   |            |   |    |          |  |             | 2,199         |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   | 2,199   |   |  |   |        |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  
|BALANCE, December 31, 2005                                     |  |              | 35,034 |   |            | $ | 350 |          |  | $           | 315,489       |   |  | $             | (1,942 | ) |               | $ | (2,431 | )             |  | $ | (6,324        | ) |  | $ | 305,142 |   |  | $ | 52,242 |  
|                                                               |  |              |        |   |            |   |     |          |  |             |               |   |  |               |        |   |               |   |        |               |  |   |               |  



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DIGITAL RIVER, INC.





Consolidated Statements of Cash Flows For the Years Ended
December 31,


|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |         |         |       |        | 
|------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------ | ------ | ------- | ------- | ----- | ------ | 
|                                                                                      |                                                          | 2005                                                              |                                               |                                           | 2004     |         |         | 2003     |         
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      |                                                          | (In thousands)                                                    |                                              
|OPERATING ACTIVITIES:                                                                 |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |        
|Net income                                                                            |                                                          | $                                                                 | 54,343                                        |                                           |          | $       | 35,324  |          |          | $      | 17,136 |        
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |        
|                                                                                      |                                                          | Amortization of acquisition-related intangibles                   |                                               |                                           | 8,730    |         |         |          | 8,269    |        |        |         | 5,380   |      
|                                                                                      |                                                          | Change in accounts receivable allowance, net of acquisitions      |                                               |                                           | (598     | )       |         |          | 709      |        |        |         | (1,247  | )    
|                                                                                      |                                                          | Depreciation and amortization                                     |                                               |                                           | 8,833    |         |         |          | 8,203    |        |        |         | 7,275   |      
|                                                                                      |                                                          | Tax benefit of stock-based compensation                           |                                               |                                           | 47,879   |         |         |          |         |        |        |         |        |      
|                                                                                      |                                                          | Deferred income taxes and other                                   |                                               |                                           | (34,789  | )       |         |          |         |        |        |         |        |      
|                                                                                      |                                                          | Litigation and other charges                                      |                                               |                                           | (739     | )       |         |          | 1,090    |        |        |         |        |      
|                                                                                      |                                                          | Change in operating assets and liabilities (net of acquisitions): |                                               |                                           |          |         |         |          |          |        |        |         |         |      
|                                                                                      |                                                          |                                                                   | Accounts receivable                           |                                           |          | (10,304 | )       |          |          | (8,223 | )      |         |         | 3,558 |       
|                                                                                      |                                                          |                                                                   | Prepaid and other assets                      |                                           |          | (2,417  | )       |          |          | 1,037  |        |         |         | 132   |       
|                                                                                      |                                                          |                                                                   | Accounts payable                              |                                           |          | 34,822  |         |          |          | 34,433 |        |         |         | 9,210 |       
|                                                                                      |                                                          |                                                                   | Deferred revenue                              |                                           |          | 1,395   |         |          |          | (230   | )      |         |         | 1,671 |       
|                                                                                      |                                                          |                                                                   | Income tax payable                            |                                           |          | 2,740   |         |          |          | 143    |        |         |         |      |       
|                                                                                      |                                                          |                                                                   | Accrued payroll and other accrued liabilities |                                           |          | 9,859   |         |          |          | 4,380  |        |         |         | 4,716 |       
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      |                                                          |                                                                   |                                               | Net cash provided by operating activities |          |         | 119,754 |          |          |        | 85,135 |         |         |       | 47,831 | 
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|INVESTING ACTIVITIES:                                                                 |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |        
|                                                                                      | Purchases of investments                                 |                                                                   |                                               | (190,713                                  | )        |         |         | (199,699 | )        |        |        | (58,993 | )      
|                                                                                      | Sales of investments                                     |                                                                   |                                               | 127,771                                   |          |         |         | 94,059   |          |        |        |        |        
|                                                                                      | Cash paid for acquisitions, net of cash received         |                                                                   |                                               | (54,177                                   | )        |         |         | (126,457 | )        |        |        | (6,944  | )      
|                                                                                      | Purchases of equipment and capitalized software          |                                                                   |                                               | (8,328                                    | )        |         |         | (9,255   | )        |        |        | (6,271  | )      
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      |                                                          | Net cash used in investing activities                             |                                               |                                           | (125,447 | )       |         |          | (241,352 | )      |        |         | (72,208 | )    
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|FINANCING ACTIVITIES:                                                                 |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |        
|                                                                                      | Principal amount on line of credit                       |                                                                   |                                               |                                          |          |         |         | 45,000   |          |        |        |        |        
|                                                                                      | Repayment of principal on line of credit                 |                                                                   |                                               |                                          |          |         |         | (45,000  | )        |        |        |        |        
|                                                                                      | Proceeds from convertible senior notes                   |                                                                   |                                               |                                          |          |         |         | 188,371  |          |        |        |        |        
|                                                                                      | Proceeds from sales of common stock                      |                                                                   |                                               |                                          |          |         |         |         |          |        |        | 43,406  |        
|                                                                                      | Exercise of stock options and warrants                   |                                                                   |                                               | 23,199                                    |          |         |         | 19,719   |          |        |        | 12,255  |        
|                                                                                      | Sales of common stock under employee stock purchase plan |                                                                   |                                               | 2,199                                     |          |         |         | 904      |          |        |        | 800     |        
|                                                                                      | Repurchase of common stock                               |                                                                   |                                               | (13,145                                   | )        |         |         |         |          |        |        |        |        
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      |                                                          | Net cash provided by financing activities                         |                                               |                                           | 12,253   |         |         |          | 208,994  |        |        |         | 56,461  |      
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                               |                                                          |                                                                   | (2,524                                        | )                                         |          |         | 2,072   |          |          |        |       |        
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                             |                                                          |                                                                   | 4,036                                         |                                           |          |         | 54,849  |          |          |        | 32,084 |        
|CASH AND CASH EQUIVALENTS, beginning of period                                        |                                                          |                                                                   | 127,734                                       |                                           |          |         | 72,885  |          |          |        | 40,801 |        
|CASH AND CASH EQUIVALENTS, end of period                                              |                                                          | $                                                                 | 131,770                                       |                                           |          | $       | 127,734 |          |          | $      | 72,885 |        
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|SUPPLEMENTAL DISCLOSURES:                                                             |                                                          |                                                                   |                                               |                                           |          |         |         |          |          |        |        |        
|                                                                                      | Cash paid for interest on Convertible Senior Notes       |                                                                   | $                                             | 2,641                                     |          |         | $       |         |          |        | $      |        |        
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      | Cash paid for income taxes                               |                                                                   | $                                             | 193                                       |          |         | $       |         |          |        | $      |        |        
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         
|                                                                                      | Noncash investing and financing activities:              |                                                                   |                                               |                                           |          |         |         |          |          |        |        |         |        
|                                                                                      |                                                          | Common stock issued in acquisitions and earn-outs                 |                                               | $                                         |         |         |         | $        | 5,344    |        |        | $       | 1,025   |      
|                                                                                      |                                                          |                                                                   |                                               |                                           |          |         |         |          |         



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DIGITAL RIVER, INC.





