DIGITAL RIVER INC /DE, S-1/A, 1998-07-15

DIGITAL RIVER INC /DE
S-1/A, 1998-07-15
COMPUTER INTEGRATED SYSTEMS DESIGN

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1998

REGISTRATION NO. 333-56787

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

AMENDMENT NO. 1
TO
FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
--------------------------

DIGITAL RIVER, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7375 41-1901640
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>

5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(612) 830-9042

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

JOEL A. RONNING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DIGITAL RIVER, INC.
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(612) 830-9042

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------

COPIES TO:

JEFFREY S. ZIMMAN, ESQ. HOWARD S. ZEPRUN, ESQ.
MICHAEL J. SULLIVAN, ESQ. ROBERT G. DAY, ESQ.
LANA K. HAWKINS, ESQ. WILSON SONSINI GOODRICH & ROSATI
COOLEY GODWARD LLP PROFESSIONAL CORPORATION
ONE MARITIME PLAZA, 20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300

--------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /

--------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value......... 3,680,000 $12.00 $44,160,000 $13,028(3)
</TABLE>

(1) Includes 480,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.

(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.

(3) $11,874 of this amount has previously been paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

SUBJECT TO COMPLETION
JULY 15, 1998

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

3,200,000 SHARES

[LOGO]

COMMON STOCK
---------

All of the 3,200,000 shares of Common Stock offered hereby are being sold by
Digital River, Inc. ("Digital River" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock. For factors considered in
determining the initial public offering price, see "Underwriting." It is
currently estimated that the initial public offering price of the Common Stock
will be between $10.00 and $12.00 per share. The Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol "DRIV."

----------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

-------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total (3).............................................. $ $ $
</TABLE>

(1) See "Underwriting" for information relating to indemnification of the
Underwriters.

(2) Before deducting expenses of the offering estimated at $700,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
480,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."

----------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.

BT ALEX. BROWN BANCAMERICA ROBERTSON STEPHENS

BEAR, STEARNS & CO. INC.

THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
PICTORIAL FLOWCHART DEPICTING A PURCHASE OF SOFTWARE
THROUGH THE COMPANY'S CENTRAL NETWORK SERVER
("CNS"), SHOWING THE TRANSACTION PROCESSING AND
OTHER VALUE-ADDED SERVICES PROVIDED BY THE COMPANY.

[ILLUSTRATIONS]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT
COVERING TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------

Digital River is a registered trademark of the Company. All other trademarks
or service marks appearing in this Prospectus are the property of their
respective owners.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH
STATEMENTS ARE ONLY PREDICTIONS, INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION
"RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.

THE COMPANY

Digital River, Inc. ("Digital River" or the "Company") is a leading provider
of comprehensive electronic commerce outsourcing solutions to software
publishers and online retailers. The Company has developed a technology platform
that allows it to provide a suite of electronic commerce services to its
software publisher and online retailer clients, including electronic software
delivery ("ESD"). The Company also provides data mining and merchandising
services to assist clients in increasing Internet page view traffic to, and
sales through, their Web stores. Rather than maintaining its own branded Web
store that would compete with its clients, Digital River provides an outsourcing
solution that allows its clients to promote their own brands while leveraging
Digital River's investment in infrastructure and technology. As of June 30,
1998, the Company had contracts with 1,122 software publisher clients and 346
online retailer clients, including Corel Corporation, Cyberian Outpost, Inc.,
Lotus Development Corporation, Micro Warehouse, Inc., Network Associates, Inc.
and Symantec Corporation, and maintained a database of more than 123,000
software products from its various software publisher clients, including more
than 18,000 software titles and more than 105,000 digital images, such as
photography and clip art, and type fonts. Through June 30, 1998, the Company had
completed more than 172,000 transactions for more than 124,000 unique end-users.

Digital River's proprietary commerce network server ("CNS") technology
serves as the platform for the Company's solutions. The CNS incorporates custom
software applications that enable ESD, Web store authoring, fraud prevention,
export control, merchandising programs and online registration, and features a
database of more than 123,000 software products. Using its CNS platform, the
Company creates Web stores for its clients that replicate the look and feel of
such clients' own Web sites. End-users can browse for products and make
purchases online, and, once purchases are made, the Company delivers the
products directly to the end-user, primarily through ESD. The Company also
provides transaction processing services and collects and maintains critical
information about end-users. This information can later be used by the Company's
clients to facilitate add-on or upgrade sales and for other direct marketing
purposes. The Company actively manages direct marketing campaigns for its
clients, and also delivers purchase information and Web store traffic statistics
to its clients on a regular basis.

