Edgar Filing: DIGITAL RIVER INC /DE

10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008


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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 000-24643

DIGITAL RIVER, INC.

(Exact name of registrant as specified in its charter)


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

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

(952) 253-1234
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of common stock outstanding at October 1, 2008 was 37,090,614 shares.

DIGITAL RIVER, INC.
Form 10-Q
Index


PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3

	Condensed Consolidated Statements of Income for the three and nine months ended
	September 30, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September
	30, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Qualitative and Quantitative Disclosure about Market Risk	27

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6.	Exhibits	42

SIGNATURES		43

EXHIBIT INDEX		44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DIGITAL RIVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


	(Unaudited)
	September 30,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	345,249		$	381,788
Short-term investments		149,907			315,636
Accounts receivable, net of allowance of $3,004 and $2,489		54,699			64,914
Deferred income taxes		2,784			7,899
Prepaid expenses and other		17,438			4,577

Total current assets		570,077			774,814


Property and equipment, net		34,235			31,102
Goodwill		278,732			261,885
Intangible assets, net of accumulated amortization of $64,859 and $59,493		35,454			32,382
Long-term investments		109,008			—
Deferred income taxes		15,606			15,606
Other assets		6,631			11,955

TOTAL ASSETS	$	1,049,743		$	1,127,744


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Convertible senior notes	$	195,000		$	—
Accounts payable		181,033			180,386
Accrued payroll		17,345			12,704
Deferred revenue		12,289			10,384
Accrued acquisition costs		4,500			399
Other accrued liabilities		31,491			41,229

Total current liabilities		441,658			245,102


NON-CURRENT LIABILITIES:
Convertible senior notes		—			195,000
Other liabilities		11,377			11,362

Total non-current liabilities		11,377			206,362

TOTAL LIABILITIES		453,035			451,464


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common Stock, $.01 par value; 120,000,000 shares authorized; 43,294,562 and 42,502,019 shares issued		433			425
Treasury stock at cost; 6,203,948 and 1,952,884 shares		(215,952	)		(77,707	)
Additional paid-in capital		617,087			597,128
Retained earnings		172,637			125,501
Accumulated other comprehensive income		22,503			30,933

Total stockholders’ equity		596,708			676,280

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,049,743		$	1,127,744

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Revenue	$	96,301		$	82,539		$	298,309		$	252,397
Costs and expenses:
Direct cost of services		3,913			3,009			12,557			7,998
Network and infrastructure		10,552			7,983			31,136			22,812
Sales and marketing		35,419			32,945			114,396			99,927
Product research and development		12,993			10,170			38,737			27,057
General and administrative		9,861			9,055			30,939			28,711
Depreciation and amortization		4,047			3,120			11,838			9,269
Amortization of acquisition-related intangibles		2,001			1,611			6,347			5,964

Total costs and expenses		78,786			67,893			245,950			201,738

Income from operations		17,515			14,646			52,359			50,659
Interest income		4,513			7,831			15,057			23,977
Other expense, net		(1,387	)		(303	)		(3,789	)		(1,449	)

Income before income tax expense		20,641			22,174			63,627			73,187
Income tax expense		5,007			6,875			16,491			22,689

Net income	$	15,634		$	15,299		$	47,136		$	50,498


Net income per share — basic	$	0.43		$	0.38		$	1.27		$	1.25

Net income per share — diluted	$	0.39		$	0.35		$	1.15		$	1.12


Shares used in per-share calculation — basic		36,495			40,078			37,186			40,555

Shares used in per-share calculation — diluted		41,620			45,386			42,203			46,099

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)


	Nine Months Ended
	September 30,
	2008			2007
OPERATING ACTIVITIES:
Net income	$	47,136		$	50,498
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of acquisition-related intangibles		6,347			5,964
Change in accounts receivable allowance, net of acquisitions		632			628
Depreciation and amortization		11,838			9,269
Stock-based compensation expense related to stock-based compensation plans		10,161			10,536
Excess tax benefits from stock-based compensation		(1,685	)		(11,297	)
Deferred and other income taxes		6,927			17,337
Change in operating assets and liabilities
Accounts receivable		10,204			(8,373	)
Prepaid and other assets		(7,819	)		(1,652	)
Accounts payable		1,310			810
Deferred revenue		1,789			1,782
Income tax payable		(10,289	)		3,314
Other accrued liabilities		39			5,912

Net cash provided by operating activities		76,590			84,728


INVESTING ACTIVITIES:
Purchases of investments		(460,549	)		(228,342	)
Sales of investments		516,108			197,645
Cash paid for acquisitions, net of cash received		(22,221	)		(30,573	)
Purchases of equipment and capitalized software		(15,169	)		(9,752	)

Net cash provided by/(used for) investing activities		18,169			(71,022	)


FINANCING ACTIVITIES:
Exercise of stock options		6,841			11,244
Sales of common stock under employee stock purchase plan		1,446			1,244
Repurchase of common stock		(137,858	)		(62,968	)
Repurchase of restricted stock to satisfy tax withholding obligation		(387	)		(382	)
Excess tax benefits from stock-based compensation		1,685			11,297

Net cash used for financing activities		(128,273	)		(39,565	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(3,025	)		6,716

NET DECREASE IN CASH AND CASH EQUIVALENTS		(36,539	)		(19,143	)
CASH AND CASH EQUIVALENTS, beginning of period		381,788			390,243

CASH AND CASH EQUIVALENTS, end of period	$	345,249		$	371,100

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest on convertible senior notes	$	2,438		$	2,438

Cash paid for income taxes	$	17,039		$	1,819

Noncash investing and financing activities:
Common stock issued in acquisitions and earn-outs	$	—		$	986

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which in our opinion are necessary to fairly state our consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2008. The December 31, 2007, balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States.

Summary of Significant Accounting Policies

A detailed description of our significant accounting policies can be found in our most recent Annual Report filed on Form 10-K for the fiscal year ended December 31, 2007.

Research and Development and Software Development

Research and development expenses consist primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement of existing products and services, quality assurance, and testing. Costs to develop software for internal use are required to be capitalized and amortized over the estimated useful life of the software in accordance with AICPA Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” We capitalized $1.6 million related to software development during the nine months ended September 30, 2008, inclusive of small amounts outside of Product Research and Development as recorded in our Condensed Consolidated Statement of Income. We did not capitalize any significant costs related to software development during the nine months ended September 30, 2007.

Stock-Based Compensation Expense

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors including stock options, restricted stock grants and employee stock purchases made through our Employee Stock Purchase Plan based on estimated fair values.

We have adopted SFAS 123(R) using the modified prospective transition method under which prior periods are not revised. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. Stock-based compensation expense recognized in our Condensed Consolidated Statement of Income for 2007 and 2008 includes compensation expense for share-based awards granted prior to, but not yet vested, as of December 31, 2005, as well as compensation expense for the share-based payment awards granted subsequent to December 31, 2005. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of our common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period. As stock-based compensation expense recognized in our Condensed Consolidated Statement of Income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

SFAS 123(R) also requires the benefits of tax deductions in excess of recognized stock-based compensation expense be reported as a financing cash flow, rather than an operating cash flow as required prior to adoption of SFAS 123(R) in our Condensed Consolidated Statement of Cash Flows.

See Note 4 in the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information regarding our stock-based compensation plans.

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Comprehensive Income

The components of our comprehensive income include net income and adjustments to stockholders’ equity for the foreign currency translation adjustments which was a $7.3 million loss for the nine months ended September 30, 2008, and net unrealized gain (loss) on available-for-sale securities which was a $1.2 million loss for the nine months ended September 30, 2008.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” This revised Statement, which we refer to as SFAS No. 141(R), is intended to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting rules. SFAS No. 141(R) will significantly change the accounting for business combinations in a number of areas, including the treatment of contingent consideration, contingencies, acquisition costs and restructuring costs. Also under this Statement, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. This Statement was initially effective as of January 1, 2008, but in February 2008, the FASB delayed the effective date for applying this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted FAS 157 as of January 1, 2008 for assets and liabilities within its scope and the impact was immaterial to our financial statements. Nonfinancial assets and liabilities for which we have not applied the provisions of FAS 157 include those measured at fair value in goodwill and indefinite lived intangible asset impairment testing, and asset retirement obligations initially measured at fair value and will be adopted in 2009. See Note 7 for further information.

2. NET INCOME PER SHARE

Basic income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated by dividing net income, adjusted to exclude interest expense and financing cost amortization related to potentially dilutive securities, by the weighted average number of common shares outstanding during the period, plus any additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period.

The following table summarizes the computation of basic and diluted net income per share (in thousands, except per share amounts):

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Earnings per share — basic
Net income — basic	$	15,634	$	15,299	$	47,136	$	50,498
Weighted average shares outstanding — basic		36,495		40,078		37,186		40,555

Earnings per share — basic	$	0.43	$	0.38	$	1.27	$	1.25


Earnings per share — diluted
Net income — basic	$	15,634	$	15,299	$	47,136	$	50,498
Exclude: Interest expense and amortized financing cost of convertible senior notes, net of tax benefit		435		434		1,304		1,304

Net income — diluted	$	16,069	$	15,733	$	48,440	$	51,802

Weighted average shares outstanding — basic		36,495		40,078		37,186		40,555
Dilutive impact of non-vested stock and options outstanding		700		883		592		1,119
Dilutive impact of convertible senior notes		4,425		4,425		4,425		4,425

Weighted average shares outstanding — diluted		41,620		45,386		42,203		46,099

Net income per share — diluted	$	0.39	$	0.35	$	1.15	$	1.12

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.

3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS

Acquisitions completed in 2008

On September 1, 2008, we acquired all of the capital stock of Think Subscription, Inc. (Think Subscription), a privately-held company based in Provo, Utah, for approximately $5.1 million in cash. Think Subscription provides subscription management and fulfillment software to content publishers, online service providers, media vendors and other subscription-based businesses. The agreement also provides Think Subscription shareholders with an earn-out opportunity based on Think Subscription achieving certain revenue and earnings targets during the first three years subsequent to the acquisition. Any future earn-out will result in additional goodwill. The allocation of the purchase price of Think Subscription will be finalized upon completion of the analysis of the fair market value of Think Subscription’s assets. The result of the allocation of the purchase price between amortizable costs and goodwill could have an impact on our future operating results.

On January 1, 2008, we acquired all of the capital stock of DigitalSwift Corporation (DigitalSwift), a privately-held company based in Madison, Georgia, for approximately $9.2 million in cash. DigitalSwift is a manufacturer and fulfiller of on-demand, dynamic and build-to-order CDs and DVDs to consumers. The agreement also provides DigitalSwift shareholders with an earn-out opportunity based on DigitalSwift achieving certain revenue and earnings targets during the first year subsequent to the acquisition. Any future earn-out will result in additional goodwill.

On January 1, 2008, we acquired the assets of IA Users Club d.b.a. CustomCD, Inc. (CustomCD), a privately held company based in Portland, Oregon and Krefeld, Germany, for approximately $7.0 million in cash. This acquisition involved an asset purchase of the US-based business and a stock purchase of the business located in Germany. CustomCD creates, sells and delivers to consumers custom CDs and DVDs containing software, games, and other licensed content. The agreement also provides CustomCD shareholders with an earn-out opportunity based on CustomCD achieving certain revenue and earnings targets during the first two years subsequent to the acquisition. Any future earn-out will result in additional goodwill.

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Acquisitions completed in 2007

On September 1, 2007, we acquired all of the capital stock of NetGiro Systems AB (NetGiro), a privately held company based in Stockholm, Sweden, for approximately $27.4 million in cash. NetGiro is a payment service provider. The agreement also provides NetGiro shareholders with an earn-out opportunity based on NetGiro achieving certain revenue and earnings targets during the first year subsequent to the acquisition. Any future earn-out will result in additional goodwill.

