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 and Item 1A of Part 1 of the Form 10-K for the period ended December 31, 2008. 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. We have no obligation to update the matters set forth herein. Overview
We provide end-to-end global e-commerce and marketing solutions to a wide variety of companies in software, consumer electronics, computer games, video games, and other markets. 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 while mitigating risks. 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, online marketing including e-mail marketing, management of affiliate paid search programs, payment processing services, 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 products and 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' branded 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 browse for products and make purchases online. We typically are the seller of record for transactions through our client branded 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. We have invested substantial resources to develop our e-commerce and marketing 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. Our e-commerce store solutions range from simple remote control models to more comprehensive online store models.
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.
Our clients include many of the largest software, consumer electronics, computer and video game companies, including Absolute Software Corporation, Adobe Systems, Inc., Aspyr Media, Inc., Autodesk, Inc., Canon Europa N.V., Computer Associates, Cyber Patrol, LLC, Eastman Kodak Company, Electronic Arts, Inc., Lexmark, Inc., Microsoft Corporation, Nuance Communications, Inc., SanDisk Corporation, Smith Micro Software, Inc., Symantec Corporation, and Trend Micro, Inc.
As announced on October 12, 2009, Symantec Corporation has informed us that it has elected not to renew its e-commerce agreement with us, which will result in the termination of the e-commerce agreement on June 30, 2010. We expect a material decrease in revenue and operating income as a result of Symantec's decision to not renew its e-commerce agreement with us as Symantec migrates its stores from our e-commerce infrastructure to their internally developed e-commerce platform. However, as Symantec has not yet informed us of its migration plans or the nature of the support Symantec will require from us during the transition period, we are currently unable to predict the magnitude or timing of the revenue impact on our business, our future revenues and our operating results. Our intention is to moderate the impact on our consolidated financial results of the expected reduction in revenue

through acquisition of new clients, organic growth within existing clients, new product and service introductions, cost-saving initiatives and acquisition activities. Unless and until we generate sufficient new business to offset the loss of Symantec, our third quarter 2009 financial results will be difficult or impossible to duplicate in upcoming quarters. We just recently received this notice and have not had an opportunity to review our operating plan in light of this announcement. Therefore the statements we make below in terms of the items in our operating statement may not reflect this change in our client base. We were incorporated in Delaware in February 1994. Our headquarters are located at 9625 West 76th Street, Eden Prairie, Minnesota and our telephone number is 952-253-1234.
General information about us can be found at www.digitalriver.com under the "Company/Investor Relations" link. Our annual report on Forms 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.
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,
                                                   2009             2008              2009             2008
Revenue                                            100.0 %          100.0 %           100.0 %          100.0 %

Costs and expenses (exclusive of
depreciation and amortization expense
shown separately below):
Direct cost of services                              4.6              4.0               4.1              4.2
Network and infrastructure                          11.9             11.0              11.1             10.4
Sales and marketing                                 38.3             36.8              38.7             38.3
Product research and development                    14.2             13.5              13.2             13.0
General and administrative                           9.4             10.2               9.5             10.4
Depreciation and amortization                        5.2              4.2               4.6              4.0
Amortization of acquisition-related costs            1.8              2.1               1.9              2.1

Total costs and expenses                            85.4             81.8              83.1             82.4

Income from operations                              14.6             18.2              16.9             17.6
Interest Income                                      0.6              4.7               0.8              5.0
Other income (expense), net                          0.3             (1.5 )               -             (1.3 )

Income before income tax expense                    15.5             21.4              17.7             21.3
Income tax expense                                   4.4              5.2               4.5              5.5

Net income                                          11.1 %           16.2 %            13.2 %           15.8 %