Digital River believes that the market for software sales online will
continue to grow rapidly. Jupiter Communications, LLC, estimates that the market
for software sold online will increase from an estimated $69 million in 1997 to
an estimated $2.3 billion by 2002. The Internet is particularly well-suited for
the distribution of most software because software products can be purchased and
delivered quickly, conveniently and cost-effectively to an end-user's home or
office computer through ESD. The Company believes that ESD is an effective means
of delivery today for most software applications and that as Internet bandwidth
increases, ESD will become increasingly attractive even for large software
titles. Accordingly, the Company believes that ESD will represent an increasing
share of online software sales and will be critical to online retailers'
success. Unlike established physical distribution channels for shrink-wrapped
software, there is currently no established, comprehensive electronic
distribution source for online retailers. The distribution of software products
through ESD is complex and requires significant up-front and ongoing investments
in secure, reliable and scaleable systems. Accordingly, the Company believes
that

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<PAGE>
a substantial market opportunity exists for a comprehensive, cost-effective,
outsourced electronic commerce solution that provides software publishers and
online retailers with access to a critical mass of software products and a
robust distribution and transaction network.

The Company provides a number of advantages to software publishers, online
retailers and end-users. By entering into a relationship with the Company,
software publishers can avoid the up-front and ongoing cost and complexity of
operating an electronic commerce infrastructure, offer a full library of their
software products, avoid shipping and packaging costs, and offer software
products through their own Web store or the Company's network of online retailer
clients. The Company also provides software publishers with valuable end-user
information and data mining capabilities that can facilitate targeted marketing,
upgrade notification and sophisticated merchandising. Digital River offers
online retailers the ability to access the software products of most of the
Company's software publisher clients without having to negotiate agreements and
arrange the relationship with individual software publishers and without the
cost and risk associated with carrying inventory. End-users who purchase
products over the Company's network benefit from value-added services including
credit card security and upgrade notifications, as well as the protection of the
Company's archiving service through which the Company guarantees replacement of
software products in the event of accidental loss or damage.

Digital River was incorporated in Minnesota in February 1994 and
reincorporated into Delaware in December 1997. Unless the context requires
otherwise, references in this Prospectus to "Digital River" and the "Company"
refer to Digital River, Inc. a Delaware corporation and its subsidiaries. The
Company's executive offices are located at 5198 West 76th Street, Edina,
Minnesota 55439, and its telephone number is (612) 830-9042.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,200,000 shares
Common Stock to be outstanding after the 16,913,715 shares (1)
offering.....................................
Use of proceeds.............................. For general corporate purposes, including
continued investment in product development,
expansion of sales and marketing activities
and working capital.
Proposed Nasdaq National Market symbol....... DRIV
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................................ $ -- $ 111 $ 2,472 $ 461 $ 5,746
Gross profit................................................. -- 16 420 82 955
Loss from operations......................................... (165) (697) (3,538) (1,195) (5,673)
Net loss..................................................... (143) (689) (3,485) (1,176) (5,523)

Basic and diluted net loss per share (2)..................... $ (0.03) $ (0.13) $ (0.46) $ (0.18) $ (0.49)
Shares used in per share computation (2)..................... 5,333 5,333 7,514 6,438 11,279
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 4,755 $ 36,791
Short-term investments............................................................... 4,934 4,934
Working capital...................................................................... 7,852 39,888
Total assets......................................................................... 12,697 44,733
Accumulated deficit.................................................................. (9,848) (9,848)
Total stockholders' equity........................................................... 10,283 42,319
</TABLE>

- --------------------------

(1) Based on shares outstanding as of June 30, 1998. Excludes (i) 1,532,087
shares of Common Stock issuable upon exercise of options outstanding as of
June 30, 1998 at a weighted average exercise price of $2.16 per share, (ii)
803,008 shares of Common Stock issuable upon exercise of warrants
outstanding as of June 30, 1998 at a weighted average exercise price of
$2.52 per share, and (iii) 801,246 shares reserved for future grants under
the Company's stock option plan. See "Management--Employee Benefit Plans"
and Notes 3 and 4 of Notes to Consolidated Financial Statements.

(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.

(3) Adjusted to reflect the sale by the Company of 3,200,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."

EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION, (II) REFLECTS A 2
FOR 3 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK TO BE EFFECTED PRIOR TO THE
CONSUMMATION OF THIS OFFERING AND (III) REFLECTS THE AUTOMATIC CONVERSION OF ALL
OUTSTANDING SHARES OF SERIES A PREFERRED STOCK INTO COMMON STOCK UPON THE
COMPLETION OF THIS OFFERING.

5
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN
STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
SUCH STATEMENTS ARE ONLY PREDICTIONS, INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH BELOW, WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE
LOSSES. The Company was incorporated in February 1994 and was considered a
development stage company through August 1996. The Company conducted its first
online sale through a client's Web store in August 1996 and is still in the
early stages of development. Accordingly, the Company has a limited operating
history upon which investors may evaluate its business and prospects. Since
inception, the Company has incurred significant losses, and as of June 30, 1998,
had an accumulated deficit of approximately $9.8 million. The Company intends to
expend significant financial and management resources on the development of
additional services, sales and marketing, technology and operations to support
larger-scale operations and greater service offerings. As a result, the Company
expects to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and such losses are anticipated to
increase significantly from current levels. There can be no assurance that the
Company's sales will increase or even continue at their current level or that
the Company will achieve or maintain profitability or generate cash from
operations in future periods. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new and
rapidly evolving markets such as electronic commerce. To address these risks,
the Company must, among other things, maintain existing and develop new
relationships with software publishers and online retailers, implement and
successfully execute its business and marketing strategy, continue to develop
and upgrade its technology and transaction-processing systems, provide superior
customer service and order fulfillment, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in addressing such risks, and the failure to do
so would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's current and future expense
levels are based largely on its planned operations and estimates of future
sales. Sales and operating results generally depend on the volume and timing of
orders received, which are difficult to forecast. The Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in sales would have an
immediate adverse effect on the Company's business, financial condition and
results of operations. In view of the rapidly evolving nature of the Company's
business and its limited operating history, the Company is unable to accurately
forecast its sales and believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance.

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and
annual operating results are likely to fluctuate significantly in the future due
to a variety of factors, many of which are outside the Company's control.
Factors that will influence the Company's operating results include: (i) the
Company's ability to retain existing software publishers and online retailers as
clients, to attract new software publishers and online retailers as clients at a
steady rate and to maintain software publisher, online retailer and end-user
satisfaction; (ii) the announcement or introduction of new Web sites, Web
stores, services and products by the Company and its competitors; (iii) price
competition and margin erosion; (iv) the level of use of the Internet and
consumer acceptance of the Internet for the purchase of consumer products such
as those offered by the Company; (v) the Company's ability to upgrade and
develop its systems and

6
<PAGE>

infrastructure, in particular its CNS; (vi) the termination of any strategic
accounts such as Corel Corporation, from which the Company derives a significant
portion of its sales; (vii) technical difficulties or system downtime; (viii)
the Company's ability to attract new personnel in a timely and effective manner;
(ix) the mix of sales generated through software publisher client Web stores
compared to online retailer Web stores; (x) the failure of Internet bandwidth to
increase over time and/or an increase in the cost to end-users of obtaining or
utilizing Internet bandwidth; (xi) the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business, operations
and infrastructure; (xii) certain U.S. and foreign government regulations; and
(xiii) the failure of the Internet to continue to develop as a viable commercial
marketplace. The Company also may, as inducement to obtain certain strategic
contracts, offer certain economic terms to software publishers and online
retailers which will reduce its gross margins. As a result, the Company believes
that it will continue to incur operating losses in the future. Due to the
foregoing factors, the Company's annual or quarterly operating results may fall
below the expectations of securities analysts and investors. In such event, the
trading price of the Common Stock would likely be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CLIENT CONCENTRATION; LENGTHY SALES CYCLE. Sales initiated through the Web
stores of three software publisher clients collectively accounted for
approximately 29% and 34% of the Company's sales in 1997 and the six months
ended June 30, 1998, respectively. The Company expects that a small percentage
of clients will continue to account for a substantial portion of the Company's
sales for the foreseeable future. Contracts with these clients are generally
short term in nature. In the event that any one of these contracts is not
renewed or is otherwise terminated, the Company's business, financial condition
and results of operations could be materially adversely affected.