Notes to Consolidated Financial Statements


December 31, 2005 and 2004




|   |                                                                         
|-- | ------------------------------------------------------------------------
|1. | Nature of Operations and Summary of Significant Accounting
    Policies:

e-commerce




| |                                               
| | ----------------------------------------------
| | Principles of Consolidation and Classification





| |                             
| | ----------------------------
| | Foreign Currency Translation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                       
| | ----------------------
| | Short-Term Investments



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                       
| | ----------------------
| | Property and Equipment



|                                               |                              |      |         |        |      |   |         |        | 
|---------------------------------------------- | ---------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                              | 2005 |         |        | 2004 |  
|                                               |                              |      |         |        |      |  
|Computer hardware and software                 |                              | $    | 44,849  |        |      | $ | 35,292  |       
|Furniture, fixtures and leasehold improvements |                              |      | 7,151   |        |      |   | 5,847   |       
|                                               |                              |      |         |        |      |  
|                                               | Total property and equipment |      | $       | 52,000 |      |   | $       | 41,139 | 
|Accumulated depreciation                       |                              |      | (34,045 | )      |      |   | (23,772 | )     
|                                               |                              |      |         |        |      |  
|                                               | Net property and equipment   |      | $       | 17,955 |      |   | $       | 17,367 | 
|                                               |                              |      |         |        |      |  



| |                            
| | ---------------------------
| | Purchased Intangible Assets





| |                  
| | -----------------
| | Long-Lived Assets



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |             
| | ------------
| | Other Assets



|                                 |  |      |        |  |      |   |       | 
|-------------------------------- |  | ---- | ------ |  | ---- | - | ----- | 
|                                 |  | 2005 |        |  | 2004 |  
|                                 |  |      |        |  |      |  
|Unamortized debt financing costs |  | $    | 5,960  |  |      | $ | 6,258 | 
|Cost of investment               |  |      | 6,000  |  |      |   |      | 
|Other                            |  |      | 214    |  |      |   | 14    | 
|                                 |  |      |        |  |      |  
|Total other assets               |  | $    | 12,174 |  |      | $ | 6,272 | 
|                                 |  |      |        |  |      |  





| |                          
| | -------------------------
| | Other Accrued Liabilities



|                                         |  |      |        |  |      |   |        | 
|---------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                         |  | 2005 |        |  | 2004 |  
|                                         |  |      |        |  |      |  
|Accrued expenses                         |  | $    | 12,451 |  |      | $ | 9,444  | 
|Sales, value-added and transaction taxes |  |      | 5,479  |  |      |   | 3,160  | 
|Current and deferred income taxes        |  |      | 3,280  |  |      |   | 143    | 
|                                         |  |      |        |  |      |  
|Total other accrued liabilities          |  | $    | 21,210 |  |      | $ | 12,747 | 
|                                         |  |      |        |  |      |  



| |                     
| | --------------------
| | Comprehensive Income







| |                    
| | -------------------
| | Revenue Recognition

(


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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




e-commerce










| |                 
| | ----------------
| | Deferred Revenue





| |                  
| | -----------------
| | Advertising Costs





| |             
| | ------------
| | Income Taxes



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                  
| | -----------------
| | Other Income, Net





| |                 
| | ----------------
| | Use of Estimates





| |                                                  
| | -------------------------------------------------
| | Research and Development and Software Development





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



03-01,


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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|   |                      
|-- | ---------------------
|2. | Net Income per Share:





|                                                                                                           |  |                                  |        |  |      |   |        |      |  |   |        | 
|---------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                                                           |  | For the Years Ended December 31, |       
|                                                                                                           |  |                                  |       
|                                                                                                           |  | 2005                             |        |  | 2004 |   |        | 2003 | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Earnings per share  basic                                                                                 |  |                                  |        |  |      |   |        |      |  |   |        | 
|Net income  basic                                                                                         |  | $                                | 54,343 |  |      | $ | 35,324 |      |  | $ | 17,136 | 
|Weighted average shares outstanding  basic                                                                |  |                                  | 34,536 |  |      |   | 32,328 |      |  |   | 29,398 | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Earnings per share  basic                                                                                 |  | $                                | 1.57   |  |      | $ | 1.09   |      |  | $ | 0.58   | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Earnings per share  diluted                                                                               |  |                                  |        |  |      |   |        |      |  |   |        | 
|Net income  basic                                                                                         |  | $                                | 54,343 |  |      | $ | 35,324 |      |  | $ | 17,136 | 
|Exclude: Interest expense and amortized financing cost of
    convertible senior notes, net of tax benefit |  |                                  | 2,099  |  |      |   | 1,772  |      |  |   |       | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Net income  diluted                                                                                       |  | $                                | 56,442 |  |      | $ | 37,096 |      |  | $ | 17,136 | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Weighted average shares outstanding  basic                                                                |  |                                  | 34,536 |  |      |   | 32,328 |      |  |   | 29,398 | 
|Dilutive impact of non-vested stock and options outstanding                                                |  |                                  | 2,487  |  |      |   | 3,626  |      |  |   | 3,653  | 
|Dilutive impact of convertible senior notes                                                                |  |                                  | 4,425  |  |      |   | 2,578  |      |  |   |       | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Weighted average shares outstanding  diluted                                                              |  |                                  | 41,448 |  |      |   | 38,532 |      |  |   | 33,051 | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 
|Earnings per share  diluted                                                                               |  | $                                | 1.36   |  |      | $ | 0.96   |      |  | $ | 0.52   | 
|                                                                                                           |  |                                  |        |  |      |   |        |      | 



59



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|   |                        
|-- | -----------------------
|3. | Short-Term Investments:



|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |   |         |  |  |   |        | 
|----------------------------------- |  | ---------------------- | ------- | --------- | ---------------------- | - | ------------ | --------- |  | ---- | ----- | - | --------- | --------- | ------- | ------ | ----- | - | ------- |  |  | - | ------ | 
|                                    |  | Unrealized Gain/(Loss) |         |           | Maturities/Reset Dates |  
|                                    |  |                        |         |           |                        |  
|                                    |  |                        |         | Less Than |                        |   | Greater Than |           |  | Fair |       |   | Less Than |           |         | 1 to 3 |      
|                                    |  | Cost                   |         |           | 12 Months              |   |              | 12 Months |  |      | Value |   |           | 12 Months |         |        | Years |  
|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |  
|2005                                |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |   |         |  |  |   |        | 
|U.S. government agencies            |  |                        | 147,982 |           |                        |   | (1,277       | )         |  |      | (189  | ) |           |           | 146,516 |        |       |   | 64,003  |  |  |   | 82,513 | 
|Student loan bonds                  |  |                        | 60,000  |           |                        |   |             |           |  |      |      |   |           |           | 60,000  |        |       |   | 60,000  |  |  |   |       | 
|Other                               |  |                        | 14,053  |           |                        |   |             |           |  |      |      |   |           |           | 14,053  |        |       |   | 14,053  |  |  |   |       | 
|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |  
|Total available-for-sale securities |  | $                      | 222,035 |           |                        | $ | (1,277       | )         |  | $    | (189  | ) |           | $         | 220,569 |        |       | $ | 138,056 |  |  | $ | 82,513 | 
|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |  
|2004                                |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |   |         |  |  |   |        | 
|U.S. government agencies            |  |                        | 79,133  |           |                        |   | (234         | )         |  |      |      |   |           |           | 78,899  |        |       |   | 4,660   |  |  |   | 74,239 | 
|Student loan bonds                  |  |                        | 85,500  |           |                        |   | 3            |           |  |      |      |   |           |           | 85,503  |        |       |   | 85,503  |  |  |   |       | 
|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |  
|Total available-for-sale securities |  | $                      | 164,633 |           |                        | $ | (231         | )         |  | $    |      |   |           | $         | 164,402 |        |       | $ | 90,163  |  |  | $ | 74,239 | 
|                                    |  |                        |         |           |                        |   |              |           |  |      |       |   |           |           |         |        |       |  