Future Earn-outs

As of September 30, 2008, there was an estimated potential for future earn-outs of $4.2 million in accrued acquisition liabilities. Any of the estimated maximum potential future earn-out beyond the $4.2 million accrual will result in additional goodwill.

Pro Forma Operating Results (Unaudited)

The consolidated financial statements include the operating results of each business from the date of acquisition. The following unaudited pro forma condensed results of operations for the three and nine months ended September 30, 2008 and 2007 have been prepared as if each of the acquisitions in 2008 and 2007 had occurred on January 1, 2007 (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

Revenue	$	96,687	$	86,580	$	299,780	$	265,548
Income from operations		17,101		14,081		51,516		48,226
Net income		15,220		14,735		46,296		48,068

Basic net income per share	$	0.42	$	0.37	$	1.24	$	1.19
Diluted net income per	$	0.38	$	0.33	$	1.13	$	1.07

This pro forma financial information does not purport to represent results that would actually have been obtained if the transactions had been completed on January 1, 2007, or any future results that may be realized.

Goodwill and Other Intangible Assets

We account for our goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 precludes the amortization of goodwill and intangible assets with indefinite lives, but these assets are reviewed annually (or more frequently if impairment indicators arise) for impairment.

We complete our annual impairment test using a two-step approach based in the fourth quarter of each fiscal year, and reassess any intangible assets, including goodwill, recorded in connection with earlier acquisitions. There was no material impairment of goodwill or other intangible assets in the three and nine months ended September 30, 2008 and 2007.

Information regarding our other intangible assets is as follows (in thousands):

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	As of September 30, 2008
	Carrying Amount		Accumulated		Carrying Amount
	Gross		Amortization		Net
Customer relationships	$	63,375	$	37,067	$	26,308
Non-compete agreements		5,441		5,319		122
Technology/tradename		31,497		22,473		9,024

Total	$	100,313	$	64,859	$	35,454


	As of December 31, 2007
	Carrying Amount		Accumulated		Carrying Amount
	Gross		Amortization		Net
Customer relationships	$	57,327	$	33,761	$	23,566
Non-compete agreements		5,351		5,328		23
Technology/tradename		29,197		20,404		8,793

Total	$	91,875	$	59,493	$	32,382

Amortization expense for the three months ended September 30, 2008 and 2007 was $2.0 million and $1.6 million, respectively and $6.3 million and $6.0 million for the nine months ended September 30, 2008 and 2007 respectively. The result of the allocation of the purchase price between amortizable costs and goodwill could have an impact on our future operating results. Estimated amortization expense for the remaining life of the intangible assets, based on intangible assets as of September 30, 2008, is as follows (in thousands):


Year

2008	$	2,118
2009		7,660
2010		6,132
2011		4,856
2012		4,587
2013		2,689
Thereafter		7,412

Total	$	35,454

4. STOCKHOLDERS’ EQUITY

Option and Restricted Stock Awards

2007 Plan

Our stockholders approved the Digital River, Inc. 2007 Equity Incentive Plan (the “2007 Plan”) at the Company’s annual stockholder meeting held on May 31, 2007. The number of shares issuable under the 2007 Plan equals 2,000,000 shares of our common stock. In addition, shares not issued under the 1998 Plan shall become available for issuance under the 2007 Plan to the extent a stock option or other stock award under the 1998 Plan expires or terminates before shares of common stock are issued under the award. Under our 2007 Equity Incentive Plan we have the flexibility to grant incentive and non-statutory stock options, restricted stock awards, restricted stock unit awards and performance shares to our directors, employees, and consultants.

1998 Plan

The 1998 Equity Incentive Plan expired in June 2008 except as to options still outstanding under the Plan.

General Stock Award Information

As of September 30, 2008, there were 1,698,054 shares available for future awards under our 2007 Plan. The number of shares available has been reduced by three shares for every two shares of restricted stock awards granted under the Plans.

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Options granted to employees typically expire no later than ten years after the date of grant. Incentive stock option grants must have an exercise price of at least 100% of the fair market value of a share of common stock on the grant date. Incentive stock options granted to employees who, immediately before such grant, owned stock directly or indirectly representing more than 10% of the voting power of our stock, will have an exercise price of 110% of the fair market value of a share of common stock on the grant date and will expire no later than five years from the date of grant.

A summary of the changes in outstanding options is as follows:


									Weighted
	Shares						Options		Average
	Available			Options			Price		Price
	for Grant			Outstanding			Per Share		Per Share
Balance, December 31, 2006		1,540,200			3,557,783		$	2.59 - $57.36	$	18.68
Granted		(573,376	)		573,376			45.07 - 56.61		54.17
Restricted stock effect on shares available for grant		(251,426	)		N/A			N/A		N/A
Exercised					(1,219,519	)		2.59 - 45.24		11.08
Canceled/expired		133,330			(133,330	)		4.56 - 56.61		38.01
Additional Shares Reserved		2,000,000			N/A			N/A		N/A

Balance, December 31, 2007		2,848,728			2,778,310		$	2.59 - $57.36	$	28.41
Granted		(707,000	)		707,000			30.68 - 41.44		32.26
Restricted stock effect on shares available for grant		(527,334	)		N/A			N/A		N/A
Exercised					(389,564	)		4.56 - 38.17		17.56
Canceled/expired		83,660			(83,660	)		9.13 - 56.61		44.47

Balance, September 30, 2008		1,698,054			3,012,086		$	2.59 - $57.36	$	30.27

The total pretax intrinsic value of options exercised during the nine months ended September 30, 2008, was $7.7 million.

The following table summarizes significant ranges of outstanding and exercisable options under our 1998 Plan and 2007 Plan as of September 30, 2008:


	Options Outstanding							Options Exercisable
			Weighted	Weighted		Aggregate				Weighted		Aggregate
	Number		Average	Average		Intrinsic		Number		Average		Intrinsic
Exercise Price	Outstanding		Life Remaining	Price		Value		Exercisable		Price		Value
$2.59 - $3.88		19,187	2.3 years	$	2.74	$	568,992		19,187	$	2.74	$	568,992
4.56 - 7.55		170,323	2.8 years		5.67		4,553,188		170,323		5.67		4,553,188
9.55 - 13.92		357,665	4.1 years		11.69		7,405,772		301,421		11.84		6,196,526
16.72 - 22.98		388,746	5.1 years		22.39		3,892,456		367,317		22.58		3,607,451
23.01 - 30.69		625,603	6.5 years		28.23		2,608,876		426,065		28.31		1,741,775
31.84 - 57.36		1,450,562	8.7 years		41.09		286,536		385,012		44.57		28,927

$2.59 - $57.36		3,012,086	6.9 years	$	30.27	$	19,315,820		1,669,325	$	25.22	$	16,696,859

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $32.40 as of September 30, 2008, which would have been received by the option holders had those option holders exercised their options as of that date.

A summary of the changes in restricted stock under our 1998 Plan and 2007 Plan as of September 30, 2008, is as follows:

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


				Weighted
	Restricted			Average
	Stock			Intrinsic Value
Non-Vested Balance, December 31, 2006		89,500		$	39.96
Granted		198,889			53.75
Vested		(23,713	)		39.19
Forfeited		(31,272	)		48.54

Non-Vested Balance, December 31, 2007		233,404		$	50.64
Granted		362,300			32.24
Vested		(54,885	)		49.66
Forfeited		(10,744	)		46.62

Non-Vested Balance, September 30, 2008		530,075		$	38.24

Inducement Equity Incentive Plan

Effective on December 14, 2005, in connection with our acquisition of Commerce5, Inc., we adopted an Inducement Equity Incentive Plan (the “Inducement Plan”) initially for Commerce5, Inc. executives who joined Digital River as a result of the acquisition, or other personnel who join us after the date of the Inducement Plan adoption. A total of 87,500 restricted shares of Digital River stock may be issued under the Inducement Plan, subject to vesting. In accordance with the NASDAQ rules, no stockholder approval was required for the Inducement Plan.

Employee Stock Purchase Plan

We also sponsor an employee stock purchase plan (“ESPP”) under which 1,200,000 shares have been reserved for purchase by employees. The purchase price of the shares under the ESPP is the lesser of 85% of the fair market value on the first or last day of the offering period. Offering periods are currently every six months ending on June 30 and December 31. Employees may designate up to ten percent of their compensation for the purchase of shares under the ESPP. Total shares purchased by employees under the ESPP were 51,423 shares for the nine months ended September 30, 2008, and 76,436 shares and 71,183 shares in the years ended December 31, 2007 and 2006, respectively. There were 428,994 shares still reserved under the ESPP as of September 30, 2008.

Stock Repurchase Activity

In June 2007 our Board of Directors authorized a new stock buyback program to repurchase up to an aggregate of $200 million of our common stock. This buyback program superseded the prior buyback program.

During the nine months ended September 30, 2008, 4,239,312 shares were repurchased under the 2007 Repurchase Program, including 3,876,612 shares repurchased pursuant to the accelerated share repurchase program. None of the repurchased shares have been retired.

The Accelerated Share Repurchase (ASR) agreement was entered into with Goldman Sachs (GS) on February 7, 2008 and called for GS to repurchase $127 million of Digital River, Inc. stock between February 7, 2008 and June 20, 2008. Based on the agreement, Digital River received a final share count based on a discount of the Volume Weighted Average Price of Digital River stock from February 21, 2008, through the end of the contract. On June 20, 2008, GS had concluded the ASR program with a final share delivery of 327,767 shares. The aggregate number of shares repurchased pursuant to the ASR program was 3,876,612 shares at an average price of $32.76 per share. The ASR agreement terminated upon completion of the ASR program on June 20, 2008 in accordance with its terms. With the conclusion of the ASR program, we have completed the 2007 Repurchase Program.

Expense Information under SFAS 123(R)

On January 1, 2006, we adopted SFAS 123(R) which requires measurement and recognition of compensation expense for all stock-based payments made to employees and directors including stock options, restricted stock grants and employee stock purchases made through our ESPP based on estimated fair values. The following table summarizes

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

stock-based compensation expense, net of tax, related to employee stock options and employee stock purchases recognized under SFAS 123(R) (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Costs and expenses
Direct cost of services	$	220		$	223		$	659		$	643
Network and infrastructure		60			58			123			191
Sales and marketing		1,403			1,230			3,788			3,848
Product research and development		371			391			969			1,409
General and administrative		1,569			1,509			4,622			4,445

Stock-based compensation included in costs and expenses		3,623			3,411			10,161			10,536
Tax benefit		(712	)		(913	)		(2,082	)		(2,953	)

Stock-based compensation expense, net of tax	$	2,911		$	2,498		$	8,079		$	7,583

Valuation Information under SFAS 123(R)

The weighted-average fair value of stock options granted during the nine months ended September 30, 2008 and 2007 were $11.19 and $22.51 per share, respectively, using the Black-Scholes option pricing model with the following weighted average assumptions:


	Nine Months Ended
	September 30,
	2008			2007
Risk-free interest rate		2.0	%		4.5	%
Expected life (years)		3.4			3.5
Volatility factor		0.45			0.51
Expected dividends		—			—

The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our stock options. The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding and is based on historical exercise patterns. We used historical closing stock price volatility for a period equal to the expected term of the options granted. The dividend yield assumption is based on our history and expectation of future dividend payouts.

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Income for the three months ended September 30, 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

At September 30, 2008, there was approximately $30.6 million of total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, related to unvested share-based awards. Unrecognized stock-based compensation expense is expected to be recognized over the next 3.9 years on a weighted average basis and will be adjusted for any future changes in estimated forfeitures.

5. INCOME TAXES

For the three months ended September 30, 2008 and 2007, our tax expense was $5.0 million and $6.9 million, respectively. For the three months ended September 30, 2008, our tax expense consisted of approximately $2.0 million of U.S. tax expense and $3.0 million of foreign tax expense. Tax expense for the three months ended September 30, 2008, was comparatively lower than in prior periods as the Company lowered its estimated annual effective tax rate

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

from 29.0% to 27.5%. It was also lower due to return-to-provision adjustments made during the quarter. For the three months ended September 30, 2008 and 2007, the tax rate was 24.3% and 31.0%, respectively.