The Company markets its services directly to software publishers and online
retailers. The Company's Strategic Sales Group focuses on larger software
publishers and online retailers with significant online revenue potential. These
sales are typically complex in nature and involve a lengthy sales cycle. Due to
operating procedures in many large organizations, an extended time period may
elapse after key decision makers have selected the Company's electronic commerce
outsourcing solutions and before a contract with the Company can be signed. As a
result, the period between the initial sales call until a contract with a
software publisher or online retailer with significant sales potential is
consummated typically ranges from six to twelve months, and can be longer.
Therefore, the timing of sales from these software publisher and online retailer
clients is difficult to predict. Delays in signing contracts with significant
software publisher or online retailer clients could have a material adverse
effect on the Company's business, financial condition and results of operations.

RISKS ASSOCIATED WITH ESD; MARKET ACCEPTANCE OF ESD. The Company's success
will depend in large part on end-user acceptance of ESD as a method of
distributing software. ESD is a relatively new method of distributing software
products and the growth and market acceptance of ESD is highly uncertain and
subject to a number of risks. Factors that will influence market acceptance of
ESD include: the availability of sufficient network bandwidth to enable
purchasers to rapidly download software, the impact of time-based Internet
access fees, the number of software products that are available for purchase
through ESD as compared to those available through physical delivery, the level
of end-user comfort with the process of downloading software via the Internet
and the relative ease of such process and concerns about transaction security.
If ESD does not achieve widespread market acceptance, the Company's business,
financial condition and results of operations would be materially adversely
affected. Even if ESD achieves widespread acceptance, there can be no assurance
that the Company will overcome the substantial existing and future technical
challenges associated with electronically delivering software reliably and
consistently on a long-term basis. The failure by the Company to do so would
materially and adversely affect the Company's business, financial condition and
results of operations.

DEPENDENCE ON THE INTERNET, GROWTH IN ELECTRONIC COMMERCE AND INTERNET
INFRASTRUCTURE DEVELOPMENT. Sales of software products using the Internet do not
currently represent a significant portion of overall

7
<PAGE>
software sales. The Company's future sales and any future profits are
substantially dependent upon the widespread acceptance and use of the Internet
as an effective medium of commerce by end-users. Rapid growth in the use of and
interest in the Internet and other online services is a recent development and
there can be no assurance that acceptance and use will continue to develop or
that a sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. The Company relies
on end-users who have historically used traditional means of commerce to
purchase software products. For the Company to be successful, these end-users
must accept and utilize new ways of conducting business and exchanging
information.

In addition, the Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant growth in the number of users,
their frequency of use or an increase in their bandwidth resources, there can be
no assurance that the infrastructure for the Internet will be able to support
the demands placed upon them. In addition, the Internet could lose its viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or due to increased
governmental regulation. Changes in or insufficient availability of
communications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet. If use of the
Internet does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet does not effectively support growth that may
occur, or if the Internet does not become a viable commercial marketplace, the
Company's business, financial condition and results of operations would be
materially adversely affected.

DEPENDENCE ON SOFTWARE PUBLISHERS. The Company is entirely dependent upon
the software publishers that supply it with software, and the availability of
such software is unpredictable. The Company's contracts with its software
publisher clients are generally one year in duration, with an automatic renewal
provision for additional one-year periods, unless the Company is provided with a
written notice at least 90 days prior to the termination of the contract. As is
common in the industry, the Company has no long-term or exclusive contracts or
arrangements with any software publisher that guarantees the availability of
software products. There can be no assurance that the software publishers that
currently supply software to the Company will continue to do so or that the
Company will be able to establish new relationships with software publishers. If
the Company is unable to develop and maintain satisfactory relationships with
software publishers on acceptable commercial terms, if the Company is unable to
obtain sufficient quantities of software, if the quality of service provided by
such software publishers falls below a satisfactory standard or if the Company's
level of returns exceeds its clients' expectations, the Company's business,
financial condition and results of operations could be materially adversely
affected.

DEPENDENCE ON ONLINE RETAILERS. The Company's strategy is dependent upon
increasing its sales of software products through online retailers. The Company
has historically generated substantially all of its sales from the sale of
software to end-users that were initiated through its software publisher
clients' Web stores. In 1997 and the six months ended June 30, 1998, less than
6% of the Company's sales were generated through online retailer clients' Web
stores. While the Company plans to increase its sales and marketing efforts over
time in an effort to generate increased sales from online retailer clients,
there can be no assurance that the Company will be successful in entering into
contractual relationships with additional online retailers or that its current
contractual relationships will be renewed. The Company's failure to enter into
contractual relationships with major online retailers or a substantial number of
smaller online retailers or the failure to renew its existing online retailer
contracts could have a material adverse impact upon the Company's business,
financial condition and results of operations.