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|   |                                                       
|-- | ------------------------------------------------------
|4. | Business Combinations, Goodwill and Intangible Assets:



|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |       |  |   |       |       |  |   |     |       | 
|--------------------------- | ----- | ------- | --- | --- | ------------- | - | ------- | -------- |  | - | ----------- | ----------------------- |  | -------- | ------- | ----------- | ---------- | - | -------- | ------------- |  | ------- | ---------- | ----- |  | - | ----- | ----- |  | - | --- | ----- | 
|                            |       |         |     |     |               |   |         |          |  |   |             | Other Intangible Assets | 
|                            |       |         |     |     |               |   |         |          |  |   |             |                         | 
|                            |       | Initial |     |     | Initial       |   |         |          |  |   |             |                         |  |          |         | Non-        |           
|                            |       | Shares  |     |     | Purchase      |   |         | Acquired |  |   | Assumed     |                         |  |          |         | Technology/ |            |   | Customer |               |  | Compete |           
|Acquisition                 |       | Issued  |     |     | Consideration |   |         | Assets   |  |   | Liabilities |                         |  | Goodwill |         |             | Tradenames |   |          | Relationships |  |         | Agreements |      
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|2005                        |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |       |  |   |       |       |  |   |     |      
|Commerce5, Inc.(1)          |       |         |    |     |               | $ | 45,000  |          |  | $ | 3,321       |                         |  | $        | (5,501  | )           |            | $ | 38,737   |               |  | $       | 1,607      |       |  | $ | 7,639 |       |  | $ |    |      
|SWReg                       |       |         |    |     |               |   | 8,800   |          |  |   | 5,373       |                         |  |          | (6,464  | )           |            |   | 9,090    |               |  |         | 589        |       |  |   | 1,747 |       |  |   |    |      
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|                            | Total |         |     |    |               |   | $       | 53,800   |  |   | $           | 8,694                   |  |          | $       | (11,965     | )          |   | $        | 47,827        |  |         | $          | 2,196 |  |   | $     | 9,386 |  |   | $   |      | 
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|2004                        |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |       |  |   |       |       |  |   |     |      
|element 5, AG               |       |         |    |     |               | $ | 120,000 |          |  | $ | 14,662      |                         |  | $        | (16,673 | )           |            | $ | 110,775  |               |  | $       | 5,654      |       |  | $ | 7,814 |       |  | $ | 784 |      
|Fireclick, Inc.             |       |         |    |     |               |   | 7,500   |          |  |   | 451         |                         |  |          | (111    | )           |            |   | 7,512    |               |  |         | 701        |       |  |   |      |       |  |   | 250 |      
|BlueHornet Networks, Inc.   |       |         | 160 |     |               |   | 1,176   |          |  |   | 756         |                         |  |          | (280    | )           |            |   | 4,280    |               |  |         | 836        |       |  |   | 1,104 |       |  |   | 250 |      
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|                            | Total |         |     | 160 |               |   | $       | 128,676  |  |   | $           | 15,869                  |  |          | $       | (17,064     | )          |   | $        | 122,567       |  |         | $          | 7,191 |  |   | $     | 8,918 |  |   | $   | 1,284 | 
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|2003                        |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |       |  |   |       |       |  |   |     |      
|Metatec International       |       |         |    |     |               | $ | 1,300   |          |  | $ | 121         |                         |  |          |        |             |            | $ | 789      |               |  | $       | 300        |       |  | $ |      |       |  | $ | 75  |      
|Infocon America Corporation |       |         |    |     |               |   | 1,100   |          |  |   | 78          |                         |  |          | (232    | )           |            |   | 953      |               |  |         | 207        |       |  |   |      |       |  |   | 75  |      
|The Registration Network    |       |         |    |     |               |   | 2,500   |          |  |   | 71          |                         |  |          | (1,320  | )           |            |   | 934      |               |  |         | 600        |       |  |   | 1,011 |       |  |   | 150 |      
|Emetrix, Inc.               |       |         |    |     |               |   | 2,600   |          |  |   | 132         |                         |  |          | (1,107  | )           |            |   | 601      |               |  |         | 600        |       |  |   | 1,360 |       |  |   | 150 |      
|GameZone, Inc.              |       |         |    |     |               |   | 1,100   |          |  |   |            |                         |  |          | (194    | )           |            |   | 821      |               |  |         | 208        |       |  |   |      |       |  |   | 100 |      
|Other                       |       |         |    |     |               |   | 416     |          |  |   |            |                         |  |          | (9      | )           |            |   | 100      |               |  |         | 220        |       |  |   |      |       |  |   | 150 |      
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      
|                            | Total |         |     |    |               |   | $       | 9,016    |  |   | $           | 402                     |  |          | $       | (2,862      | )          |   | $        | 4,198         |  |         | $          | 2,135 |  |   | $     | 2,371 |  |   | $   | 700   | 
|                            |       |         |     |     |               |   |         |          |  |   |             |                         |  |          |         |             |            |   |          |               |  |         |            |      






|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | The Commerce5, Inc. purchase price allocation is preliminary and
    subject to adjustment.



| |                               
| | ------------------------------
| | Acquisitions completed in 2005

e-commerce


e-commerce




| |                               
| | ------------------------------
| | Acquisitions completed in 2004

e-commerce


61



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)






|                         |  |           |     |  |           |   |       |         |         |              |      |   |  |             |       |         |              |   |      |      |  |   |        |   |  |   |       | 
|------------------------ |  | --------- | --- |  | --------- | - | ----- | ------- | ------- | ------------ | ---- | - |  | ----------- | ----- | ------- | ------------ | - | ---- | ---- |  | - | ------ | - |  | - | ----- | 
|                         |  | Accrual   |     |  |           |   |       |         | Accrual |              |      |   |  |             |       | Accrual |             
|                         |  | April 16, |     |  | Net       |   |       |         |         | December 31, |      |   |  |             |       |         | December 31, |  
|                         |  | 2004      |     |  | Additions |   |       | Charges |         |              | 2004 |   |  | Adjustments |       |         | Charges      |   |      | 2005 | 
|                         |  |           |     |  |           |   |       |         |         |              |      |   |  |             |       |         |              |   |      |      | 
|Shareholder escrow       |  | $         |    |  |           | $ | 2,500 |         |         | $            |     |   |  | $           | 2,500 |         |              | $ |     |      |  | $ | (1,250 | ) |  | $ | 1,250 | 
|Employee severance costs |  |           | 700 |  |           |   | 2,100 |         |         |              | (400 | ) |  |             | 2,400 |         |              |   | (200 | )    |  |   | (1,250 | ) |  |   | 950   | 
|Facilities consolidation |  |           | 200 |  |           |   | 100   |         |         |              | (300 | ) |  |             |      |         |              |   |     |      |  |   |       |   |  |   |      | 
|                         |  |           |     |  |           |   |       |         |         |              |      |   |  |             |       |         |              |   |      |      | 
|Total                    |  | $         | 900 |  |           | $ | 4,700 |         |         | $            | (700 | ) |  | $           | 4,900 |         |              | $ | (200 | )    |  | $ | (2,500 | ) |  | $ | 2,200 | 
|                         |  |           |     |  |           |   |       |         |         |              |      |   |  |             |       |         |              |   |      |      | 

