Digital River Exceeds Third Quarter Revenue and Earnings Expectations

• Q3 Revenue - $53.2 million, up 35 percent year-over-year
• Q3 GAAP Diluted EPS - $0.31, up 41 percent year-over-year
• Q3 Pro Forma Diluted EPS - $0.50, up 72 percent year-over-year

MINNEAPOLIS, October 26, 2005-Digital River, Inc. (NASDAQ: DRIV), a global leader in e-commerce outsourcing, today reported revenue of $53.2 million for the quarter ended September 30, 2005. This represents an increase of 35 percent from revenue of $39.4 million in the third quarter of 2004. This performance exceeded the Company’s third quarter revenue guidance of $52.5 million, provided on July 27, 2005.

Q3 GAAP Results: In the third quarter, net income was $12.4 million, or $0.31 per share on a diluted basis, including $4.7 million of income tax expense. These results represent an increase of 52 percent compared to net income of $8.1 million, or $0.22 per diluted share with no income tax expense in the third quarter of 2004. This performance exceeded the GAAP diluted net income per share guidance of $0.27, provided by the Company on July 27, 2005.

The Company’s net effective tax rate for the quarter ended September 30, 2005, was approximately 28 percent, reflecting adjustments made in connection with the Company’s 2004 U.S. federal income tax return. Absent these adjustments, the Company’s total income taxes for the quarter would have been $5.8 million, net income would have been $11.3 million, and GAAP diluted net income per share would have been $0.28.

Q3 Pro Forma Results: Net income for the third quarter of 2005, prior to the amortization of acquisition-related expenses and $4.5 million of non-cash income taxes, was $18.9 million, or $0.50 per share, excluding the impact of the Company’s contingent convertible notes. These results represent a 79 percent increase compared to net income, on a similar basis, of $10.6 million, or $0.29 per diluted share, in the third quarter of 2004. This performance exceeded the pro forma diluted net income per share guidance of $0.48, provided by the Company on July 27, 2005.

Nine Months Ended September 30, 2005, Revenue Results: For the nine-month period ended September 30, 2005, the Company reported revenue of $158.9 million. This represents a 50 percent increase from revenue of $106.2 million in the similar period of the prior year.

Nine Months Ended September 30, 2005, GAAP Results: Through September 30, 2005, net income was $36.6 million, or $0.92 per share on a diluted basis, including $14.8 million of income tax expense. These results compared to net income of $22.5 million, or $0.63 per diluted share, with no income tax expense for the same period of 2004.

Nine Months Ended September 30, 2005, Pro Forma Results: Through September 30, 2005, net income, prior to the amortization of acquisition-related expenses and $13.4 million of non-cash income taxes, was $56.5 million, or $1.52 per share, excluding the impact of the Company’s contingent convertible notes. These results compared to net income, on a similar basis, of $28.8 million, or $0.81 per diluted share, for the same period of 2004.

“In the third quarter, we again exceeded our revenue and earnings expectations,” said Joel Ronning, Digital River’s CEO. “Our business continues to scale and our strategic growth initiatives are paying off. Revenue generated through international markets, strategic marketing services and our oneNetwork online sales channel contributed to our solid third quarter performance.”

Q4 2005 Guidance
Forward-looking guidance for the fourth quarter ending December 31, 2005, is as follows:
- Revenue is expected to be $57.1 million;
- GAAP diluted net income per share is expected to be $0.29; and
- Pro forma diluted net income per share is expected to be $0.51.

Full Year 2005 Guidance
Assuming fourth quarter 2005 results are achieved, full year 2005 results are expected to be:
- Revenue of $216.0 million; growth of 40 percent compared to $154.1 million for the full year 2004;
- GAAP diluted net income per share of $1.21, growth of 26 percent compared to $0.96 per share for the full year 2004; and
- Pro forma diluted net income per share of $2.03, growth of 64 percent compared to $1.24 per share for the full year 2004.

Based on the variability of stock-based compensation expense, which will impact GAAP results beginning January 1, 2006, and the variability of tax calculations and available tax elections, the Company determined that the clearest forward-looking financial guidance for shareholders uses a non-GAAP measure of net income, which will be a new pro forma methodology for the Company. This methodology is similar to that used by many companies in the software, technology and Internet sectors. Beginning with the full year of 2006, guidance will be provided for expected total revenue and non-GAAP net income per share with a reconciliation of non-GAAP net income per share to GAAP net income per share. Because of the variability of stock-based compensation expense, GAAP net income per share guidance will be provided as a range.