RISK OF CAPACITY CONSTRAINTS; LIMITED REDUNDANT SYSTEMS; SYSTEM DEVELOPMENT
RISKS. The Company provides commerce, marketing and delivery services to
software publishers, retailers and end-users through its CNS
transaction-processing and client management systems, including electronic
inventory of products and consumer marketing information. The satisfactory
performance, reliability and availability of

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the CNS and the underlying network infrastructure are critical to the Company's
operating results, as well as to its reputation and its ability to attract and
retain clients and maintain adequate customer service levels. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, other natural disasters, power loss, telecommunications failure,
break-ins and similar events. The Company presently has limited redundant
systems, no back-up facilities and carries limited business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and fulfill end-user orders. Any systems interruptions that result in
reduced order fulfillment performance would reduce the online volume of goods
sold and the attractiveness of the Company's product and service offerings to
software publishers, retailers and end-users, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company has experienced periodic interruptions, affecting all or a
portion of its systems, which it believes will continue to occur from time to
time. The Company periodically enhances and expands its technology and
transaction-processing systems, and network infrastructure and other
technologies to accommodate increases in the volume of traffic on the CNS. There
can be no assurance that the Company will be successful in its efforts to
improve and increase the capacity of its network infrastructure, or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its CNS or expand and upgrade its systems and infrastructure
in a timely manner to accommodate such increases. The Company's inability to add
software and hardware or to develop and upgrade further its existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic on its CNS may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service and impaired quality
and speed of order fulfillment, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, there can be no assurance that additional network capacity will be
available from third-party suppliers when it is needed by the Company. There can
be no assurance that the Company's or its suppliers' network will be able to
achieve or maintain in a timely manner a sufficiently high capacity of data
transmission, especially if demands on the CNS increase. The Company's failure
to achieve or maintain high capacity data transmission could significantly
reduce demand for its services, which would have a material adverse effect on
its business, financial condition and results of operations.

ELECTRONIC COMMERCE SECURITY RISKS. The secure transmission of confidential
information over public networks is critical to the acceptance of electronic
commerce. The Company relies on certain encryption and authentication technology
licensed from third parties to provide secure transmission of confidential
information, such as end-user credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect end-user transaction
data. If any such compromise were to occur, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause disruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of transactions conducted on
the Internet and the privacy of users may also inhibit the growth of the
Internet generally, and electronic commerce in particular. To the extent that
activities of the Company involve the storage and transmission of proprietary
information, such as credit card numbers and end-user profile information,
security breaches could damage the Company's reputation and expose the Company
to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that a failure to prevent such security breaches will not have a material
adverse effect on the Company's business, financial condition and results of
operations.

COMPETITION. The electronic commerce market is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify in the
future, particularly in the area of electronic sale

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and distribution of software products. The Company currently competes directly
with other providers of electronic commerce solutions, including CyberSource
Corporation, Preview Software Corporation, Release Software Corporation and
TechWave, Inc. The Company also competes indirectly with software companies that
offer tools and services for electronic commerce, including companies that
provide a broad range of Internet and server solutions such as Microsoft
Corporation and Netscape Communications Corporation, as well as a large number
of companies that provide tools and services enabling one or more of the
transaction processing functions of electronic commerce, such as transaction
control, data security, customer interaction and database marketing. In addition
to direct competition with other transaction processing providers and enablers
and indirect competition with other providers of electronic commerce software
and systems, the Company also competes with companies that sell and distribute
software products via the Internet, including online retailers such as CNET,
Inc., Ingram Micro Inc. and software.net Corporation, as well as companies such
as AltaVista (a subsidiary of Digital Equipment Corporation), America Online,
Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc. and Yahoo! Inc., which
specialize in electronic commerce or derive a substantial portion of their
revenues from electronic commerce and may themselves offer, or provide means for
others to offer, software products.

The Company believes that the principal competitive factors in its market
are breadth of product offerings, software publisher and online retailer
relationships, brand recognition, system capacity, reliability, price,
selection, speed and accessibility, customer service, quality of site content,
convenience and speed of fulfillment. There can be no assurance that the online
retailers and the other companies listed above will not compete directly with
the Company by adopting a similar business model. Moreover, while certain of
these companies are also clients or potential clients of the Company, they may
compete with the Company's electronic commerce outsourcing solution to the
extent that they develop electronic commerce systems or acquire such systems
from other software vendors or service providers.

Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors as the use of the
Internet and other online services increases. In addition, new technologies and
the expansion of existing technologies, such as price comparison programs that
select specific titles from a variety of Internet Web sites may direct end-users
to online retailers that compete with the Company, which would increase
competitive pressures on the Company. Increased competition may result in
reduced operating margins, as well as a loss of market share. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the CNS and the underlying network infrastructure. The Internet and the
electronic commerce industry are characterized by rapid technological change,
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 the Company's existing CNS
technology and systems obsolete. The Company's success will depend, in part, on
its ability to both license and internally develop leading technologies useful
in its business, enhance its existing services, develop new services and
technology that address the increasingly sophisticated and varied needs of its
clients, and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis. The development of the CNS
technology and other proprietary technology entails significant technical and
business risks. There can be no assurance that the Company will successfully use
new technologies effectively or adapt its proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company

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is unable, for technical, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions, client requirements or emerging
industry standards, its business, financial condition and results of operations
could be materially adversely affected.

MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM; LIMITED EXECUTIVE
OFFICER RESOURCES. The Company has rapidly and significantly expanded its
operations and anticipates that further significant expansion will be required
to address potential growth in its client base and market opportunities. From
January 1, 1997 to June 30, 1998, the Company has increased its number of
employees from 11 to 76. This expansion has placed, and is expected to continue
to place, a significant strain on the Company's managerial, operational and
financial resources. The majority of the Company's existing senior management
personnel joined the Company within the last 14 months, including the Company's
Chief Financial Officer, who joined the Company in April 1998. Joel A. Ronning,
the Company's President and Chief Executive Officer also serves as the Chairman
of the Board of Tech Squared, Inc. ("Tech Squared"), a principal stockholder of
the Company. The Company's new employees include a number of key managerial,
technical and operations personnel who have not yet been fully integrated into
the Company, and the Company expects to add additional key personnel in the near
future. In particular, there are currently two senior management positions
available, including Vice President of Sales and Vice President of
Merchandising, for which the Company is currently recruiting candidates. The
Company also expects to hire additional direct sales and marketing personnel. To
manage the expected growth of its operations and personnel, the Company will be
required to improve existing and implement new operational, financial and
management controls, reporting systems and procedures, to install new management
information and control systems and to train, motivate and manage its employees.
There can be no assurance that the Company will install such management
information and control systems in an efficient and timely manner, or that the
Company's current or planned personnel, systems, procedures and controls will be
adequate to support the Company's future operations. In addition, there can be
no assurance that management will be able to hire, train, retain, motivate and
manage required personnel or that the Company's management will be able to
successfully identify, manage and exploit existing and potential market
opportunities. If the Company is unable to manage growth effectively, its
business, financial condition and results of operations would be materially
adversely affected.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management, particularly Joel A. Ronning, the
Company's President and Chief Executive Officer and Kelly J. Wical, the
Company's Chief Technology Officer. The Company's performance also depends on
its ability to retain and motivate its other executive officers and key
employees. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has a long-term
employment agreement only with Mr. Ronning. See "Management--Employment
Agreement." Also, the Company only maintains a "key person" life insurance
policy on Mr. Ronning. The Company's future success also depends on its ability
to identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, operations, merchandising, sales and marketing and
customer service personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. The failure to retain and
attract the necessary technical, managerial, merchandising, sales and marketing
and customer service personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.

INTELLECTUAL PROPERTY. The Company regards trademarks, copyrights, trade
secrets and other intellectual property as critical to its success, and relies
on trademark, trade secret protection and confidentiality and/or license
agreements with its employees, clients, partners and others to protect its
proprietary rights. The Company's policy is to seek to protect its proprietary
position by, among other methods, filing United States and foreign patent
applications related to its proprietary technology, inventions and improvements
that are important to the development of its business. Proprietary rights
relating to the Company's technologies will be protected from unauthorized use
by third parties only to the extent that they are