return-on


e-mail




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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                                        
| | ---------------------------------------
| | Pro Forma Operating Results (Unaudited)



|                         |  |      |         |  |      |   |         |      |  |   |         | 
|------------------------ |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                         |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                         |  |      |         |  |      |   |         |      | 
|Revenue                  |  | $    | 230,975 |  |      | $ | 178,814 |      |  | $ | 121,025 | 
|Income from operations   |  |      | 64,119  |  |      |   | 25,649  |      |  |   | 6,488   | 
|Net income               |  |      | 51,771  |  |      |   | 26,411  |      |  |   | 6,786   | 
|Diluted income per share |  | $    | 1.30    |  |      | $ | 0.71    |      |  | $ | 0.21    | 





| |         
| | --------
| | Goodwill







|                                         |  |       |         |  
|---------------------------------------- |  | ----- | ------- | -
|                                         |  | Total |        
|                                         |  |       |        
|Balance as of December 31, 2003          |  | $     | 23,921  |  
|Goodwill from acquisitions and earn-outs |  |       | 124,165 |  
|                                         |  |       |        
|Balance as of December 31, 2004          |  | $     | 148,086 |  
|Goodwill from acquisitions and earn-outs |  |       | 49,096  |  
|Adjustments(1)                           |  |       | (1,883  | )
|                                         |  |       |        
|Balance as of December 31, 2005          |  | $     | 195,299 |  
|                                         |  |       |        






|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adjustments to goodwill during the year ended December 31,
    2005, resulted primarily from foreign currency translation
    adjustments relating to goodwill associated with our current and
    prior period acquisitions.

63



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                  
| | -----------------
| | Intangible Assets



|                       |  |                   |        |  |              |   |          |        |  |   |        | 
|---------------------- |  | ----------------- | ------ |  | ------------ | - | -------- | ------ |  | - | ------ | 
|                       |  | December 31, 2005 |       
|                       |  |                   |       
|                       |  | Carrying          |        |  |              |   | Carrying |       
|                       |  | Amount            |        |  | Accumulated  |   |          | Amount | 
|                       |  | Gross             |        |  | Amortization |   |          | Net    | 
|                       |  |                   |        |  |              |   |          |        | 
|Customer relationships |  | $                 | 34,666 |  |              | $ | 21,103   |        |  | $ | 13,563 | 
|Non-compete agreements |  |                   | 5,121  |  |              |   | 4,300    |        |  |   | 821    | 
|Technology/tradename   |  |                   | 17,065 |  |              |   | 11,395   |        |  |   | 5,670  | 
|                       |  |                   |        |  |              |   |          |        | 
|Total                  |  | $                 | 56,852 |  |              | $ | 36,798   |        |  | $ | 20,054 | 
|                       |  |                   |        |  |              |   |          |        | 

|                       |  |                   |        |  |              |   |          |        |  |   |        | 
|---------------------- |  | ----------------- | ------ |  | ------------ | - | -------- | ------ |  | - | ------ | 
|                       |  | December 31, 2004 |       
|                       |  |                   |       
|                       |  | Carrying          |        |  |              |   | Carrying |       
|                       |  | Amount            |        |  | Accumulated  |   |          | Amount | 
|                       |  | Gross             |        |  | Amortization |   |          | Net    | 
|                       |  |                   |        |  |              |   |          |        | 
|Customer relationships |  | $                 | 25,406 |  |              | $ | 14,784   |        |  | $ | 10,622 | 
|Non-compete agreements |  |                   | 5,134  |  |              |   | 3,549    |        |  |   | 1,585  | 
|Technology/tradename   |  |                   | 15,002 |  |              |   | 9,912    |        |  |   | 5,090  | 
|                       |  |                   |        |  |              |   |          |        | 
|Total                  |  | $                 | 45,542 |  |              | $ | 28,245   |        |  | $ | 17,297 | 
|                       |  |                   |        |  |              |   |          |        | 



|                       |  |         |        |          |      |  |         |        |          |   |        |  |  |          |         |  |      |   |       |  |  |  |         | 
|---------------------- |  | ------- | ------ | -------- | ---- |  | ------- | ------ | -------- | - | ------ |  |  | -------- | ------- |  | ---- | - | ----- |  |  |  | ------- | 
|                       |  | 2005(1) |        |          | 2004 |  |         | 2003   |         
|                       |  |         |        |          |      |  |         |        |         
|                       |  |         |        | Weighted |      |  |         |        | Weighted |   |        |  |  | Weighted |        
|                       |  |         |        | Average  |      |  |         |        | Average  |   |        |  |  | Average  |        
|                       |  | Amount  |        |          | Life |  |         | Amount |          |   | Life   |  |  | Amount   |         |  | Life |  
|                       |  |         |        |          |      |  |         |        |          |   |        |  |  |          |         |  |      |  
|Customer Relationships |  | $       | 9,386  |          |      |  | 4 years |        |          | $ | 8,918  |  |  |          | 3 years |  |      | $ | 2,371 |  |  |  | 3 years | 
|Non-compete agreements |  |         |       |          |      |  |        |        |          |   | 1,284  |  |  |          | 3 years |  |      |   | 700   |  |  |  | 3 years | 
|Technology/tradename   |  |         | 2,196  |          |      |  | 4 years |        |          |   | 7,191  |  |  |          | 3 years |  |      |   | 2,135 |  |  |  | 3 years | 
|                       |  |         |        |          |      |  |         |        |          |   |        |  |  |          |         |  |      |  
|Total                  |  | $       | 11,582 |          |      |  | 4 years |        |          | $ | 17,393 |  |  |          | 3 years |  |      | $ | 5,206 |  |  |  | 3 years | 






|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | The Commerce5, Inc. purchase price allocation is preliminary and
    subject to adjustment.



|      |  |        |        | 
|----- |  | ------ | ------ | 
|Year  |  | Amount |       
|      |  |        |       
|2006  |  | $      | 10,226 | 
|2007  |  |        | 5,377  | 
|2008  |  |        | 3,133  | 
|2009  |  |        | 1,313  | 
|2010  |  |        | 5      | 
|      |  |        |       
|Total |  | $      | 20,054 | 
|      |  |        |       