For the nine months ended September 30, 2008 and 2007, our tax expense was $16.5 million and $22.7 million, respectively. For the nine months ended September 30, 2008, our tax expense consisted of approximately $9.8 million of U.S. tax expense and $6.7 million of foreign tax expense.

In prior years, there was uncertainty of future realization of the deferred tax assets resulting from acquired U.S. tax loss carryforwards due to anticipated limitations, including limitations under Section 382 of the Internal Revenue Code. Therefore a valuation allowance was recorded against the tax effect of such tax loss carryforwards. We evaluated these deferred tax assets and concluded it is more likely than not that we will realize $11.6 million of these deferred tax assets. This is based on conclusions of an IRC Section 382 analysis completed during 2007 as well as our expected future taxable income. The release of the valuation allowance was recorded in the second quarter of 2007 and was reflected as a reduction to goodwill. A valuation allowance remains on approximately $2.3 million of deferred tax assets related to acquired operating losses and other tax attributes as we believe it is more likely than not that these deferred tax assets will not be realized. This valuation allowance is due to anticipated limitations on acquired losses.

As of September 30, 2008, we had $5.8 million of unrecognized tax benefits. All of these unrecognized tax benefits would affect our effective tax rate if recognized. During the third quarter, the Company effectively settled certain tax positions with taxing authorities and as a result gross unrecognized tax benefits decreased by $0.2 million. Gross unrecognized tax benefits increased by $1.4 million for other items identified during the quarter. As of September 30, 2008, we had approximately $0.4 million of accrued interest related to uncertain tax positions.

Due to the potential resolution of examinations currently being performed by taxing authorities, and the expiration of various statutes of limitation, it is reasonably possible that the balance of our gross unrecognized tax benefits may change within the next twelve months by a range of zero to $1.4 million.

6. DEBT

In 2004 we sold and issued $195.0 million in aggregate principal amount of 1.25% convertible senior notes due January 1, 2024 (Notes), in a private, unregistered offering. The Notes were sold at 100% of their principal amount.

We are required to pay interest on the Notes on January 1 and July 1 of each year so long as the Notes are outstanding. The Notes bear interest at a rate of 1.25% and, if specified conditions are met, are convertible into our common stock at a conversion price of $44.063 per share. The Notes may be surrendered for conversion under certain circumstances, including the satisfaction of a market price condition, such that the price of our common stock reaches a specified threshold; the satisfaction of a trading price condition, such that the trading price of the Notes falls below a specified level; the redemption of the Notes by us, the occurrence of specified corporate transactions, as defined in the related indenture; and the occurrence of a fundamental change, as defined in the related indenture. The initial conversion price is equivalent to a conversion rate of approximately 22.6948 shares per $1,000 of principal amount of the Notes. We will adjust the conversion price if certain events occur, as specified in the related indenture, such as the issuance of our common stock as a dividend or distribution or the occurrence of a stock subdivision or combination. If a fundamental change, such as a change in our control, as defined in the related indenture, occurs on or before January 1, 2009, we may also be required to purchase the Notes for cash and pay an additional make whole premium payable in our common stock upon the repurchase or conversion of the Notes in connection with the fundamental change.

Holders of the Notes have the right to require us to repurchase their Notes prior to maturity on January 1, 2009, 2014 and 2019. We have the right to redeem the Notes, under certain circumstances, on or after July 1, 2007 and prior to January 1, 2009, and we may redeem the Notes at any time on or after January 1, 2009. Through December 31, 2007, we classified the Notes as long-term debt. However, in light of the right of holders to require us to redeem the Notes on January 1, 2009, we have reclassified the Notes as short-term debt.

In the third quarter of 2008 and 2007, we incurred interest expense of $0.6 million and $0.6 million, respectively, on the Notes and made $1.2 million interest payments in each of the third quarters of 2008 and 2007. Interest expense on the Notes was $1.8 million for each of the nine months ended September 30, 2008 and September 30, 2007.

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, (FAS 157) for financial instruments. FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires enhanced disclosures about fair value measurements. FAS 157 does not require any new fair value measurements; rather it specifies valuation methods and disclosures to be applied when fair value measurements are required under existing or future accounting pronouncements.

FAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs such as quoted prices in active markets;

Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and


Level 3 —		Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumption.

As of September 30, 2008, we held certain assets that are required to be measured at fair value on a recurring basis. These included cash equivalents and short and long-term investments.

As of September 30, 2008, Digital River held $109.5 million of investments at par value in auction-rate securities (ARS), the vast majority of which are AAA/Aaa-rated and collateralized by student loans guaranteed 100 percent by the U.S. government. All the securities are 105-115% collateralized guaranteed by the Department of Education.

All of these securities continue to fail due to illiquid market conditions. It is likely, that there will be further liquidation of securities at par within the next 12 months, however we have no definitive means to determine which securities and the timing.

In aggregate the ARS portfolio is yielding 3.30%. We continue to believe that we will be able to liquidate at par over time. Accordingly, we treated the fair value discount as a temporary condition. We anticipate we have sufficient cash flow from operations to execute our business strategy and fund our operational needs. We believe that capital markets are also available if we need to finance other investing alternatives. If we have to liquidate our ARS we do not believe we would be a distressed seller.

We did determine a market value discount of $0.4 million existed as of September 30, 2008 and recorded a temporary fair value reduction to “Other Comprehensive income” on the balance sheet in the third quarter 2008. We believe the securities will continue to yield the coupon rates. We did apply a 6% discount for two years assuming the market will become liquid after two years. Our model assumes that we will hold the ARS to maturity.

The table below presents our assets measured at fair value on a recurring basis as of September 30, 2008:

DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	FAIR VALUE MEASUREMENTS
	AS OF SEPTEMBER 30, 2008
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	345,249	$	345,249	$	—	$	—
Short-term investments		149,907		149,807		—		100
Long-term investments		109,008		—		—		109,008

Total assets measured at fair value	$	604,164	$	495,056	$	—	$	109,108

Based on market conditions, we have classified auction rate securities as Level 3 within FAS 157’s hierarchy since our initial adoption of FAS 157 at January 1, 2008. As of September 30, 2008, the difference between fair value and par value of these securities was immaterial to our financial statements.

8. LITIGATION

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the final outcome of these matters is currently not determinable, we believe there is no litigation pending against us that is likely to have, individually or in the aggregate, a material adverse effect on our consolidated financial position, results of operations or cash flows. Because of the uncertainty inherent in litigation, it is possible that unfavorable resolutions of these lawsuits, proceedings and claims could exceed the amount we have currently reserved for these matters.

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

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

Overview

We provide end-to-end global e-commerce solutions to a wide variety of companies in software, consumer electronics, computer and video games, and other markets. We were incorporated in 1994 and began building and operating online stores for our clients in 1996. We offer our clients a broad range of services that enable them to quickly and cost effectively establish an online sales channel capability and to subsequently manage and grow online sales on a global basis. Our offerings help our clients mitigate risk and grow their online revenues. Our services include design, development and hosting of online stores and shopping carts, store merchandising and optimization, order management, denied parties screening, export controls and management, tax compliance and management, fraud management, digital product delivery via download, physical product fulfillment, subscription management, multi-lingual customer service, online marketing including e-mail marketing, management of paid search programs, website optimization, web analytics and reporting, and CD production and delivery.

Our products and services allow our clients to focus on promoting and marketing their brands while leveraging our investments in technology and infrastructure to facilitate the purchase of products through their online websites. When shoppers visit one of our clients’ websites and purchase goods, they are transferred to an e-commerce store and /or shopping cart operated by us on our e-commerce platforms. Once on our system, shoppers can typically browse for products and make purchases online. We typically are the seller of record for transactions through our stores. After a purchase is made, we either deliver the product digitally via download over the Internet or transmit instructions to a third party for physical fulfillment of the order. We also process the buyer’s payment as the merchant of record, including collection and remittance of applicable taxes, and can provide customer service in multiple languages to handle order-related questions. We believe we are an example of an emerging trend known as “Software as a Service” (SaaS). We have invested substantial resources to develop our e-commerce software platforms and we provide access and use of our platforms to our clients as a service as opposed to selling the software to be operated on their own in-house computer hardware.

In addition to the services we provide that facilitate the completion of an online transaction, we also offer services designed to increase traffic to our clients’ websites and the associated online stores and to improve the sales productivity of those stores. Our services include paid search advertising, search engine optimization, affiliate marketing, store optimization, multi-variant testing, web analytic services and e-mail optimization. All of our services are designed to help our clients acquire customers more effectively, sell to those customers more often and more efficiently, and increase the lifetime value of each customer. Through our acquisition of NetGiro, we offer clients payment processing services.

Our clients include many of the largest software, consumer electronics, and computer and video game companies and major retailers of these products, including Autodesk, Inc., Canon Europa N.V., Computer Associates, Electronic Arts, Inc., Lexmark, Inc., Microsoft Corporation, Nuance Communications Inc, SanDisk Corporation, Smith Micro Software, Inc., Symantec Corporation, and Trend Micro, Inc.

General information about us can be found at www.digitalriver.com under the “Company/Investor Relations” link. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments or exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with the Securities and Exchange Commission.

Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets such as e-commerce. See Item 1A of Part II for a discussion of the risk factors that could have a material adverse effect on our business, financial condition and results of operations.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that we believe are the most critical in fully understanding and evaluating our reported financial results are the following:

Revenue Recognition. We recognize revenue from services rendered once all the following criteria for revenue recognition have been met: (1) pervasive evidence of an agreement exists; (2) the services have been rendered; (3) the fee is fixed and determinable and not subject to refund or adjustment; and (4) collection of the amounts due is reasonably assured.

We evaluate the criteria outlined in Emerging Issues Task Force, (“EITF”) Issues No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as net revenue. We act as the seller and merchant of record on most of the transactions processed and have contractual relationships with our clients, which obligate us to pay to the client a specified percentage of each sale. We derive our revenue primarily from transaction fees based on a percentage of the product sale price and fees from services rendered associated with the e-commerce and other services provided to our clients and end customers. Our revenue is recorded as net of amounts remitted to our client, as generally our clients are subject to inventory risks and control customers’ product choices. Clients do not have the right to take possession of the software applications used in the delivery of services.

We also provide customers with various proprietary software backup services. We recognize revenue for these backup services upon delivery or based upon historical usage within the contract period of the digital backup services when this information is available. Digital backup services are recognized straight-line over the life of the backup service when historical usage information is unavailable. Shipping revenues are recorded net of any associated costs.

We also, to a lesser extent, provide fee-based client services, which include website design and hosting, custom development and integration, analytical marketing and email marketing services. If we receive payments for fee-based services in advance of delivery, these amounts are deferred and recognized over the service period.

Provisions for doubtful accounts and transaction losses and authorized credits are made at the time of revenue recognition based upon our historical experience. The provision for doubtful accounts and transaction losses are recorded as charges to operating expense, while the provision for authorized credits is recognized as a reduction of net revenues.

In June 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” (“EIFT 06-3”). EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Company presents these taxes on a net basis which is consistent with our revenue presentation.

Allowance for Doubtful Accounts. We must make estimates and assumptions that can affect the amount of assets and liabilities and the amounts of revenues and expenses we report in any financial reporting period. We use estimates in determining our allowance for doubtful accounts, which are based on our historical experience and current trends. We must estimate the collectability of our billed accounts receivable. We analyze accounts receivable and consider our historical bad debt experience, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We must make significant judgments and estimates in connection with the allowance in any accounting period. There may be material differences in our operating results for any period if we change our estimates or if the estimates are not accurate.

Credit Card Chargeback Reserve. We use estimates based on historical experience and current trends to determine accrued chargeback expenses. Significant management judgments are used and estimates made in connection with the accrued expenses in any accounting period. There may be material differences in our operating results for any

period if we change our estimates or if the estimates are not accurate.