REVENUE. Our revenue was $99.4 million for the three months ended September 30, 2009 compared to $96.3 million for the same period in the prior year, an increase of $3.1 million or 3.2%. For the nine months ended September 30, 2009, revenue totaled $298.9 million, an increase of $0.6 million, or 0.2%, from revenue of $298.3 million in the same period of the prior year. The revenue increases were attributed to increased traffic, growth in the number of consumer electronic clients we serve, growth in our digital software business and expanded strategic marketing activities with a larger number of clients. The revenue increases were also partially driven by foreign currency impact year over year.
International e-commerce sales were approximately 41.9% of total sales in the three month period ended September 30, 2009, compared to 42.7% in the same period of the prior year. The decrease in international revenue was primarily driven by foreign currency exchange rate fluctuations and increased sales by key U.S. clients.
DIRECT COST OF SERVICES. Direct cost of services primarily includes costs related to personnel, product fulfillment, backup CD production and delivery solutions and certain client-specific costs. Direct cost of service expense increased to $4.6 million for the three months ended September 30, 2009, compared to $3.9 million for the same period in the prior year. The increase was primarily attributable to higher CD production and delivery costs associated with higher revenue. For the nine months ended September 30, 2009, direct cost of service expense was $12.5 million, compared to $12.6 million for the same period of the prior year.

As a percentage of revenue, direct cost of services were 4.6% and 4.1% for the three and nine months ended September 30, 2009, compared to 4.0% and 4.2% in the same periods of the prior year.
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 $11.8 million and $10.6 million for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009, network and infrastructure expenses were $33.1 million, up from $31.1 million for the same period of the prior year. The increases were mainly due to increased data communication expenses and higher client website traffic as a result of various marketing campaigns and client product launches and one time severance and transition costs related to outsourcing our customer service operations to Tennessee-based Sitel Corporation (Sitel). We believe the partnership with Sitel, which has offices in 27 countries and 60,000 associates, will allow us to more efficiently scale to meet the growing requirements of our global client base. We will be able to offer more flexible staffing, expanded support in emerging markets, added multi-lingual capabilities, and in the near future, new global services such as in-bound and out-bound telesales.
As a percentage of revenue, network and infrastructure expenses were 11.9% and 11.1% for the three and nine months ended September 30, 2009, compared to 11.0% and 10.4% in the same period of the prior year.
SALES AND MARKETING. Our sales and marketing expenses include credit card transaction and other payment processing fees, personnel and related costs, advertising, promotional and product marketing expenses, credit card chargebacks and bad debt expense. Sales and marketing expenses were $38.1 million for the three months ended September 30, 2009 from $35.4 million for the same period in the prior year. Sales and marketing expense increased to $115.7 million for the nine months ended September 30, 2009 from $114.4 million for the same period in the prior year. The increase was primarily driven by higher payment processing related fees and new or expanded client paid search marketing programs in 2009. As a percentage of revenue, sales and marketing expenses were 38.3% and 38.7% in the three and nine months ended September 30, 2009, compared to 36.8% and 38.3% in the same periods in the prior year.
PRODUCT RESEARCH AND DEVELOPMENT. Our product research and development expenses include personnel and related expenses associated with developing, maintaining and enhancing our technology platforms and related systems. Product research and development expenses were $14.1 million for the three months ended September 30, 2009, compared to $13.0 million for the same period in the prior year. For the nine months ended September 30, 2009, product research and development expenses were $39.6 million compared to $38.7 million for the same period in the prior year. Higher research and development workforce related costs were incurred during the three and nine month periods ended September, 30 2009 as compared to the same periods of the prior year to support increased investment in technologies to strengthen our leadership position in software and unlock opportunities in markets such as consumer electronics, games, subscriptions, and business-to-business software. The higher research and development workforce related expenses were offset by the benefit of foreign currency translation and increased capitalization of internal and consulting labor to support on-going initiatives in our e-commerce infrastructure. These investments advance global system scalability, our e-marketing capabilities, data management and client reporting.
As a percentage of revenue, product research and development expenses were 14.2% and 13.2% in the three and nine months ended September 30, 2009, compared to 13.5% and 13.0% for the same periods in the prior year.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses primarily include executive, accounting and administrative personnel and related expenses, professional fees for legal, tax and audit services, bank fees and insurance. General and administrative expenses were $9.3 million and $28.3 million, respectively, for the three and nine months ended September 30, 2009, compared to $9.9 million and $30.9 million for the same periods in the prior year. The decrease in general and administrative costs for the three and nine months ended September 30 2009, compared to the same periods in 2008 were mainly due to lower personnel related costs as a result of targeted cost control measures. As a percentage of revenue, general and administrative expenses were 9.4% and 9.5% for the three and nine months ended September 30, 2009, compared to 10.2% and 10.4% for the same periods of the prior year.
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 $5.2 million and $13.6 million for the three and nine months ended September 30, 2009, respectively, compared to $4.0 million and $11.8 million for the same periods in the prior year.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES. For the period ended September 30, 2009 our amortization of acquisition-related intangibles line item consisted of amortization of intangible assets recorded from eight acquisitions in the past four years. Amortization of acquisition-related intangible assets was $1.8 million and $5.7 million, respectively, for the three and nine months ended September 30, 2009, compared to $2.0 million and $6.3 million for the same periods in the prior year. The decreases in 2009 were primarily due to the benefit of foreign currency translation on our NetGiro acquisition. INTEREST INCOME. Our interest income represents the total of interest income on our cash, cash equivalents, short-term investments and long-term investments. Interest income was $0.6 million and $2.5 million for the three and nine months ended September 30, 2009, compared to $4.5 million and $15.1 million for the same period in the prior year. The significant decrease in interest income was due to the use of approximately $188 million of cash in January 2009, to satisfy the majority of holders of our 1.25% Convertible Senior Notes due 2024 who exercised their put option to require the company to repurchase their notes. Additionally, yields on fixed income investments have declined substantially from 2008.
OTHER INCOME (EXPENSE), NET. Our other income (expense), net line item includes the total of interest expense on our debt, foreign currency transaction gains and losses and asset disposal gains and losses. Interest expense was $0.0 million and $0.1 million, respectively, for the three and nine months ended September 30, 2009, compared to $0.6 million and $1.8 million for the same periods in the prior year. The decrease in other interest expense was due to the significant decrease in our outstanding Convertible Senior Notes in January 2009. Foreign currency re-measurement was a gain of $0.3 million and a $0.1 million for the three and nine months ended September 30, 2009, respectively, compared to a loss of $0.8 million and $0.9 million for the same periods in the prior year. Gains and losses on asset disposals were immaterial for the three and nine months ended September 30, 2009 compared to a loss of $0.0 million and $1.0 million for the same periods in the prior year. The loss on asset disposals included one-time charges of approximately $0.5 million each for a settlement of patent litigation and a write-down of intangible assets related to our 2007 Bitpass asset acquisition.
INCOME TAXES. For the three months ended September 30, 2009 and 2008, our tax expense was $4.3 million and $5.0 million, respectively. For the three months ended September 30, 2009, our tax expense consisted of approximately $3.5 million of U.S. tax expense and $0.8 million of foreign tax expense. Tax expense was comparatively lower than in prior periods due to lower pre-tax income for the current period. For the three months ended September 30, 2009 and 2008, the tax rate was 28.2% and 24.3%, respectively. The current tax rate reflects $0.1 million of tax expense related to discrete provision-to-return adjustments. The lower prior year third quarter tax rate was primarily due to an adjustment to the prior year annual effective tax rate from 29.0% to 27.5% that occurred during that quarter.
For the nine months ended September 30, 2009 and 2008, our tax expense was $13.5 million and $16.5 million, respectively. For the nine months ended September 30, 2009, our tax expense consisted of approximately $11.8 million of U.S tax expense and $1.7 million of foreign tax expense. For the nine months ended September 30, 2009 and 2008, the tax rate was 25.6% and 25.9%, respectively. Differences in our effective tax rate from the U.S. statutory rate are primarily due to our mix of earnings from international operations and the differences in statutory rates in these countries from the U.S. rate. Off Balance Sheet Arrangements
None