64



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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                       |  |      |         |   |      |   |         |  
|---------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                       |  | 2005 |         |   | 2004 |  
|                       |  |      |         |   |      |  
|Tangible assets        |  | $    | 8,694   |   |      | $ | 15,869  |  
|Liabilities assumed    |  |      | (11,965 | ) |      |   | (17,064 | )
|Customer relationships |  |      | 9,386   |   |      |   | 8,918   |  
|Non-compete agreements |  |      |        |   |      |   | 1,284   |  
|Technology/tradename   |  |      | 2,196   |   |      |   | 7,191   |  
|Goodwill               |  |      | 47,827  |   |      |   | 123,481 |  
|                       |  |      |         |   |      |  
|Net assets acquired    |  | $    | 56,138  |   |      | $ | 139,679 |  
|                       |  |      |         |   |      |  



|   |                          
|-- | -------------------------
|5. | Stock-Based Compensation:





|                                                                                                    |                      |                                  |        |         |      |   |        |         |   |   |        |         |  
|--------------------------------------------------------------------------------------------------- | -------------------- | -------------------------------- | ------ | ------- | ---- | - | ------ | ------- | - | - | ------ | ------- | -
|                                                                                                    |                      | For the Years Ended December 31, |       
|                                                                                                    |                      |                                  |       
|                                                                                                    |                      | 2005                             |        |         | 2004 |   |        | 2003    |  
|                                                                                                    |                      |                                  |        |         |      |   |        |         |  
|Net income, as reported                                                                             |                      | $                                | 54,343 |         |      | $ | 35,324 |         |   | $ | 17,136 |        
|Add: Stock-based compensation, as reported                                                          |                      |                                  |       |         |      |   |       |         |   |   |       |        
|Deduct: Total stock-based compensation determined under fair
    value based method for all awards: |                      |                                  |        |         |      |   |        |         |   |   |        |        
|                                                                                                    | Compensation expense |                                  |        | (13,018 | )    |   |        | (26,426 | ) |   |        | (14,540 | )
|                                                                                                    | Tax benefit          |                                  |        | 4,531   |      |   |        |        |   |   |        |        |  
|                                                                                                    |                      |                                  |        |         |      |   |        |         |  
|Adjusted net income, fair value method for all stock-based awards                                   |                      | $                                | 45,856 |         |      | $ | 8,898  |         |   | $ | 2,596  |        
|                                                                                                    |                      |                                  |        |         |      |   |        |         |  
|Basic income per share  as reported                                                                |                      | $                                | 1.57   |         |      | $ | 1.09   |         |   | $ | 0.58   |        
|Diluted income per share  as reported                                                              |                      | $                                | 1.36   |         |      | $ | 0.96   |         |   | $ | 0.52   |        
|Basic income per share  SFAS No. 123 adjusted                                                      |                      | $                                | 1.33   |         |      | $ | 0.28   |         |   | $ | 0.09   |        
|Diluted income per share  SFAS No. 123 adjusted                                                    |                      | $                                | 1.19   |         |      | $ | 0.29   |         |   | $ | 0.08   |        

65



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                               |  |      |       |   |      |  |       |      |  |  |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                               |  | 2005 |       |   | 2004 |  |       | 2003 | 
|                                               |  |      |       |   |      |  |       |      | 
|Risk-free interest rate                        |  |      | 4     | % |      |  | 4     | %    |  |  | 4     | %
|Expected life (years)                          |  |      | 3.14  |   |      |  | 1-4   |      |  |  | 4     |  
|Volatility factor                              |  |      | 0.68  |   |      |  | 1.3   |      |  |  | 1.3   |  
|Expected dividends                             |  |      |      |   |      |  |      |      |  |  |      |  
|Weighted average fair value of options granted |  |      | 13.75 |   |      |  | 13.14 |      |  |  | 13.46 |  



|   |              
|-- | -------------
|6. | Income Taxes:



|              |  |                         |        |  |      |   |        |      |  |   |        | 
|------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|              |  | Year Ended December 31, |       
|              |  |                         |       
|              |  | 2005                    |        |  | 2004 |   |        | 2003 | 
|              |  |                         |        |  |      |   |        |      | 
|United States |  | $                       | 65,347 |  |      | $ | 33,778 |      |  | $ | 17,136 | 
|International |  |                         | 6,333  |  |      |   | 2,625  |      |  |   |       | 
|              |  |                         |        |  |      |   |        |      | 
|Total         |  | $                       | 71,680 |  |      | $ | 36,403 |      |  | $ | 17,136 | 
|              |  |                         |        |  |      |   |        |      | 



|                                                    |  |                         |         |   |      |   |       |      |  |   |   | 
|--------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ----- | ---- |  | - | - | 
|                                                    |  | Year Ended December 31,
|                                                    |  |                        
|                                                    |  | 2005                    |         |   | 2004 |   |       | 2003
|                                                    |  |                         |         |   |      |   |       |     
|Current tax expense (benefit):                      |  |                         |         |   |      |   |       |      |  |   |   | 
|United States federal                               |  | $                       | 23,161  |   |      | $ |      |      |  | $ |  | 
|State and local                                     |  |                         | 1,610   |   |      |   |      |      |  |   |  | 
|International                                       |  |                         | 3,825   |   |      |   | 1,079 |      |  |   |  | 
|                                                    |  |                         |         |   |      |   |       |      | 
|Total current provision for income taxes            |  |                         | 28,596  |   |      |   | 1,079 |      |  |   |  | 
|Deferred tax expense (benefit):                     |  |                         |         |   |      |   |       |      |  |   |   | 
|United States federal                               |  |                         | (10,288 | ) |      |   |      |      |  |   |  | 
|State and local                                     |  |                         | (647    | ) |      |   |      |      |  |   |  | 
|International                                       |  |                         | (324    | ) |      |   |      |      |  |   |  | 
|                                                    |  |                         |         |   |      |   |       |      | 
|Total deferred provision (benefit) for income taxes |  |                         | (11,259 | ) |      |   |      |      |  |   |  | 
|                                                    |  |                         |         |   |      |   |       |      | 
|Provision for income taxes                          |  | $                       | 17,337  |   |      | $ | 1,079 |      |  | $ |  | 
|                                                    |  |                         |         |   |      |   |       |      | 

66



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                                    |  |                         |        |   |      |   |         |      |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2005                    |        |   | 2004 |   |         | 2003 | 
|                                    |  |                         |        |   |      |   |         |      | 
|Tax expense at statutory rate       |  | $                       | 25,102 |   |      | $ | 12,740  |      |  | $ | 5,998  |  
|State taxes, net of federal benefit |  |                         | 1,359  |   |      |   | 1,484   |      |  |   | 725    |  
|International rate differential     |  |                         | (1,561 | ) |      |   | 128     |      |  |   |       |  
|Non-deductible goodwill             |  |                         |       |   |      |   | 183     |      |  |   | 314    |  
|Other                               |  |                         | 1,801  |   |      |   | 1,012   |      |  |   | 35     |  
|Change in valuation allowance       |  |                         | (9,364 | ) |      |   | (14,468 | )    |  |   | (7,072 | )
|                                    |  |                         |        |   |      |   |         |      | 
|Total                               |  | $                       | 17,337 |   |      | $ | 1,079   |      |  | $ |       |  
|                                    |  |                         |        |   |      |   |         |      | 



|                                            |  |      |         |   |      |   |         |  
|------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                            |  | 2005 |         |   | 2004 |  
|                                            |  |      |         |   |      |  
|Deferred tax assets:                        |  |      |         |   |      |   |         |  
|Net operating loss and credit carryforwards |  | $    | 47,944  |   |      | $ | 40,809  |  
|Nondeductible reserves and accruals         |  |      | 2,854   |   |      |   | 1,761   |  
|Depreciation and amortization               |  |      | 5,475   |   |      |   | 5,718   |  
|Valuation allowance                         |  |      | (17,504 | ) |      |   | (42,973 | )
|                                            |  |      |         |   |      |  
|Total                                       |  |      | 38,769  |   |      |   | 5,315   |  
|                                            |  |      |         |   |      |  
|Deferred tax liabilities:                   |  |      |         |   |      |   |         |  
|Depreciation                                |  |      | (788    | ) |      |   |        |  
|Other intangibles                           |  |      | (5,706  | ) |      |   | (5,315  | )
|                                            |  |      |         |   |      |  
|Total deferred tax liabilities              |  |      | (6,494  | ) |      |   | (5,315  | )
|                                            |  |      |         |   |      |  
|Net deferred tax assets                     |  | $    | 32,275  |   |      | $ |        |  
|                                            |  |      |         |   |      |  