Non-GAAP net income is computed by starting with GAAP pre-tax income as reported on the Company’s statement of operations, adding back amortization of acquisition-related costs, and beginning in 2006, stock-based compensation expense, to calculate non-GAAP pre-tax income. This figure is then taxed at 34 percent, the Company’s anticipated fully-taxed rate, to arrive at non-GAAP net income. This amount is then divided by fully-diluted GAAP shares outstanding, which includes the impact of the Company’s contingent convertible notes, to derive non-GAAP EPS. For convenience, a table that summarizes non-GAAP net income and net income per share for historical quarters beginning in 2004 and year-to-date for 2005 is provided with the financial statements accompanying this announcement.

Full Year 2006 Guidance
Forward-looking guidance for the full-year ending December 31, 2006, is as follows:
- Revenue is expected to be $250.0 million;
- GAAP net income per share is expected to be $1.10 to $1.15 per diluted share, including $13.0 to $16.0 million of stock-based compensation expense. This expected result can be compared to $1.21 per diluted share expected in 2005 and $0.96 per diluted share achieved in 2004, excluding stock-based compensation expense for both comparable periods; and
- Non-GAAP diluted net income per share is expected to be $1.44. This expected result can be compared to non-GAAP net income per share, using the same methodology of $1.24 expected in 2005 and $0.77 achieved in 2004.

“We believe our guidance reflects a healthy marketplace for Digital River in 2005 and beyond,” Ronning said. “Our business continues to benefit from several market forces, including globalization and the ongoing shift from in-store to online purchasing and from physical to digital software delivery.”

Digital River’s pro forma net income and per share results exclude the effects, if any, of the amortization of acquisition-related expenses, non-cash income taxes and the impact on GAAP results of the Company’s contingent convertible notes. A detailed reconciliation to provide clarity on the comparability of the GAAP and non-GAAP data has been provided in table form following the financial statements accompanying this announcement. In addition, the calculation of GAAP diluted net income per share is provided in the table. Further information regarding the Company’s use of non-GAAP financial data has been included in the Company’s Form 8-K filed with the SEC on October 26, 2005.

This release references the non-GAAP measures “non-GAAP net income” and “non-GAAP net income per share – diluted.” Digital River believes investors will have a more complete understanding of its historical and projected future financial performance if they have visibility to both GAAP and non-GAAP financial measures. The Company uses these non-GAAP measures as a means to evaluate its performance period-to-period without taking into account certain expenses, including amortization of acquisition-related costs and stock-based compensation expense. In particular, stock-based compensation expense may fluctuate materially due to fluctuations in the price of Digital River’s common stock both on a quarterly and annual basis. These financial measures should be considered in addition to, and not as a substitute for, or superior to, other measures of financial performance prepared in accordance with GAAP.

Digital River will hold a third quarter conference call today at 4:45 p.m. Eastern Daylight Time. A live webcast of the conference call can be accessed from http://www.digitalriver.com/2005q3earnings/. Alternatively, a live broadcast of the call may be heard by using conference ID # 6574110 and dialing 888-896-0863 inside the United States or Canada, or by calling 973-582-2741 from international locations. A webcast replay of the call will be archived on the Company’s corporate Web site.

Click here to view Digital River's Q3 2005 Financial Statements.

About Digital River, Inc.
Digital River, Inc., a global leader in e-commerce outsourcing, builds and manages online businesses for more than 40,000 software publishers, manufacturers, distributors and online retailers. Its multi-channel e-commerce solution, which supports both direct and indirect sales, is designed to help companies of all sizes maximize online revenues as well as reduce the costs and risks of running an e-commerce operation. The company’s comprehensive platform offers site development and hosting, order management, fraud prevention, export controls, tax management, physical and digital product fulfillment, multi-lingual customer service, advanced reporting and strategic marketing services.

Founded in 1994, Digital River is headquartered in Minneapolis with offices in major U.S. cities as well as London; Tokyo; Taipei, Taiwan; and Cologne, Germany. For more details about Digital River, visit the corporate Web site at www.digitalriver.com or call 952-253-1234.

Forward-Looking Statements
This press release contains forward-looking statements, including statements regarding the Company’s anticipated future growth, including the expansion of its global business infrastructure, and future financial performance as well as statements containing the words “anticipates” or “expects,” and similar words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to differ materially from those expressed or implied by such forward-looking statements. Such factors include, among others: the Company’s limited operating history and variability of operating results; competition in the e-commerce market; challenges associated with international expansion, and other risk factors referenced in the Company’s public filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K filed on March 16, 2005, for the year ended December 31, 2004.

The forward-looking statements regarding fourth quarter 2005 and full year 2006 reflect Digital River’s expectations as of October 26, 2005. Results may be materially affected by many factors, such as changes in global economic conditions and consumer spending, fluctuations in foreign currency rates, the rate of growth of online commerce and the Internet and other factors. The guidance assumes, among other things, that there are no changes to stock-based compensation expense and that no additional intangible assets are recorded.

Digital River is a registered trademark of Digital River, Inc. All other trademarks and registered trademarks are trademarks of their respective owners.