Goodwill, Intangibles and Other Long-Lived Assets. We depreciate property, plant and equipment; amortize certain intangibles and certain other long-lived assets with definite lives over their useful lives. Useful lives are based on our estimates of the period of time over which the assets will generate revenue or benefit our business. We review assets with definite lives for impairment whenever events or changes in circumstances indicate that the value we are carrying on our financial statements for an asset may not be recoverable. Our evaluation considers non-financial data such as changes in the operating environment and business strategy, competitive information, market trends and operating performance. If there are indications that impairment may be necessary, we use an undiscounted cash flow analysis to determine the impairment amount, if any. Assets with indefinite lives are reviewed for impairment annually in the fourth quarter (or more frequently if there are indications that an impairment may be necessary) utilizing the two-step approach prescribed in Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” There have been no material impairments of goodwill and other intangible assets for the three and nine months ended September 30, 2008 and 2007.

Income Taxes and Deferred Taxes. Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record deferred tax assets for favorable tax attributes, including tax loss carryforwards. We currently have significant U.S. tax loss carryforwards consisting solely of acquired operating tax loss carryforwards, and a lesser amount of acquired foreign operating tax loss carryforwards. A portion of the benefit of the acquired tax loss carryforwards has been reserved by a valuation allowance pursuant to United States generally accepted accounting principles. These valuation reserves of the deferred tax asset will be reversed if and when it is more likely than not that the deferred tax asset will be realized. We evaluate the need for a valuation allowance of the deferred tax asset on a quarterly basis. If the benefit of these acquired tax loss carryforwards is recognized, we will not recognize the benefit in the statement of income. Rather, the benefit will be recognized as a reduction to goodwill.

On January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits.

Fair Value Measurements. On January 1, 2008, we adopted FAS No. 157, “Fair Value Measurements” (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. This Statement was initially effective as of January 1, 2008, but in February 2008, the FASB delayed the effective date for applying this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted FAS 157 as of January 1, 2008 for assets and liabilities within its scope and the impact was immaterial to our financial statements.

Stock-Based Compensation Expense. On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors including stock options, restricted stock grants and employee stock purchases made through our Employee Stock Purchase Plan based on estimated fair values.

requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

See Note 4 in the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information regarding our stock-based compensation plans.

Results of Operations

The following table sets forth certain items from our condensed consolidated statements of income as a percentage of total revenue for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue		100.0	%		100.0	%		100.0	%		100.0	%

Cost of Revenue (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services		4.0			3.6			4.2			3.2
Network and infrastructure		11.0			9.7			10.4			9.0
Sales and marketing		36.8			39.9			38.3			39.6
Product research and development		13.5			12.3			13.0			10.7
General and administrative		10.2			11.0			10.4			11.4
Depreciation and amortization		4.2			3.8			4.0			3.7
Amortization of acquisition-related intangibles		2.1			2.0			2.1			2.3

Total costs and expenses		81.8			82.3			82.4			79.9

Income from operations		18.2			17.7			17.6			20.1
Interest Income		4.7			9.5			5.0			9.5
Other expense, net		(1.5	)		(0.4	)		(1.3	)		(0.6	)

Income before income tax expense		21.4			26.8			21.3			29.0
Income tax expense		5.2			8.3			5.5			9.0

Net income		16.2	%		18.5	%		15.8	%		20.0	%

We acquired NetGiro Systems AB (NetGiro) on September 1, 2007, DigitalSwift Corporation (DigitalSwift) and CustomCD, Inc. (CustomCD) in January 2008 and Think Subscription, Inc on September 1, 2008. The results of these acquisitions must be factored into any comparison of our 2008 results to the results for 2007. See Note 3 of our Consolidated Financial Statements in this Form 10-Q for pro forma financial information as if these entities had been acquired on January 1, 2008.

REVENUE. Our revenue increased to $96.3 million for the three months ended September 30, 2008, from $82.5 million for the same period in the prior year, an increase of $13.8 million, or 16.7%. For the nine months ended September 30, 2008, revenue totaled $298.3 million, an increase of $45.9 million, or 18.2%, from revenue of $252.4 million in the same period of the prior year. The revenue increases were primarily attributable to increased traffic, increase in average order value offset by a reduction in close ratio, growth in the number of online game and consumer electronic clients we served, increased sales from international sites, expanded strategic marketing activities with a larger number of clients, and acquisitions. NetGiro, DigitalSwift, CustomCD and Think Subscription accounted for $6.1 million of total revenue for the three months ended September 30, 2008. For the nine months ended September 30, 2008, total revenue for NetGiro, DigitalSwift, CustomCD and Think Subscription equaled $17.9 million. Sales of security software products for PCs represent the largest contributor to our revenues.

International e-commerce sales were unchanged at 43% of total sales in the three month period ended September 30, 2008 and 2007, and for the nine month period ended September 30, 2008 and 2007.

DIRECT COST OF SERVICES. Our direct cost of services primarily include costs related to personnel, product fulfillment, physical on demand, our proprietary back-up CD production and client-specific costs. Direct cost of

service expense was $3.9 million for the three months ended September 30, 2008, up from $3.0 million for the same period in the prior year. For the nine months ended September 30, 2008, direct cost of service expense was $12.6 million, up from $8.0 million for the same period of the prior year. The increases for the three and nine month periods ended September 30, 2008, were primarily due to increased CD supply and personnel costs incurred by our January 2008 DigitalSwift and CustomCD acquisitions which also drove higher gross revenue. The remaining increases were attributable to additional personnel and website optimization consulting costs to support our largest clients and handle increased sales volume. As a percentage of revenue, direct cost of services was 4.1% and 4.2% for the three and nine months ended September 30, 2008, compared to 3.6% and 3.2% in the same periods of the prior year.

We currently believe that direct cost of services will increase in absolute dollars in 2008 compared to 2007 as a result of our acquisitions and as we continue to expand our worldwide CD fulfillment capacity to meet anticipated shipment volumes, particularly in the consumer electronics market that we serve.

NETWORK AND INFRASTRUCTURE. Our network and infrastructure expenses primarily include personnel related expenses and costs to operate and maintain our technology platforms, customer service, data communication and data center operations. Network and infrastructure expenses were $10.6 million and $8.0 million for the three months ended September 30, 2008 and 2007, respectively. The increase for the three months ended September 30, 2008, compared to the same period in the prior year was mainly due to $1.5 million in personnel related expense and approximately $0.9 million in data communication and software licenses expenses.

For the nine months ended September 30, 2008, network and infrastructure expenses were $31.1 million, up from $22.8 million for the same period of the prior year. The year over year cost increase for the nine months ended September 30, 2008 supported revenue growth and was comprised of approximately $2.7 million in personnel and consulting related expenses, $2.7 million in additional software license amortization expense and data communication expenses and $2.5 million of network and infrastructure costs related to our September 2007 NetGiro acquisition. As a percentage of revenue, network and infrastructure increased to 11.0% and 10.4% for the three and nine months ended September 30, 2008, compared to 9.7% and 9.0% in the same periods of the prior year.

We currently believe network and infrastructure expenses will increase in absolute dollars in 2008 compared to 2007 due to the impact of acquisitions and as we continue to expand our global data center and customer service capacity.

SALES AND MARKETING. Our sales and marketing expenses mainly include credit card transaction and other payment processing fees, personnel and related costs, advertising, promotional and product marketing expenses, credit card chargeback’s and bad debt expense. Sales and marketing expenses increased to $35.4 million for the three months ended September 30, 2008 from $32.9 million for the same period in the prior year. The increase for the three months ended September 30, 2008, compared to the same period in the prior year was mainly due to approximately $1.9 million in personnel and consulting related expenses, $1.1 million in marketing and advertising expenses and $1.1 million in sales and marketing personnel and payment processing costs incurred by our September 2007 NetGiro acquisition.

Sales and marketing expense increased to $114.4 million for the nine months ended September 30, 2008 from $99.9 million in the same period of 2007. The increase for the nine months ended 2008 compared to 2007 was primarily due to an additional $6.0 million in personnel and consulting related costs to support our global growth initiatives in strategic and product marketing, a $4.9 million increase in credit card and other payment processing fees directly related to incremental gross revenue and the addition of new international payment methods, and $3.1 million in sales and marketing expenses incurred by our recent acquisition, NetGiro. As a percentage of revenue, sales and marketing expenses decreased to 36.8% and 38.3% in the three and nine months ended September 30, 2008, compared to 39.9% and 39.6% for the same periods in the prior year.

We currently believe sales and marketing expenses will increase in absolute dollars in 2008 compared to 2007, to support the expansion of our client relationships through increased investments in subscriptions, international payment processing and strategic marketing services. We also plan to continue to invest in key vertical markets, in particular consumer electronics and games.

PRODUCT RESEARCH AND DEVELOPMENT. Our product research and development expenses include the costs of personnel and related expenses associated with developing, maintaining and enhancing our technology platforms and

related systems. Product research and development expense was $13.0 million and $38.7 million, respectively, for the three and nine months ended September 30, 2008 from $10.2 million and $27.1 million for the same periods in the prior year. The increase for the nine months ended September 30, 2008, compared to the same period in the prior year primarily related to software development and quality assurance personnel and consultant related costs to support strategic investments in our e-commerce infrastructure. These increases included $1.3 million and $4.4 million of research and development costs incurred by our recent acquisitions NetGiro, Custom CD, Digital Swift and Think Subscription, Inc. for the three and nine month periods ended September 30, 2008, respectively as compared to the same periods in 2007.

Our research and development investments supported on-going initiatives in our e-commerce infrastructure to advance global system scalability, our e-marketing capabilities and client reporting. We expect these investments to drive long-term operational efficiencies across the organization and provide further competitive differentiation. We capitalized approximately $1.2 million and $1.4 million of software development labor costs during the three and nine months ended September 30, 2008, respectively. This capitalization was primarily related to design efforts on our new enterprise resource planning system. We did not capitalize any significant costs related to software development during the same periods in 2007. As a percentage of revenue, product research and development expense was 13.5% and 13.0% in the three and nine months ended September 30, 2008, compared to 12.3% and 10.7% for the same periods in the prior year.

We currently believe that product research and development expenses will increase in absolute dollars in 2008 compared to 2007, as a result of our completed acquisitions and continued investments in product development required to remain competitive.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses primarily include the costs of executive, accounting and administrative personnel and related expenses, professional fees for legal, tax and audit services, bank fees and insurance. General and administrative expenses increased to $9.9 million and $30.9 million, respectively, for the three and nine months ended September 30, 2008, from $9.1 million and $28.7 million for the same periods in the prior year. The increase for the three months ended September 30, 2008, compared to the same period in 2007 was mainly due to $0.8 million in additional personnel and consulting related costs.

For the nine months ended September 30, 2008, compared to the same period in 2007 the increase resulted from approximately $1.8 million higher personnel and consulting related costs to support infrastructure investments and continued growth and $1.0 million additional general and administrative costs incurred by our NetGiro acquisition. These increases were partially offset by $0.7 million lower legal expenses for the nine month period ended September 30, 2008, compared to the prior year which included professional legal fees related to our internal review of historical stock option practices. As a percentage of revenue, general and administrative expenses declined to 10.2% and 10.4% for the three and nine months ended September 30, 2008, compared to 11.0% and 11.4% for the same periods of the prior year.

We currently believe that general and administrative expenses will increase in absolute dollars in 2008 compared to 2007, as we continue to invest in our infrastructure to support our continued organic growth and expenses related to acquisitions.

DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses include the depreciation of computer equipment and office furniture and the amortization of purchased and internally developed software, leasehold improvements made to our leased facilities and debt financing costs. Computer equipment, software and furniture are depreciated under the straight-line method using three to seven year lives and leasehold improvements are amortized over the shorter of the life of the asset or the remaining length of the lease. Depreciation and amortization expense was $4.0 million and $11.8 million for the three and nine months ended September 30, 2008, respectively, compared to $3.1 million and $9.3 million for the same periods in the prior year. The increase was primarily due to depreciation and amortization on new data center equipment, third party software licenses and facilities.