paid-in




67



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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)


paid-in




step-up




|   |                               
|-- | ------------------------------
|7. | Commitments and Contingencies:



| |       
| | ------
| | Leases



|                                 |  |                   |       | 
|-------------------------------- |  | ----------------- | ----- | 
|Year Ending December 31,         |  | Lease Obligations |      
|                                 |  |                   |      
|2006                             |  | $                 | 2,921 | 
|2007                             |  | $                 | 2,270 | 
|2008                             |  | $                 | 1,729 | 
|2009                             |  | $                 | 612   | 
|2010-2011                        |  | $                 | 229   | 
|                                 |  |                   |      
|Total future minimum obligations |  | $                 | 7,761 | 
|                                 |  |                   |      



| |           
| | ----------
| | Litigation



68



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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




time-to




| |                           
| | --------------------------
| | Indemnification Provisions







|   |                
|-- | ---------------
|8. | Long-Term Debt:







69



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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)










|   |                      
|-- | ---------------------
|9. | Stockholders Equity:



| |                         
| | ------------------------
| | Share Repurchase Program





|    |                        
|--- | -----------------------
|10. | Employee Benefit Plans:



| |        
| | -------
| | Options





70



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##### Table of Contents



DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)






|                           |  |             |            |   |               |  |                 | 
|-------------------------- |  | ----------- | ---------- | - | ------------- |  | --------------- | 
|                           |  | Options     |            |   | Options Price | 
|                           |  | Outstanding |            |   | per Share     | 
|                           |  |             |            |   |               | 
|Balance, December 31, 2002 |  |             | 6,054,283  |   |               |  | $ 1.69 - $31.13 | 
|Grants                     |  |             | 2,858,651  |   |               |  | 8.98 -  27.40   | 
|Exercised                  |  |             | (1,678,761 | ) |               |  | 1.69 -  26.88   | 
|Cancelled                  |  |             | (568,027   | ) |               |  | 2.59 -  31.13   | 
|                           |  |             |            |   |               | 
|Balance, December 31, 2003 |  |             | 6,666,146  |   |               |  | 1.69 -  31.13   | 
|Grants                     |  |             | 1,603,600  |   |               |  | 20.60 -  24.86  | 
|Exercised                  |  |             | (1,942,212 | ) |               |  | 2.59 -  31.13   | 
|Cancelled                  |  |             | (612,794   | ) |               |  | 2.59 -  31.13   | 
|                           |  |             |            |   |               | 
|Balance, December 31, 2004 |  |             | 5,714,740  |   |               |  | 1.69 -  31.13   | 
|Grants                     |  |             | 846,678    |   |               |  | 23.90 -  30.69  | 
|Exercised                  |  |             | (1,719,114 | ) |               |  | 1.69 -  30.69   | 
|Cancelled                  |  |             | (318,919   | ) |               |  | 3.88 -  27.40   | 
|                           |  |             |            |   |               | 
|Balance, December 31, 2005 |  |             | 4,523,385  |   |               |  | $ 1.69 - $31.13 | 
|                           |  |             |            |   |               | 



|                |  |                     |           |  |                     |  |           |               |  |   |             |  |  |               |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- |  | ------------------- |  | --------- | ------------- |  | - | ----------- |  |  | ------------- | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |           |  | Options Exercisable | 
|                |  |                     |           |  |                     | 
|                |  | Number              |           |  | Weighted Average    |  |           | Weighted      |  |   | Number      |  |  | Weighted      |          
|Exercise Price  |  | Outstanding         |           |  | Life Remaining      |  |           | Average Price |  |   | Exercisable |  |  | Average Price |          
|                |  |                     |           |  |                     |  |           |               |  |   |             |  |  |               |          
|$ 1.69 - $ 3.88 |  |                     | 141,004   |  |                     |  | 3.1 years |               |  | $ | 3.04        |  |  |               | 141,004   |  |  | $ | 3.04  | 
|4.56 -   7.55   |  |                     | 1,062,616 |  |                     |  | 5.4 years |               |  |   | 5.41        |  |  |               | 947,685   |  |  |   | 5.35  | 
|9.13 -  13.92   |  |                     | 967,156   |  |                     |  | 6.8 years |               |  |   | 11.42       |  |  |               | 538,100   |  |  |   | 11.92 | 
|16.72 -  22.98  |  |                     | 1,036,174 |  |                     |  | 7.7 years |               |  |   | 22.00       |  |  |               | 634,531   |  |  |   | 22.34 | 
|23.01 -  31.13  |  |                     | 1,316,435 |  |                     |  | 8.8 years |               |  |   | 26.94       |  |  |               | 219,141   |  |  |   | 25.73 | 
|                |  |                     |           |  |                     |  |           |               |  |   |             |  |  |               |          
|$ 1.69 - $31.13 |  |                     | 4,523,385 |  |                     |  | 7.1 years |               |  | $ | 16.69       |  |  |               | 2,480,461 |  |  | $ | 12.79 | 



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan



71



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




| |                                 
| | --------------------------------
| | Inducement Equity Incentive Plan





| |                      
| | ---------------------
| | Employee Benefit Plan





|    |                     
|--- | --------------------
|11. | Segment Information:

e-commerce


E-Business




|              |       |      |         |         |      |   |         |         |  |   |        |         | 
|------------- | ----- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------- | 
|              |       | 2005 |         |         | 2004 |   |         | 2003    | 
|              |       |      |         |         |      |   |         |         | 
|United States |       | $    | 135,110 |         |      | $ | 106,350 |         |  | $ | 76,913 |        
|Europe        |       |      | 59,951  |         |      |   | 35,450  |         |  |   | 16,192 |        
|Other         |       |      | 25,347  |         |      |   | 12,330  |         |  |   | 8,096  |        
|              |       |      |         |         |      |   |         |         | 
|              | Total |      | $       | 220,408 |      |   | $       | 154,130 |  |   | $      | 101,201 | 
|              |       |      |         |         |      |   |         |         | 