Liquidity and Capital Resources
As of September 30, 2009, we had $396.4 million of cash and cash equivalents. Our primary source of internal liquidity is our operating activities. Net cash provided by operations for the nine months ended September 30, 2009, of $106.2 million was primarily the result of net income adjusted for non-cash expenses and balance sheet changes such as a decrease in prepaid and other assets. Net cash provided by operations for the nine months ended September 30, 2008, of $76.6 million was primarily the result of net income adjusted for non-cash expenses and balance sheet changes such as a decrease in accounts receivable and income tax payable.
Net cash used for investing activities for the nine months ended September 30, 2009, was $30.3 million and was the result of net sales of investments of $0.3 million, cash paid for acquisitions net of cash received of $4.5 million, and purchases of equipment and capitalized software of $26.1 million. 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 financing activities for the nine months ended September 30, 2009, was $176.2 million. Cash paid for convertible senior notes was $186.7 million, proceeds of $9.1 million were provided by the sale of stock through the exercise of stock options, proceeds of $1.3 million were provided by the sale of stock under the employee stock purchase plan, cash used in the repurchase of restricted stock to satisfy tax withholding obligation was $0.5 million and proceeds of $0.6 million were provided by the excess tax benefit from stock-based compensation. Net cash used for financing activities for 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 and we repurchased $137.9 million of common stock. As announced on October 12, 2009, Symantec Corporation has informed us that it has elected not to renew its e-commerce agreement with us, which will result in the termination of the e-commerce agreement on June 30, 2010. We expect a material decrease in revenue and operating profit as a result of Symantec's decision to not renew its e-commerce agreement with us. However, as Symantec has not yet informed us of its migration plans or the nature of the support Symantec will require from us during the transition period, we are currently unable to predict the magnitude or timing of the revenue impact on our future revenues and our internal liquidity.
As of September 30, 2009, we held $101.9 million of investments at par value, $95.7 million fair value, in auction-rate securities (ARS); all are AAA/Aaa rated and 105%-115% over collateralized by student loans guaranteed by the U.S. government with the exception of one security which is rated AAA/A3 and one security which is rated AAA/Aa1. All the securities are 100% guaranteed by the Department of Education or the Federal Family Education Loan Program (FFELP) with the exception of two securities which are 82.5% and 99% guaranteed by FFELP. Almost all of these securities continue to fail at auction due to illiquid market conditions.
The Company determined a market value discount, due to current illiquid market conditions, was required and recorded a temporary fair value reduction of $16.3 million (14.9% of par value) recorded to "Accumulated other comprehensive income" on the December 31, 2008 balance sheet. In the third quarter, $0.5 million of our ARS were successfully liquidated at par. As of September 30, 2009, the Company has adjusted the market value discount of $6.2 million (6.0% of par value) through "Accumulated other comprehensive income". The determination of fair value required management to make estimates and assumptions about the ARS. The discounted cash flow model we used to value these securities included the following assumptions:
• determination of the penalty coupon rate, frequency of reset period associated with each ARS