We currently believe depreciation and amortization expense will increase in absolute dollars in 2008 compared to 2007 as we continue to expand our worldwide customer support capacity and expand the number of operating global data centers.

AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES. Our “amortization of acquisition-related intangibles” line item consists of amortization of intangible assets recorded from nine of our acquisitions during the past four years. Amortization of acquisition-related intangible assets was $2.0 million and $6.3 million, respectively,

for the three and nine months ended September 30, 2008, compared to $1.6 million and $6.0 million for the same periods in the prior year. The increase was due to additional amortization from recent acquisitions. We have purchased, and expect to continue purchasing assets or businesses which may include the purchase of intangible assets.

INTEREST INCOME. Our interest income represents the total of interest income on our cash, cash equivalents, long-term investments and short-term investments. Interest income was $4.5 million and $15.1 million, respectively, for the three and nine months ended September 30, 2008, compared to $7.8 million and $24.0 million for the same periods in the prior year. The decrease in interest income was primarily due to the use of $138 million in cash for our share repurchase program during the first quarter of 2008. Interest income also declined due to lower yields on our portfolio during 2008.

OTHER EXPENSE, NET. Our “other expense, net” line includes the total of interest expense on our debt and foreign currency transaction gains and losses and disposals of asset gains and losses. Interest expense was unchanged at $0.6 million and $1.8 million, respectively, for the three and nine months ended September 30, 2008 and 2007. Foreign currency re-measurement was a loss of $0.8 and a $0.9 million for the three and nine months ended September 30, 2008, respectively, compared to a gain of $0.3 million and $0.4 million for the same periods in the prior year. The loss on disposals of assets was $0.0 and $1.0 million for the three and nine month period ending September 30, 2008, respectively. Disposals of assets were immaterial in the same periods of 2007. Gains and losses from the sale of investments were immaterial for the three and nine months ended September 30, 2008 and 2007.

INCOME TAXES. For the three months ended September 30, 2008 and 2007, our tax expense was $5.0 million and $6.9 million, respectively. For the three months ended September 30, 2008, our tax expense consisted of approximately $2.0 million of U.S. tax expense and $3.0 million of foreign tax expense. Tax expense for the three months ended September 30, 2008, was comparatively lower than in prior periods as the Company lowered its estimated annual effective tax rate from 29.0% to 27.5%. It was also lower due to return-to-provision adjustments made during the quarter. For the three months ended September 30, 2008 and 2007, the tax rate was 24.3% and 31.0%, respectively. For the nine months ended September 30, 2008 and 2007, our tax expense was $16.5 million and $22.7 million, respectively. For the nine months ended September 30, 2008, our tax expense consisted of approximately $9.8 million of U.S. tax expense and $6.7 million of foreign tax expense.

Off Balance Sheet Arrangements

None

Liquidity and Capital Resources

As of September 30, 2008, we had $345.2 million of cash and cash equivalents, and $149.9 million of short-term investments. Our primary source of internal liquidity is our operating activities. Net cash provided by operations during the first nine months of 2008 and 2007 was primarily the result of net income adjusted for non-cash expenses and balance sheet changes.

Net cash provided by investing activities for the nine months ended September 30, 2008, was $18.2 million and was the result of net sales of investments of $55.6 million, cash paid for acquisitions net of cash received of $22.2 million, and purchases of capital equipment of $15.2 million. Net cash used for investing activities for the nine months ended September 30, 2007 was $71.0 million and was the result of net purchases of investments of $30.7 million, cash paid for acquisitions net of cash received of $30.6 million, and purchases of capital equipment of $9.7 million.

Net cash used for financing activities during the nine months ended September 30, 2008, was $128.3 million. Proceeds of $8.3 million were provided by the sale of stock through the exercise of stock options and the employee stock purchase plan, cash used in the repurchase of restricted stock to satisfy tax withholding obligation was $0.4 million, and proceeds of $1.7 million were provided by the excess tax benefit from stock-based compensation. In 2008, we repurchased $137.9 million of common stock, which reduced our net cash provided by financing activities. Net cash used for financing activities during the nine months ended September 30, 2007, was $39.6 million. Proceeds of $12.5 million were provided by the sale of stock through the exercise of stock options and the employee stock purchase plan, and proceeds of $11.3 million were provided by the excess tax benefit from stock-based compensation. In July 2007, we repurchased $63.0 million of common stock, which reduced our net cash provided by financing activities.

At September 30, 2008, we held approximately $109.5 million of municipal debt at par value with an auction reset feature (“auction rate securities”) whose underlying assets are generally student loans which are FFELP (Federal Family Education Loan Program) over-collateralized, guaranteed and backed by the Department of Education.

As of November 1, 2008, there have been no successful auctions for auction rate securities. All of our auction rate securities, including those subject to the failure, are currently rated AAA, the highest rating, by a rating agency. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments.

The investment principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, or final payments come due according to the contractual maturities of the debt issues. We intend to hold our auction-rate securities until we can recover the full principal amount through one of the means described above, and have the ability to do so based on our other sources of liquidity.

We currently believe the market liquidity for these securities will recover and they are not, other than temporarily, impaired, primarily due to the government guarantee of the underlying securities; however, there is no guarantee that it will not take until the final maturity of the underlying notes (up to 30 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

We completed our review of “Fair Value Measurements” FAS 157 for the quarter ended September 30, 2008. Fair Market Value determination was based on level 3 of the fair value hierarchy of FAS 157. We did determine a market value discount of $0.4 million existed as of September 30, 2008, and recorded it as a temporary fair value reduction to “Other Comprehensive income” on the balance sheet in the third quarter 2008. We don’t believe that we will liquidate any auction rate security at below par. We believe the securities will continue to yield the coupon rates. See Note 7 for further information.

Our principal commitments consist of interest and principal on our convertible senior notes and long-term obligations outstanding under operating leases. Although we have no material commitments for capital expenditures, we anticipate continued capital expenditures consistent with our anticipated growth in operations, infrastructure and

personnel. We expect that our operating expenses will continue to grow as our overall business grows and that operating expenses will be a material use of our cash resources.

The following table summarizes our principal contractual commitments as of September 30, 2008:


	Payment due by period (in thousands)
	Total Amount		Oct-Dec						2013 and
Contractual Obligations	Committed		2008		2009-2010		2011-2012		Thereafter

Operating Lease Obligations	$	18,589	$	1,458	$	8,472	$	2,866	$	5,793
Convertible Senior Notes	$	232,781	$	—	$	4,875	$	4,875	$	223,031
Total	$	251,370	$	1,458	$	13,347	$	7,741	$	228,824

We expect to continue to evaluate and consider a wide array of potential strategic transactions, including business combinations and acquisitions of businesses, products, services and other assets as well as licenses of technology related to our current business. At any given time, we may be engaged in discussions or negotiations with respect to one or more such transactions. Any such transactions could have a material impact on our financial position, results of operations, or cash flows. There is no assurance that any such discussions or negotiations will result in the consummation of any transaction. The process of integrating any acquisition may create unforeseen challenges for our operational, financial and management information systems, as well as unforeseen expenditures and other risks, including diversion of management’s attention from other business concerns, the potential loss of key customers, employees and business partners, difficulties in managing facilities and employees in different geographic areas, and difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions. In addition, an acquisition may cause us to assume liabilities or become subject to litigation. Further, there can be no assurance that we will realize a positive return on any acquisition or that future acquisitions will not be dilutive to our current shareholders’ percentage ownership or to earnings. We have allocated significant valuation in the form of goodwill and intangibles for the companies we acquired in the past, which is subject to impairment testing on a regular basis. If the individual businesses do not perform as expected at the acquisition dates, we may incur impairment charges for goodwill, accelerated amortization of definite-lived intangible assets due to shortened expected lives of those assets, immediate write-offs and restructuring or other related expenses.

With respect to our 1.25% convertible senior notes due January 1, 2024 (the “Notes”), we are required to pay interest on the Notes on January 1 and July 1 of each year so long as the Notes are outstanding. On July 1, 2008, we paid $1.2 million in interest for the period January 1 through June 30, 2008. The Notes bear interest at a rate of 1.25% and, if specified conditions are met, are convertible into our common stock at a conversion price of $44.063 per share. The Notes may be surrendered for conversion under certain circumstances, including the satisfaction of a market price condition, such that the price of our common stock reaches a specified threshold; the satisfaction of a trading price condition, such that the trading price of the Notes falls below a specified level; the redemption of the Notes by us, the occurrence of specified corporate transactions, as defined in the related indenture; and the occurrence of a fundamental change, as defined in the related indenture. The initial conversion price is equivalent to a conversion rate of approximately 22.6948 shares per $1,000 of principal amount of the Notes. We will adjust the conversion price if certain events occur, as specified in the related indenture, such as the issuance of our common stock as a dividend or distribution or the occurrence of a stock subdivision or combination. In addition, contingent interest is required to be paid to holders if certain conditions are met. If a fundamental change, such as a change in our control, as defined in the related indenture, occurs on or before January 1, 2009, we may also be required to purchase the Notes for cash and pay an additional make whole premium payable in our common stock upon the repurchase or conversion of the Notes in connection with the fundamental change.

We believe that existing sources of liquidity and the results of our operations will provide adequate cash to fund our operations and to repurchase the Notes, if necessary, although we may seek to raise additional capital. In January 2005, we filed a registration statement to increase our available shelf registration amount and we have approximately $82 million available for future use. In addition, we filed an acquisition shelf registration statement for up to approximately 1.5 million shares. In February 2006, we filed a shelf registration that would allow us to sell an undetermined amount of equity or debt securities in accordance with the recently approved rules applying to “well known seasoned issuers.”

These filings were made to provide future flexibility for acquisition and financing purposes. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. There can be no assurances that financing will be available in amounts or on terms acceptable to us, if at all.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

Interest Rate Risk

Our portfolio of cash equivalents and short-term investments is maintained in a variety of securities, including government agency obligations and money market funds. Investments are classified as available-for-sale securities and carried at their market value with cumulative unrealized gains or losses recorded as a component of “accumulated other comprehensive income/(loss)” within stockholders’ equity. At September 30, 2008, all securities held had maturities or reset dates of less than three years. A sharp rise in interest rates could have an adverse impact on the market value of certain securities in our portfolio. We do not currently hedge our interest rate exposure and do not enter into financial instruments for trading or speculative purposes or utilize derivative financial instruments.

At September 30, 2008, we had short-term debt of $195.0 million associated with our Notes. The market value of our short-term debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.

Foreign Currency Risk

The growth in our international operations has increased our exposure to foreign currency fluctuations as well as other risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Further, in September 2007 we acquired NetGiro Systems, a payment processor based in Stockholm, Sweden that processes international transactions, and the anticipated growth of this company will increase our exposure to foreign currency fluctuations. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

Foreign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currencies result in gains and losses that are reflected in our Consolidated Statement of Income. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased net revenues and operating expenses. Conversely, our net revenues and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies.

Transaction Exposure

The Company enters into short term foreign currency forward contracts to offset the foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in current earnings in “other expense, net”.

Translation Exposure

Foreign exchange rate fluctuations may adversely impact our consolidated financial position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are recognized as an adjustment to stockholders’ equity through accumulated other comprehensive income/(loss) net of tax benefit or expense.

Other Market Risks

Investments in auction-rate securities

At September 30, 2008, we held approximately $109.1 million of auction rate securities and concluded that no impairment currently exists on these securities. Given current conditions in the auction rate securities market as described in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Quarterly Report on Form 10-Q, we may incur temporary unrealized losses, or other-than-temporary realized losses, in the future if market conditions persist and we are unable to recover the investment principal in our auction rate securities.