72



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)




|                             |                            |               |         |        |        |   |         |               |  |   |         |        |  |   |         |         | 
|---------------------------- | -------------------------- | ------------- | ------- | ------ | ------ | - | ------- | ------------- |  | - | ------- | ------ |  | - | ------- | ------- | 
|                             |                            | 2005          |         |        | 2004   |  
|                             |                            |               |         |        |        |  
|                             |                            | United States |         |        | Europe |   |         | United States |  |   | Europe  |       
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|Total property and equipment |                            | $             | 46,694  |        |        | $ | 5,306   |               |  | $ | 37,588  |        |  | $ | 3,551   |        
|Accumulated depreciation     |                            |               | (30,691 | )      |        |   | (3,354  | )             |  |   | (21,406 | )      |  |   | (2,366  | )      
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|                             | Net property and equipment |               | $       | 16,003 |        |   | $       | 1,952         |  |   | $       | 16,182 |  |   | $       | 1,185   | 
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|Total intangible assets      |                            | $             | 42,871  |        |        | $ | 13,981  |               |  | $ | 31,290  |        |  | $ | 14,252  |        
|Accumulated amortization     |                            |               | (28,995 | )      |        |   | (7,803  | )             |  |   | (25,192 | )      |  |   | (3,053  | )      
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|                             | Net intangible assets      |               | $       | 13,876 |        |   | $       | 6,178         |  |   | $       | 6,098  |  |   | $       | 11,199  | 
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|Total goodwill               |                            | $             | 109,374 |        |        | $ | 108,380 |               |  | $ | 59,766  |        |  | $ | 110,775 |        
|Accumulated amortization     |                            |               | (22,455 | )      |        |   |        |               |  |   | (22,455 | )      |  |   |        |        
|                             |                            |               |         |        |        |   |         |               |  |   |         |       
|                             | Net goodwill               |               | $       | 86,919 |        |   | $       | 108,380       |  |   | $       | 37,311 |  |   | $       | 110,775 | 
|                             |                            |               |         |        |        |   |         |               |  |   |         |       



|    |                   
|--- | ------------------
|12. | Subsequent Events:



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DIGITAL RIVER, INC.


Notes to Consolidated Financial
Statements  (Continued)


Digital River, Inc.


Schedule II


For Years Ended December 31, 2005, 2004 and 2003


(In thousands)


|                                |  |                   |       |            |           |   |       |            |  |            |             |   |  |   |       | 
|------------------------------- |  | ----------------- | ----- | ---------- | --------- | - | ----- | ---------- |  | ---------- | ----------- | - |  | - | ----- | 
|                                |  |                   |       | Charges to |           |   |       |            | 
|                                |  | Balance at        |       |            | Costs and |   |       |            |  | Balance at |            
|2005                            |  | Beginning of Year |       |            | Expenses  |   |       | Deductions |  |            | End of Year |  
|                                |  |                   |       |            |           |   |       |            |  |            |             |  
|Allowance for doubtful accounts |  | $                 | 1,146 |            |           | $ | 468   |            |  | $          | (591        | ) |  | $ | 1,023 | 
|Accrued chargeback reserve      |  |                   | 2,246 |            |           |   | 3,031 |            |  |            | (3,832      | ) |  |   | 1,445 | 

|                                |  |                   |       |            |           |   |       |            |  |            |             |   |  |   |       | 
|------------------------------- |  | ----------------- | ----- | ---------- | --------- | - | ----- | ---------- |  | ---------- | ----------- | - |  | - | ----- | 
|                                |  |                   |       | Charges to |           |   |       |            | 
|                                |  | Balance at        |       |            | Costs and |   |       |            |  | Balance at |            
|2004                            |  | Beginning of Year |       |            | Expenses  |   |       | Deductions |  |            | End of Year |  
|                                |  |                   |       |            |           |   |       |            |  |            |             |  
|Allowance for doubtful accounts |  | $                 | 319   |            |           | $ | 1,061 |            |  | $          | (234        | ) |  | $ | 1,146 | 
|Accrued chargeback reserve      |  |                   | 1,774 |            |           |   | 3,008 |            |  |            | (2,536      | ) |  |   | 2,246 | 

|                                |  |                   |     |            |           |   |       |            |  |            |             |   |  |   |       | 
|------------------------------- |  | ----------------- | --- | ---------- | --------- | - | ----- | ---------- |  | ---------- | ----------- | - |  | - | ----- | 
|                                |  |                   |     | Charges to |           |   |       |            | 
|                                |  | Balance at        |     |            | Costs and |   |       |            |  | Balance at |            
|2003                            |  | Beginning of Year |     |            | Expenses  |   |       | Deductions |  |            | End of Year |  
|                                |  |                   |     |            |           |   |       |            |  |            |             |  
|Allowance for doubtful accounts |  | $                 | 905 |            |           | $ | 820   |            |  | $          | (1,406      | ) |  | $ | 319   | 
|Accrued chargeback reserve      |  |                   | 841 |            |           |   | 3,005 |            |  |            | (2,072      | ) |  |   | 1,774 | 

|                          |  |                   |        |          |               |          |               |              |  |  |             |   |  |   |        | 
|------------------------- |  | ----------------- | ------ | -------- | ------------- | -------- | ------------- | ------------ |  |  | ----------- | - |  | - | ------ | 
|                          |  |                   |        |          |               | Charged/ |               |              | 
|                          |  |                   |        | Charged/ |               |          | (Credited) to |              |  | 
|Deferred Income Tax Asset |  | Balance at        |        |          | (Credited) to |          |               | Other        |  |  | Balance at  |  
|Valuation Allowance       |  | Beginning of Year |        |          | Expenses      |          |               | Accounts (1) |  |  | End of Year |  
|                          |  |                   |        |          |               |          |               |              |  |  |             |  
|2005                      |  | $                 | 42,973 |          |               | $        | (9,364        | )            |  |  | (16,105     | ) |  | $ | 17,504 | 
|2004                      |  |                   | 42,944 |          |               |          | (14,468       | )            |  |  | 14,497      |   |  |   | 42,973 | 
|2003                      |  |                   | 38,965 |          |               |          | (7,072        | )            |  |  | 11,051      |   |  |   | 42,944 | 






|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | Amounts not charged (credited) to expenses were charged
    (credited) to equity or goodwill