• an average redemption period of seven years

• a contribution of the ARS paying its contractually stated interest rate

• determination of the risk adjusted discount rate based on LIBOR rates for these maturities plus market information on student loan credit spreads

In aggregate the ARS portfolio is yielding 1.4% and we continue to receive 100% of the contractually required interest payments. We continue to believe that we will be able to liquidate at par over time. We do not intend to sell the investments prior to recovery of their amortized cost basis nor do we believe it is more likely than not we may be required to sell the investments prior to recovery of their amortized cost basis. Accordingly, we treated the fair value

decline as temporary. We anticipate we will 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. See Note 8, "Fair Value Measurements" for further information.
Application of Critical Accounting Policies Critical Accounting Estimates and Policies A detailed description of our critical accounting policies can be found in our most recent Annual Report on Form 10-K for the year ended December 31, 2008. Recent Accounting Pronouncements
Accounting Standards Codification (ASC): In June 2009, the Financial Accounting Standards Board (FASB) issued ASC Topic No. 105. The new guidance establishes the FASB ASC as the single source of authoritative U.S. GAAP, with exception to rules and interpretive releases from the SEC, which continue to be sources of authoritative U.S. GAAP for SEC registrants. We have adopted the new guidance for the period ending September 30, 2009. As the new standard did not change U.S. GAAP, there was no change in the Company's Condensed Consolidated Financial Statements other than conforming U.S. GAAP references into the ASC format. Interim Disclosures about Fair Value of Financial Instruments: In April 2009, the FASB issued additional guidance related to ASC Topic No. 825, "Financial Instruments" (ASC 825). ASC 825 establishes additional disclosure requirements of fair values for certain financial instruments in the interim financial statements. We adopted the new guidance for the period ending June 30, 2009. The required disclosures are included in Note 8, "Fair Value Measurements". Other-than-temporary Impairments: In April 2009, the FASB issued new investment impairment guidance now codified in ASC Topic No. 320, "Investments - Debt and Equity Securities" (ASC 320). The guidance requires companies to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment event and to communicate more effectively when an other-than-temporary impairment event has occurred. The new guidance improves the presentation and disclosure of other-than-temporary impairment on investment securities and changes the calculation of the other-than-temporary impairment recognized in earnings in the financial statements. The new guidance does not amend existing recognition and measurement guidance related to . . .