Item 4. Controls and Procedures

(a)

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934) were effective in providing reasonable assurance that material information required to be disclosed by us in this Form 10-Q was recorded, processed, summarized and reported in a timely manner.

(b)

During the quarter ended September 30, 2008, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting. This system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded and executed in accordance with management’s authorization and financial statements are prepared in accordance with generally accepted accounting principles. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

DDR Holdings, LLC has brought a claim against us and several other defendants regarding US Patents No. 6,629,135 (the “‘135 patent”) and 6,993,572 (the “‘572 patent”), which are owned by DDR Holdings. These patents claim e-commerce outsourcing systems and methods relating to the provision of outsourced e-commerce support pages having a common look and feel with a host’s website. The case was filed in the U.S. District Court for the Eastern District of Texas on January 31, 2006. The complaint seeks injunctive relief, declaratory relief, damages and attorneys’ fees. We have denied infringement of any valid claim of the patents-in-suit, and have asserted counter-claims which seek a judicial declaration that the patents are invalid and not infringed. In September 2006, DDR Holdings filed an application for reexamination of its patents based upon the prior art produced by us and the other defendants in the case. As part of that application, DDR Holdings asserted that this prior art raised a substantial question as to the patentability of the inventions claimed in the patents. In December 2006, the Court stayed the litigation pending a decision on the reexamination application. In February 2007, the US Patent and Trademark Office ordered reexamination of DDR’s patents. On September 4, 2008, the US Patent and Trademark Office issued a non-final office action rejecting the claims in the ‘572 patent which were subject to reexamination. Should the stay of litigation be lifted, we intend to vigorously defend ourselves in this matter.

NetRatings, Inc. has brought a claim against us regarding US Patents Nos. 5,675,510, 6,115,680, 6,108,637, 6,138,155 and 6,763,386, which are owned by NetRatings. These patents generally relate to web analytic and reporting systems. The case was filed in the U.S. District Court for the District of Minnesota on October 5, 2006. The complaint sought injunctive relief, declaratory relief, damages and attorney’s fees. We have denied the allegations of infringement and have conducted a vigorous defense. On September 22, 2008, we entered into a settlement agreement with NetRatings in resolution of this case. We have made no admission of liability with respect to the NetRatings patents in connection with this settlement. On September 23, 2008, the case was dismissed with prejudice by the U.S. District Court for the District of Minnesota.

In December 2006, we announced that we had received an informal inquiry from the SEC relating to our historical stock option grant practices. On September 26, 2008, we received notice from the SEC that it has completed its investigation and does not intend to recommend any enforcement action against us in this regard.

Third parties have from time-to-time claimed, and others may claim in the future, that we have infringed their intellectual property rights, or that certain products and services we resell infringed their intellectual property rights. We have been notified of several potential intellectual property disputes, and expect that we will increasingly be subject to intellectual property infringement claims as our services expand in scope and complexity. We have in the past been forced to litigate such claims in some instances. We also may become more vulnerable to third-party claims as laws, such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts and as we expand geographically into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. These claims, whether meritorious or not, could be time-consuming and costly to resolve, cause service upgrade delays, require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements.

Item 1A. Risk Factors

The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial also may impair our business operations. Our business financial condition or results of operations could be materially adversely affected by any of these risks and the value of our common stock could decline due to any of these risks. This quarterly report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this report.

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

Sales of products for one software publisher client, Symantec Corporation, accounted for approximately 24.0% of our revenue during the third quarter of 2008. In addition, revenues derived from proprietary Digital River services sold to Symantec end-users and sales of Symantec products through our oneNetworkDirect™ retail and affiliate channel together accounted for approximately 8.7% of total Digital River revenue. In addition, a limited number of other software and physical goods clients contribute a large portion of our annual revenue. Contracts with our clients are generally one or two years in length, and generally provide for successive one year renewal periods unless a client elects not to renew. If any one of these key contracts is not renewed or otherwise terminates, or if revenues from these clients decline for any other reason (such as competitive developments), our revenue would decline and our ability to sustain profitability would be impaired. If our contract with Symantec is not renewed or otherwise terminated, or if revenues from Symantec and Symantec-related services decline for any other reason, our revenue and our ability to sustain profitability could be materially adversely impaired. It is important to our ongoing success that we maintain our key client relationships and, at the same time, develop new client relationships.

Our future success cannot be predicted based upon our operating history.

The nature of our business and the e-commerce industry in which we operate has undergone rapid development and change. Accordingly, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a relatively rapidly changing industry. If we are unable to address these issues, we may not be financially or operationally successful.

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

Through acquisitions and organic growth, we are rapidly and significantly expanding our operations, both domestically and internationally. We will continue to expand further to pursue growth of our service offerings and customer base. This expansion increases the complexity of our business and places a significant strain on our management, operations, technical performance, financial resources, and internal financial control and reporting functions, and there can be no assurance that we will be able to manage it effectively. Our personnel, systems, procedures and controls may not be adequate to effectively manage our future operations, especially as we employ personnel in multiple domestic and international locations. We may not be able to hire, train, retain and manage the personnel required to address our growth. Failure to effectively manage our growth opportunities could damage our reputation, limit our future growth, negatively affect our operating results and harm our business.

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

We sell products and services to end-users outside the United States and we intend to continue expanding our international presence. In the third quarter of 2008, our e-commerce sales to international consumers represented approximately 42.7% of our total sales. Expansion into international markets, particularly the European and Asia-Pacific regions, requires significant resources that we may fail to recover by generating additional revenue. Conducting business outside of the United States is subject to risks, including:

	•		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 and other payment-related fraud and difficulties in accounts receivable

collection;

	•		The burden and cost of complying with a variety of foreign laws, rules and regulations;

	•		The possibility of unionization of our workforce outside the United States, particularly in Europe;

	•		Political, social and economic instability;

	•		Import and export license requirements and restrictions of the United States and every other country in which we operate; and

	•		Political or economic constraints on international trade or instability.

Any of the factors described above, as well as other risks of doing business outside the United States, may have a material adverse effect on our ability to increase or maintain foreign sales. These risks have grown with the acquisitions of Digital River GmbH and NetGiro Systems, which have substantial operations outside the U.S. and with our expansion into the Asia-Pacific region.

We may be unable to successfully and cost-effectively market, sell and distribute our services in foreign markets. This may be more difficult or take longer than anticipated especially due to international challenges, such as language barriers, currency exchange issues and the fact that the Internet infrastructure in foreign countries may be less advanced than the U.S. Internet infrastructure. If we are unable to successfully expand our international operations, or manage this expansion, our operating results and financial condition could be harmed. In addition, a significant portion of our cash and marketable securities are held in non-U.S. domiciled countries.

Our operating results are subject to fluctuations in demand for products and services offered by us or our clients.

Our quarterly and annual operating results are subject to fluctuations in demand for the products or services offered by us or our clients, such as anti-virus software and anti-spyware software. In particular, sales of anti-virus software represented a significant portion of our revenues in recent years, and continue to be very important to our business. Demand for anti-virus software is subject to the unpredictable introduction of significant computer viruses. To the extent that software publishers successfully introduce products or services not sold through our platform that are competitive with products and services sold by current Digital River clients (including anti-virus products and services), our revenues could be materially adversely affected.

New obligations to collect or pay transaction taxes could substantially increase the cost to us of doing business.

Currently, we collect sales, use, value added tax (VAT) or other similar transaction taxes with respect to electronic software download and physical delivery of products in tax jurisdictions where we believe we have a taxable presence. The application of transaction taxes to interstate and international sales over the Internet is complex and evolving. We already are required to collect and remit VAT in the European Union, for example. Local, state or international jurisdictions may seek to impose transaction tax collection obligations on companies like ours that engage in e-commerce, and they may seek to impose taxes retroactively on past transactions that we believed were exempt from transaction tax liability. A successful assertion by one or more tax jurisdictions that we should collect or were obligated to collect transaction taxes on the products we sell could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our results of operations.

Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives were successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce and related e-commerce activities could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.

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

In recent years revenues from our ''remote control’’ platforms have grown as a percentage of our overall business, and we plan to continue to emphasize our self service e-commerce solutions. These platforms typically have an automated structure that allows customers to sign up for and use our e-commerce services without significant participation from Digital River personnel. Despite our efforts to contractually prohibit the sale of inappropriate and illegal goods and services and detect the same, the remote control nature of these platforms makes it more likely that transactions involving the sale of unlawful goods or services or the violation of the proprietary rights of others may occur before we

become aware of them. Furthermore, unscrupulous individuals may offer for sale, or attempt to purchase, illegal products via such platforms under innocuous names, further frustrating attempts to prevent inappropriate use of our services. Failure to detect inappropriate or illegal uses of our platforms by third parties could expose us to a number of risks, including fines, increased fees or termination of services by payment processors or credit card associations, risks of lawsuits, and civil and criminal penalties.

Loss of our credit card acceptance privileges would seriously hamper our ability to process the sale of merchandise.

The payment by end-users for the purchase of digital or physical goods that we process is typically made by credit card or similar payment method. As a result, we must rely on banks or payment processors to process transactions, and must pay a fee for this service. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards. Any such increased fees will increase our operating costs and reduce our profit margins. We also are required by our processors to comply with credit card association operating rules, and we have agreed to reimburse our processors for any fines they are assessed by credit card associations as a result of processing payments for us. The credit card associations and their member banks set and interpret the credit card rules. Visa, MasterCard, American Express, Discover, or other card associations could adopt new operating rules or re-interpret existing rules that we, or our processors, might find difficult to follow. We have had payment processing agreements with certain of our payment processors terminated due to violations of their rules, and although we have been able to successfully migrate to new processors, such migrations require significant attention from our personnel, and often result in higher fees and customer dissatisfaction. Any disputes or problems associated with our payment processors could impair our ability to give customers the option of using credit cards to fund their payments. If we were unable to accept credit cards, our business would be seriously damaged. We also could be subject to fines or increased fees from MasterCard and Visa if we fail to detect that merchants are engaging in activities that are illegal or activities that are considered “high risk,’’ primarily the sale of certain types of digital content. We may be required to expend significant capital and other resources to monitor these activities.

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.

We generate revenue by providing outsourced services to a wide variety of companies, primarily in the software and high-tech products markets. If we cannot develop and maintain satisfactory relationships with software and digital products publishers, manufacturers, online retailers and online channel partners on acceptable commercial terms, we will likely experience a decline in revenue and operating profit. We also depend on our software and digital publisher clients creating and supporting software and digital products that end-users will purchase. If we are unable to obtain sufficient quantities of software and digital products for any reason, or if the quality of service provided by these software and digital products publishers falls below a satisfactory level, we could also experience a decline in revenue, operating profit and end-user satisfaction, and our reputation could be harmed. Our contracts with our software and digital products publisher clients are generally one to two years in duration, with an automatic renewal provision for additional one-year periods, unless we are provided with a written notice before the end of the contract. As is common in our industry, we have no material long-term or exclusive contracts or arrangements with any software or digital products publishers that guarantee the availability of software or digital products. Software and digital products publishers that currently supply software or digital products to us may not continue to do so and we may be unable to establish new relationships with software or digital product publishers to supplement or replace existing relationships.

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

A key element of our business strategy involves expansion through the acquisitions of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. Between January 1, 1999 and September 30, 2008, we acquired 30 companies. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property. We have acquired, and intend to continue engaging in strategic acquisitions of businesses, technologies, services and products. Since December 2006, we have acquired four businesses, NetGiro Systems AB, DigitalSwift Corporation, CustomCD, Inc., and THINK Subscription, Inc.

Acquisitions may require significant capital infusions, typically entail many risks, and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past and may in the future experience delays in the timing and successful

integration of an acquired company’s technologies and product development, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience.

The process of integrating an acquired business, technology, service or product into our business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired business also may disrupt our ongoing business, distract management and make it difficult to maintain standards, controls and procedures. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired. Moreover, the anticipated benefits of any acquisition may not be realized. If a significant number of clients of the acquired businesses cease doing business with us, we would experience lost revenue and operating profit, and any synergies from the acquisition may be lost. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities, amortization of intangible assets or impairment of goodwill.