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##### Table of Contents



INDEX TO EXHIBITS


|        |    |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 2  | .1(1)                   |  | Stock Purchase Agreement, dated as of April 17, 2004, by
    and among Digital River, Inc., Blitz F03-1424 GmbH, a company
    organized under the laws of Germany and a wholly owned
    subsidiary of Digital River, and the selling shareholders of
    element 5 Informationstechnologien und 
    dienstleistungen Aktiengesellschaft, a company organized under
    the laws of Germany.
|       
|        | 2  | .2(2)                   |  | Amended and Restated Asset Purchase Agreement dated
    February 9, 2002, by and between the Registrant and
    Beyond.com.                                                                                                                                                                                                                                                                    
|       
|        | 2  | .3(3)                   |  | First Amendment to the Amended and Restated Asset Purchase
    Agreement dated as of March 15, 2002, by and between the
    Registrant and Beyond.com.                                                                                                                                                                                                                                         
|       
|        | 2  | .4(3)                   |  | Post-Closing Amendment to the Amended and Restated Asset
    Purchase Agreement dated as of March 31, 2002, by and
    between the Registrant and Beyond.com.                                                                                                                                                                                                                                  
|       
|        | 3  | .1(4)                   |  | Amended and Restated Certificate of Incorporation of the
    Registrant, as currently in effect.                                                                                                                                                                                                                                                                                               
|       
|        | 3  | .2(6)                   |  | Amended and Restated Bylaws of the Registrant, as currently in
    effect.                                                                                                                                                                                                                                                                                                                     
|       
|        | 3  | .3(4)                   |  | Certificate of Amendment of Amended and Restated Certificate of
    Incorporation (amending Exhibit 3.1).                                                                                                                                                                                                                                                                                      
|       
|        | 4  | .1(7)                   |  | Specimen Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 4  | .2(4)                   |  | Form of Senior Debt Indenture.                                                                                                                                                                                                                                                                                                                                                                 
|       
|        | 4  | .3(4)                   |  | Form of Subordinated Debt Indenture.                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 4  | .4                      |  | References are hereby made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                                                                                                                                                                                                                                       
|       
|        | 4  | .5(13)                  |  | 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.                                                                                                                                                                                                                                         
|       
|        | 10 | .1(7)                   |  | Form of Indemnity Agreement between Registrant and each of its
    directors and executive officers.                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .3(7)                   |  | Consent to Assignment and Assumption of Lease dated
    April 22, 1998, by and between CSM Investors, Inc.,
    IntraNet Integration Group, Inc. and Registrant.                                                                                                                                                                                                                               
|       
|        | 10 | .4(5)                   |  | Assignment of Lease dated April 21, 1998, by and between
    Intranet Integration Group, Inc. and Registrant.                                                                                                                                                                                                                                                                                  
|       
|        | 10 | .5(5)                   |  | Lease Agreement dated January 18, 2000, between Property
    Reserve, Inc. and Registrant.                                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .6(6)                   |  | First Amendment of Lease dated January 31, 2001, to that
    certain Lease dated April 24, 1996, between CSM Investors,
    Inc. and Registrant (as assignee of Intranet Integration Group,
    Inc.).                                                                                                                                                                                         
|       
|        | 10 | .7(8)                   |  | 1998 Stock Option Plan, as amended and superseded by
    Exhibit 10.19.*                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .8(9)                   |  | 1999 Stock Option Plan, formerly known as the 1999 Non-Officer
    Stock Option Plan, as amended and superseded by
    Exhibit 10.19.*                                                                                                                                                                                                                                                         
|       
|        | 10 | .9(8)                   |  | 2000 Employee Stock Purchase Plan, as amended and offering.*                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .11(10)                 |  | Second Amendment of Lease dated April 22, 2002, to that
    certain Lease dated April 24, 1996, between CSM Investors,
    Inc. and Registrant (as assignee of Intranet Integration Group,
    Inc.) as amended.                                                                                                                                                                               
|       
|        | 10 | .12(10)                 |  | Second Amendment of Lease dated April 28, 2003, to that
    certain Lease dated January 18, 2000, between Property
    Reserve Inc. and Registrant.                                                                                                                                                                                                                                            
|       
|        | 10 | .13(11)                 |  | Employment Agreement with Jay Kerutis.*                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .14(12)                 |  | Employment Agreement with Gary Howorka.*                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .15(13)                 |  | Registration Rights Agreement dated as of June 1, 2004,
    between Digital River, Inc. and the initial purchasers of Senior
    Convertible Notes due January 1, 2024.                                                                                                                                                                                                                        
|       
|        | 10 | .16(14)                 |  | Supplemental Agreement and Settlement Agreement, by and among
    Digital River, Inc., Digital River GmBH, element 5 AG,
    Messrs. Clemens Roth, Christopher Reimold, Gerrit Schumann,
    Stephan Naujoks and various other former element
    5 shareholders, dated as of January 18, 2005.                                                                                                

75



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##### Table of Contents



|        |    |                         |  |                                                                                                                                                                                                                                                           
|------- | -- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 10 | .17(15)                 |  | Summary of Compensation Program for Non-Employee Directors.                                                                                                                                                                                               
|       
|        | 10 | .18(16)                 |  | Amended and Restated Authorized Symantec Electronic Reseller for
    Shop Symantec Agreement by and among Symantec Corporation,
    Symantec Limited and Digital River, Inc. dated as of
    July 1, 2003, including Amendments 2 through 10
    thereto.
|       
|        | 10 | .19(17)                 |  | 1998 Equity Incentive Plan (formerly known as 1998 Stock Option
    Plan).*                                                                                                                                                                               
|       
|        | 10 | .20(18)                 |  | Employment Agreement between Digital River, Inc. and Carter D.
    Hicks.*                                                                                                                                                                                
|       
|        | 10 | .21(18)                 |  | Employment Offer Letter between Digital River, Inc. and Thomas
    M. Donnelly.*                                                                                                                                                                          
|       
|        | 10 | .22(19)                 |  | Amendment number 11 to the Amended and Restated Authorized
    Symantec Electronic Reseller for Shop Symantec Agreement by and
    among Symantec Corporation, Symantec Limited and Digital River,
    Inc. dated as of June 15, 2005.                   
|       
|        | 10 | .23(19)                 |  | Employment Agreement between Digital River, Inc. and Joel A.
    Ronning.*                                                                                                                                                                                
|       
|        | 10 | .24(19)                 |  | Form of Amendment to Non-Qualified Stock Option Agreement.*                                                                                                                                                                                               
|       
|        | 10 | .25(20)                 |  | Inducement Equity Incentive Plan.*                                                                                                                                                                                                                        
|       
|        | 12 | .1                      |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                        
|       
|        | 21 | .1                      |  | Subsidiaries of Digital River, Inc.                                                                                                                                                                                                                       
|       
|        | 23 | .1                      |  | Consent of Independent Registered Public Accounting Firm, dated
    March 14, 2006.                                                                                                                                                                       
|       
|        | 24 | .1                      |  | Power of Attorney, pursuant to which amendments to this Annual
    Report on Form 10-K may be filed, is included on the
    signature pages of this Annual Report on Form 10-K.                                                                           
|       
|        | 31 | .1                      |  | Certification of Digital River, Inc.s Chief Executive
    Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                        
|       
|        | 31 | .2                      |  | Certification of Digital River, Inc.s Chief Financial
    Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                        
|       
|        | 32 |                         |  | Certification of Digital River, Inc.s Chief Executive
    Officer and Chief Financial Officer pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                             
|       
|        | *  |                         |  | Management contract or compensatory plan.                                                                                                                                                                                                                 
|       
|        |   |                         |  | Confidential treatment has been requested for portions of this
    agreement, which portions have been filed separately with the
    SEC.                                                                                                                 






| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed May 4, 2004.                                                         
|
| | (2) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed February 11, 2002.                                                   
|
| | (3) | Incorporated by reference from the Companys Current Report
    on Form 8-K on
    filed April 15, 2002.                                                      
|
| | (4) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-3 (File
    No. 333-81626),
    declared effective on February 12, 2002.
|
| | (5) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 1999, filed on March 30,
    2000.            
|
| | (6) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 2000, filed on March 27,
    2001.            
|
| | (7) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1 (File
    No. 333-56787),
    declared effective on August 11, 1998.  
|
| | (8) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-8 (File
    No. 333-105864)
    filed on June 5, 2003.                  
|
| | (9) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended June 30, 2003, filed on August 14, 2003.         



|     |                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended March 31, 2003, filed on May 15, 2003.

76



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|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended September 30, 2003, filed on
    November 13, 2003.
|    
|(12) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended December 31, 2003, filed on March 15,
    2004.              
|    
|(13) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on July 13, 2004.                                                         
|    
|(14) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on January 20, 2005.                                                      
|    
|(15) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on February 15, 2005.                                                     
|    
|(16) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on June 15, 2005.                                                         
|    
|(17) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on May 31, 2005.                                                          
|    
|(18) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on July 5, 2005.                                                          
|    
|(19) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended June 30, 2005, filed on August 9, 2005.            
|    
|(20) | Incorporated by reference from the Companys Current Report
    on Form 8-K filed
    on December 20, 2005.                                                     

77