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.

We require substantial working capital to fund our business. In January 2005, we filed a registration statement to increase our available shelf registration amount and we have approximately $82 million available for future use. In addition, we filed an acquisition shelf for up to approximately 1.5 million shares. In February 2006, we filed a shelf registration that would allow us to sell an undetermined amount of equity or debt securities in accordance with the rules applying to “well-known seasoned issuers.’’ If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced and these equity securities may have rights, preferences or privileges senior to those of our common stock. In June 2004, we issued 1.25% convertible notes which require us to make interest payments and will require us to pay principal when the notes become due in 2024 or in the event of acceleration under certain circumstances, unless the notes are converted into our common stock prior to that. For a thirty day period ending January 1, 2009, the note holders have the right to have the debt redeemed at 100.25% of principal face amount. In light of current market conditions for interest rates and our stock price relative to the conversion price for the notes, it is likely that substantially all of the note holders will seek repayment on January 1, 2009. We may not have sufficient capital to service this or any future debt securities that we may issue, further, the conversion of the notes into our common stock would result in further dilution to our stockholders. Our capital requirements depend on several factors, including the rate of market acceptance of our products, the ability to expand our client base, the growth of sales and marketing, and opportunities for acquisitions of other businesses. We have had significant operating losses and negative cash flow from operations since inception. Additional financing may not be available when needed, on terms favorable to us or at all. Further, certain company investments may not be convertible into liquid assets when needed, on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of future opportunities or respond to competitive pressures, which would harm our operating results and adversely affect our ability to sustain profitability.

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.

Our quarterly and annual operating results have fluctuated significantly in the past and are likely to continue to do so in the future due to a variety of factors, some of which are outside our control. As a result, we believe that quarter-to-quarter and year-to-year comparisons of our revenue and operating results are not necessarily meaningful, and that these comparisons may not be accurate indicators of future performance. If our annual or quarterly operating results fail to meet the guidance we provide to securities analysts and investors or otherwise fail to meet their expectations, the trading price of our common stock may be impacted. Some of the factors that have contributed or may contribute to fluctuations in our quarterly and annual operating results include:

	•		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; and

	•		Acquisitions.

In addition, revenue generated by our software and digital commerce services is likely to fluctuate on a seasonal basis that is typical for the software publishing market, consumer electronics, and computer and video games markets.

Our operating expenses are based on our expectations of future revenue. These expenses are relatively fixed in the short-term. If our revenue for a quarter falls below our expectations and we are unable to quickly reduce spending in response, our operating results for that quarter would be harmed. In addition, the operating results of companies in the electronic commerce industry have, in the past, experienced significant quarter-to-quarter fluctuations that may adversely affect our stock price.

Security breaches could hinder our ability to securely transmit confidential information and could materially affect our reputation, business operations, operating results and financial condition.

Our business depends in large part on the secure transmission of confidential information over public networks, including customers’ credit card and other payment account information, and the secure storage of confidential information. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary for secure transmission of confidential information, such as end-user credit and debit card numbers. While we take significant steps to protect the security of confidential information in our possession, we cannot guarantee our security measures will prevent security breaches, or that future advances in computer and software capabilities and encryption technology, new cryptography tools and discoveries, and other events will enable us to prevent the breach or compromise of our security even if implemented by us. Further, the technology utilized in credit and debit cards, and the systems used for the transmission of payment card transactions, are controlled by the payment card industry, and vulnerabilities in these systems and technology can place payment card data at risk.

Any breach or compromise of our security could have a material adverse effect on our reputation, business, operating results and financial condition, dissuade existing and new clients from using our services, dissuade customers from transacting business through our systems, and expose us to significant costs, fines, losses, litigation, governmental investigations, and liabilities. A party who circumvents our security measures could misappropriate proprietary information or interrupt our operations. We may be required to expend significant capital and other resources to protect against security breaches or address problems caused by such breaches. Concerns over the security of the Internet and other online transactions and the privacy of users could deter people from using the Internet to conduct transactions that involve transmitting personally identifiable and other confidential information, thereby inhibiting the growth of our business.

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.

From time to time, we are named as a defendant in lawsuits claiming that we have, in some way, violated the intellectual property rights of others. We have been notified of several potential intellectual property disputes, and expect that we will increasingly be subject to intellectual property infringement claims as our services expand in scope and complexity. We have in the past been forced to litigate such claims in some instances. Any assertions or prosecutions of claims like these could require us to expend significant financial and managerial resources. The defense of any claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause product enhancement delays or require that we develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us or at all. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, we may be unable to pursue our current business plan. We expect that we will increasingly be subject to intellectual property infringement claims as our services expand in scope and complexity, and our results of operations and financial condition could be materially adversely affected.

Claims against us related to the software products and services, and/or tangible goods, which we resell and/or deliver could require us to expend significant resources.

We may become more vulnerable to third party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts. Claims may be made against us for negligence, copyright or trademark infringement, products liability or other theories based on the nature and content of software products, services, and/or tangible goods that we resell and/or deliver electronically and physically. Because we did not create these products and services, we are generally not in a position to know the quality or nature of the content of these products and services. Although we carry general liability insurance and require that our customers indemnify us against end-user claims, our insurance and indemnification measures may not cover potential claims of this type, may not adequately cover all costs incurred in defense of potential claims, or may not reimburse us for all liability that may be imposed. Any costs or imposition of liability that are not covered by insurance or indemnification measures could be expensive and time-consuming to address, distract management and delay product deliveries, even if we are ultimately successful in the defense of these claims.

If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules proclaimed after that. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

Political and economic conditions, and current turmoil in United States and global markets, may adversely affect our revenue and results of operations.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial services markets, the overall demand for consumer goods and services and general political and economic developments. Reduced demand for consumer goods and services could result in a decline in our revenue and impair our ability to sustain profitability.

Recent turmoil in U.S. and foreign credit markets, equity markets, and in the global financial services industry, including the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the U.S. and foreign governments, may continue to place pressure on the global economy and affect overall consumer spending and the availability of credit to us, our clients, and our customers. If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, they may have a material adverse effect on our business, operating results, and financial condition.

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

The market for e-commerce solutions is extremely competitive and we may find ourselves unable to compete effectively. Because there are relatively low barriers to entry in the e-commerce market, we expect continued intense competition as current competitors expand their product offerings and new competitors enter the market. In addition, our clients may become competitors in the future. Increased competition is likely to result in price reductions, reduced margins, longer sales cycles and a decrease or loss of our market share, any of which could negatively impact our revenue and earnings. We face competition from the following sources:

	•		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. and asknet Inc.;

	•		Companies that provide technologies, services or products that support a portion of the e-commerce process, such as payment processing, including CyberSource Corporation and PayPal Corp.;

	•		Companies that offer various online marketing services, technologies and products, including ValueClick, Inc., aQuantive, Inc. and Omniture, 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.

We believe that the principal competitive factors for a participant in our market are the breadth of products and services offered, proven global platforms, the number of clients and online channel partnerships a participant has, brand recognition, system reliability and scalability, price, customer service, ease of use, speed to market, convenience and quality of delivery. The online channel partners and the other companies described above may compete directly with us by adopting a similar business model. Moreover, while some of these companies also are clients or potential clients of ours, they may compete with our e-commerce outsourcing solution to the extent that they develop e-commerce systems or acquire such systems from other software vendors or service providers.

Many of our competitors have, and new potential competitors may have, more experience developing Internet-based software and e-commerce solutions, larger technical staffs, larger customer bases, more established distribution channels and customer relationships, greater brand recognition and greater financial, marketing and other resources than we have. In addition, competitors may be able to develop services that are superior to our services, achieve greater customer acceptance or have significantly improved functionality as compared to our existing and future products and services. Our competitors may be able to respond more quickly to technological developments and changes in customers’ needs. Our inability to compete successfully against current and future competitors could cause our revenue and earnings to decline.

Changes in government regulation could limit our Internet activities or result in additional costs of doing business over the Internet.

We are subject to the same international, federal, state and local laws as other companies conducting business over the Internet. Today, there are relatively few laws specifically directed towards conducting business over the Internet. The adoption or modification of laws related to the Internet could harm our business, operating results and financial condition by increasing our costs and administrative burdens. Due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the international, federal and state levels. These laws and regulations could cover issues such as:

	•		User privacy with respect to adults and minors;

	•		Our ability to collect and/or share necessary information that allows us to conduct business on the Internet;

	•		Export compliance;

	•		Pricing, taxation, and regulatory fees;

	•		Fraud;

	•		Advertising;

	•		Intellectual property rights;

	•		Information security;

	•		Quality of products and services;

	•		Security breaches;

	•		Processing of credit card information;

	•		Taxes; and

	•		Recycling of consumer products.

Applicability to the Internet of existing laws governing issues, such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy also could harm our operating results and substantially increase the cost to us of doing business. For example, numerous state legislatures have proposed that tax rules for Internet retailing and catalog sales correspond to enacted tax rules for sales from physical stores. Any requirement that we collect sales tax for each online purchase and remit the tax to the appropriate state authority would be a significant administrative burden to us, and would likely depress online sales. This and any other change in laws applicable to the Internet also might require significant management resources to respond appropriately. The vast majority of these laws were adopted prior to the advent of the Internet, and do not contemplate or address the unique issues raised thereby. Many laws that do reference the Internet and the applicability of many existing laws to the Internet are only beginning to be determined by the courts, and their applicability and reach are therefore uncertain.

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

We periodically enhance and expand our technology and transaction-processing systems, network infrastructure and other technologies to accommodate increases in the volume of traffic on our technology platforms. Any inability to add software and hardware or to develop and upgrade existing technology, transaction-processing systems or network infrastructure to manage increased traffic on this platform, or to anticipate spikes in traffic, may cause unanticipated systems disruptions, slower response times and degradation in client services, including impaired quality and speed of order fulfillment. Failure to manage increased traffic could harm our reputation and significantly reduce demand for our services, which would impair the growth of our business. We may be unable to improve and increase the capacity of our network infrastructure sufficiently or anticipate and react to expected increases in the use of the platform to handle increased volume. Further, additional network capacity may not be available from third-party suppliers when we need it. Our network and our suppliers’ networks may be unable to maintain an acceptable data transmission capability, especially if demands on the platform increase.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our e-commerce platforms and the underlying network infrastructure. If we incur significant costs without adequate results, or are unable to adapt rapidly to technological changes, we may fail to achieve our business plan. The Internet and the e-commerce industry are characterized by rapid technological changes, changes in user and client requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our technology and systems obsolete. To be successful, we must adapt to rapid technological changes by licensing and internally developing leading technologies to enhance our existing services, developing new products, services and technologies that address the increasingly sophisticated and varied needs of our clients, and responding to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our proprietary technologies involves significant technical and business risks. We may fail to use new technologies effectively or fail to adapt our proprietary technology and systems to client requirements or emerging industry standards.

System failures could reduce the attractiveness of our service offerings.

We provide commerce, marketing and delivery services to our clients and end-users through our proprietary technology transaction processing and client management systems. These systems also maintain an electronic inventory of products and gather consumer marketing information. The satisfactory performance, reliability and availability of the technology and the underlying network infrastructure are critical to our operations, level of client service, reputation and ability to attract and retain clients. We have experienced periodic interruptions, affecting all or a portion of our systems, which we believe will continue to occur from time-to-time. Any systems damage or interruption that impairs our ability to accept and fill client orders could result in an immediate loss of revenue to us, and could cause some clients to purchase services offered by our competitors. In addition, frequent systems failures could harm our reputation.

Although we maintain system redundancies in multiple physical locations, our systems and operations are vulnerable to damage or interruption from:

•

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;

	•		Power loss, computer systems failures, and Internet and telecommunications failure; and

	•		Other events beyond our control.

We may not carry sufficient business interruption insurance to fully compensate us for losses that may occur.

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

We design, develop, implement and manage e-commerce solutions that are crucial to the operation of our clients’ businesses. Defects in the solutions we develop could result in delayed or lost revenue, adverse end-user reaction, and/or negative publicity, which could require expensive corrections. As a result, clients who experience these adverse consequences either directly or indirectly by using our services could bring claims against us for substantial damages. Any claims asserted could exceed the level of any insurance coverage that may be available to us. The successful assertion of one or more large claims that are uninsured, that exceed insurance coverage or that result in changes to insurance policies, including future premium increases, could adversely affect our operating results or financial condition.

We depend on key personnel.

Our future success significantly depends on the continued services and performance of our senior management. Our performance also depends on our ability to retain and motivate our key technical employees who are skilled in maintaining our proprietary technology platforms. The loss of the services of any of our executive officers or key employees could harm our business if we are unable to effectively replace that officer or employee, or if that person should decide to join a competitor or otherwise directly or indirectly compete with us. Further, we may need to incur additional operating expenses and divert other management time in order to search for a replacement.

Our future success depends on our ability to continue to identify, attract, hire, train, retain and motivate highly skilled personnel. Competition for these personnel is intense, particularly in the Internet industry. We may be unable to successfully attract, assimilate or retain sufficiently qualified personnel. In making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of stock option grants they are to receive in connection with their employment.

Protecting our intellectual property is critical to our success.

We regard the protection of our trademarks, copyrights, trade secrets and other intellectual property as critical to our success. We rely on a combination of patent, copyright, trademark, service mark and trade secret laws and contractual restrictions to protect our proprietary rights. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with parties with whom we conduct business, in order to limit access to and disclosure of our proprietary information. These contractual arrangements and the other steps taken by us to protect our intellectual property may not prevent misappropriation of our technology or deter independent third-party development of similar technologies. We also seek to protect our proprietary position by filing U.S. patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Proprietary rights relating to our technologies will be protected from unauthorized use by third parties only to the extent they are covered by valid and enforceable patents or are effectively maintained as trade secrets. We pursue the registration of our trademarks and service marks in the U.S. and internationally. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online.

The steps we have taken to protect our proprietary rights may be inadequate and third parties may infringe or misappropriate our trade secrets, trademarks and similar proprietary rights. Any significant failure on our part to protect our intellectual property could make it easier for our competitors to offer similar services and thereby adversely affect our market opportunities. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of management and technical resources.

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.

We market our services directly to software publishers, consumer electronics manufacturers, online retailers and other prospective customers. These relationships are typically complex and take time to finalize. Due to operating procedures in many organizations, a significant amount of time may pass between selection of our products and services by key decision-makers and the signing of a contract. The period between the initial client sales call and the signing of a contract with significant sales potential is difficult to predict and typically ranges from six to twelve months. If at the end of a sales effort a prospective client does not purchase our products or services, we may have incurred substantial expenses and expended management time that cannot be recovered and that will not generate corresponding revenue. As a result, our cash flow and our ability to fund expenditures incurred during the sales cycle may be impaired. We can incur substantial front-end cost to launch client sites and it may require a substantial time before those costs are recouped by us.

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

Certain privacy and anti-email proponents have engaged in a practice of gathering, and publicly listing, network addresses that they believe have been involved in sending unwanted, unsolicited emails commonly known as spam. In response to user complaints about spam, Internet service providers have, from time to time, blocked such network addresses from sending emails to their users. If our network addresses mistakenly end up on these spam lists, our ability to provide services for our clients and consummate the sales of digital and physical goods over the Internet could be harmed.

We are subject to regulations relating to consumer privacy.

We collect and maintain end-user data for our clients, which subjects us to increasing international, federal and state regulations related to online privacy and the use of personal user information. Congress has enacted anti-spam legislation with which we must comply when providing email campaigns for our clients. Legislation and regulations are pending in various domestic and international governmental bodies that address online privacy protections. Several governments have proposed, and some have enacted, legislation that would limit the use of personal user information or require online services to establish privacy policies. In addition, the U.S. Federal Trade Commission, or FTC, has urged Congress to adopt legislation regarding the collection and use of personal identifying information obtained from individuals when accessing websites. In the past, the emphasis has been on information obtained from minors. Focus has now shifted to include online privacy protection for minors and adults.

Even in the absence of laws requiring companies to establish these procedures, the FTC has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could limit our collection of and/or ability to share with our clients demographic and personal information from end-users, which could adversely affect our ability to comprehensively serve our clients.

The European Union has adopted a privacy directive that regulates the collection and use of information that identifies an individual person. These regulations may inhibit or prohibit the collection and sharing of personal information in ways that could harm our clients or us. The globalization of Internet commerce may be harmed by these and similar regulations because the European Union privacy directive prohibits transmission of personal information outside the European Union.

Compliance with foreign laws and export/import control laws may substantially increase our costs of doing business or otherwise adversely affect our ability to offer our services.

Because our services are accessible worldwide, and we facilitate sales of products to end-users worldwide, international jurisdictions may claim that we are required to comply with their laws. Further, we may enter into agreements governed by the laws of a jurisdiction outside of the United States. Laws regulating businesses, especially companies doing business on the Internet outside of the United States may be less favorable than those in the United States, giving greater rights to our clients, consumers, content owners and users. Compliance may be more costly or may require us to change our business practices or restrict our service offerings relative to those provided in the United States. Any failure to comply with foreign laws could subject us to penalties ranging from fines to bans on our ability to offer our services as well as private lawsuits.

As our services are available over the Internet in multiple states and foreign countries, these jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. We and/or our

subsidiaries are qualified to do business only in certain states. Failure to qualify as a foreign corporation in a required jurisdiction could subject us to taxes and penalties and could result in our inability to enforce contracts in these jurisdictions.

In addition, we are subject to United States laws governing the conduct of business with other countries, such as export control laws, which prohibit or restrict the export of goods, services and technology to designated countries, denied persons or denied entities from the United States. Violation of these laws could result in fines or other actions by regulatory agencies and result in increased costs of doing business and reduced profits. In addition, any significant changes in these laws, particularly an expansion in export control laws, will increase our costs of compliance and may further restrict our overseas client base.

We are exposed to foreign currency exchange risk.

Sales outside the United States accounted for approximately 42.7% of our total sales in the third quarter of 2008. The results of operations of, and certain of our intercompany balances associated with, our internationally focused websites are exposed to foreign exchange rate fluctuations. Upon translation, net sales and other operating results from our international operations may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased net revenues and operating expenses. Similarly, our net revenues and operating expenses will decrease if the U.S. dollar strengthens against foreign currencies. As we have expanded our international operations, our exposure to exchange rate fluctuations has become more pronounced. We may enter into short-term currency forward contracts to offset the foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. The use of such hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange rates. See Item 7A of Part II in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed on February 29, 2008, for information demonstrating the effect on our consolidated statements of income from changes in exchange rates versus the U.S. dollar.

Changes in our tax rates could affect our future results.

Our future effective tax rates could be favorably or unfavorably affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations and financial condition.

Developments in accounting standards may cause us to increase our recorded expenses, which in turn would jeopardize our ability to demonstrate sustained profitability.

In January 2002, we adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets’’ (SFAS No. 142). The statement generally establishes that goodwill and intangible assets with indefinite lives are not amortized, but are to be tested on an annual basis for impairment and, if impaired, are recorded as an impairment charge in income from operations. As of September 30, 2008, we had goodwill with an indefinite life of $278.7 million from our acquisitions. If our goodwill is determined for any reason to be impaired, the subsequent accounting of the impaired portion as an expense would lower our earnings and jeopardize our ability to demonstrate sustained profitability. On January 1, 2006, we adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values. Our operating results for 2007 and 2008 contain, and our operating results for future periods will contain, a charge for stock-based compensation related to stock options, restricted stock grants and employee stock purchases.

Internet-related stock prices are especially volatile and this volatility may cause our stock price to fluctuate significantly.

The stock market and the trading prices of Internet-related companies in particular, have been notably volatile. This volatility is likely to continue in the short-term and is not necessarily related to the operating performance of affected companies. This broad market and industry volatility could significantly reduce the price of our common stock at any time, without regard to our operating performance. Factors that could cause our stock price in particular to fluctuate include, but are not limited to:

	•		Actual or anticipated variations in quarterly operating results;

	•		Announcements of technological innovations;

	•		The ability to sign new clients and the retention of existing clients;

	•		Loss of key clients;

	•		New products or services that we offer;

	•		Competitive developments, including new products or services, or new relationships by our competitors;

	•		Changes that affect our clients or the viability of their product lines;

	•		Changes in financial estimates by securities analysts;

	•		Conditions or trends in the Internet and online commerce industries;

	•		Continued uncertainty in the U.S. and global economy and markets;

	•		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.

In addition, our stock price may be impacted by the short sales and actions of other parties who may disseminate misleading information about us in an effort to profit from fluctuations in our stock price.

Provisions of our charter documents, other agreements and Delaware law may inhibit potential acquisition bids for us.

Certain provisions of our amended and restated certificate of incorporation, bylaws, other agreements and Delaware law could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our stockholders.

The investment of our substantial cash balance and our investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.

We currently believe the market liquidity for these securities will recover and are not, other than temporarily, impaired, primarily due to the government guarantee of the underlying securities; however, there is no guarantee that it will not take until the final maturity of the underlying notes (up to 30 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 6. Exhibits

(a) Exhibits


EXHIBIT
NUMBER		DESCRIPTION OF DOCUMENTS

3.1(1)		Amended and Restated Certificate of Incorporation, as amended, as currently in effect.
3.2(2)		Amended and Restated Bylaws, as currently in effect.
4.1(3)		Specimen of Common Stock Certificate.
4.2(1)		Form of Senior Debt Indenture.
4.3(1)		Form of Subordinated Debt Indenture.
4.4		References are made to Exhibits 3.1 and 3.2.
4.5(4)		Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank, N.A. as trustee, including therein the form of the Note.

12.1		Computation of Ratio of Earnings to Fixed Charges.
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Filed as exhibits 3.1 and 3.3 and exhibits 4.5 and 4.6 to our Registration Statement on Form S-3, File No. 333-81626, filed on January 29, 2002, declared effective on February 12, 2002, and incorporated herein by reference.

(2)		Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000, filed on March 27, 2001, and incorporated herein by reference.

(3)		Filed as an exhibit to our Registration Statement on Form S-1, File No. 333-56787, declared effective on August 11, 1998, and incorporated herein by reference.

(4)		Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July 13, 2004 and incorporated herein by reference.

SIGNATURES

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


Date: November 4, 2008	DIGITAL RIVER, INC.
	By:	/s/ THOMAS M. DONNELLY
		Thomas M. Donnelly
		Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX


EXHIBIT
NUMBER		DESCRIPTION OF DOCUMENTS

3.1(1)		Amended and Restated Certificate of Incorporation, as amended, as currently in effect.
3.2(2)		Amended and Restated Bylaws, as currently in effect.
4.1(3)		Specimen of Common Stock Certificate.
4.2(1)		Form of Senior Debt Indenture.
4.3(1)		Form of Subordinated Debt Indenture.
4.4		References are made to Exhibits 3.1 and 3.2.
4.5(4)		Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank, N.A. as trustee, including therein the form of the Note.
12.1		Computation of Ratio of Earnings to Fixed Charges.
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Filed as Exhibits 3.1 and 3.3 and Exhibits 4.5 and 4.6 to our Registration Statement on Form S-3, File No. 333-81626, filed on January 29, 2002, declared effective on February 12, 2002, and incorporated herein by reference.

(2)		Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000, filed on March 27, 2001, and incorporated herein by reference.

(3)		Filed as an exhibit to our Registration Statement on Form S-1, File No. 333-56787, declared effective on August 11, 1998, and incorporated herein by reference.

(4)		Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July 13, 2004 and incorporated herein by reference.