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<PAGE>
covered by valid and enforceable patents or are effectively maintained as trade
secrets. While the Company currently has twelve patent applications pending in
the United States, none have yet been issued and there can be no assurance that
any pending patent applications now or hereafter filed by, or licensed to, the
Company will result in patents being issued. The Company has filed certain
petitions to correct certain fee deficiencies for its pending patent
applications and there can be no assurance that such petitions can be granted or
that the Company will elect to pursue these applications. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. The patent
position of high technology companies involves complex legal and factual
questions and, therefore, their validity and enforceability cannot be predicted
with certainty. There can be no assurance that any of the Company's patent
applications, if issued, will not be challenged, invalidated, held unenforceable
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company against competitors with
similar technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. The Company has one registered trademark for "Digital River."
Effective trademark and trade secret protection may not be available in every
country in which the Company's products and services are made available online.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate the Company's trade secrets, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property. A failure
by the Company to protect its intellectual property in a meaningful manner could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of management and technical resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company may
receive notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that such claims will not be asserted or prosecuted
against the Company in the future or that any past or future assertions or
prosecutions will not materially adversely affect the Company's business,
financial condition and results of operations. The defense of any such claims,
whether such claims are with or without merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause
product shipment delays or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all. In the event of a successful claim of infringement
against the Company and the failure or inability of the Company to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, the Company's business, financial condition and results of
operations could be materially adversely affected.

LIABILITY FOR SOFTWARE PRODUCTS CONTENT. Claims may be made against the
Company for negligence, copyright or trademark infringement or other theories
based on the nature and content of software products that are delivered
electronically and subsequently distributed to others. Although the Company
carries general liability insurance, the Company's insurance may not cover
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify the Company for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of operations.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
requires substantial working capital to fund its business. The Company has
experienced negative cash flow from operations since inception and expects to
continue to experience significant negative cash flow from operations for the

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<PAGE>
foreseeable future. The Company expects to use the net proceeds of this offering
primarily to fund continued operations, to expand sales and marketing activities
and for the continued investment in product development. The Company believes
that such proceeds, together with its existing capital resources, will be
sufficient to meet the Company's capital requirements for the foreseeable
future. However, the Company's capital requirements depend on several factors,
including the rate of market acceptance, the ability to expand the Company's
client base, the level of expansion of sales and marketing and other factors. If
capital requirements vary materially from those currently planned, the Company
may require additional financing sooner than anticipated. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance its services, take advantage of future opportunities or respond to
competitive pressures, which could have a material adverse effect on the
Company's business, financial condition or operating results.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not currently
subject to direct regulation by any domestic or foreign governmental agency,
other than regulations applicable to businesses generally, export control laws
and laws or regulations directly applicable to electronic commerce. However, due
to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet
covering issues such as user privacy, pricing, content, copyrights, distribution
and characteristics and quality of products and services. Furthermore, the
growth and development of the market for electronic commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on those companies conducting business online. The adoption of certain
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
products and services and increase the Company's cost of doing business, or
otherwise have an adverse effect on the Company's business, financial condition
and results of operations.

Applicability to the Internet of existing laws governing issues such as
property ownership, copyrights, encryption and other intellectual property
issues, taxation, libel, export or import matters, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace which could reduce demand for the services of the Company or
increase the cost of doing business as a result of costs of litigation or
increased service delivery costs, or could in some other manner have a material
adverse effect on the Company's business, financial condition and results of
operations.

In addition, as the Company's services are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or foreign country. The Company is qualified to do business only in
Minnesota, Iowa and Washington, and failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify and could
result in the inability of the Company to enforce contracts in such
jurisdictions. Any such new legislation or regulation, the application of laws
and regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other electronic services could have a material adverse effect on
the Company's business, financial condition and results of operations.

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<PAGE>
RISK OF INTERNATIONAL SALES. Although the Company sells software products
to end-users outside the United States, there can be no assurance that the
Company will be able to expand its international presence. Conducting business
outside of the United States is subject to certain risks, including changes in
regulatory requirements and tariffs, reduced protection of intellectual property
rights, difficulties in distribution, the burden of complying with a variety of
foreign laws and political or economic constraints on international trade or
instability. In addition, the export of certain software from the United States
is subject to export restrictions as a result of the encryption technology in
such software and may give rise to liability to the extent the Company violates
such restrictions. There can be no assurance that the Company will be able to
successfully market, sell and distribute its products in local markets or that
one or more of such factors will not have a material adverse effect on the
Company's future international operations, and consequently, on the Company's
business, financial condition and results of operations.

SALES AND OTHER TAXES. The Company does not currently collect sales, use or
other similar taxes with respect to ESD or shipments of software products into
states other than Minnesota. However, one or more local, state or foreign
jurisdictions may seek to impose sales or use tax collection obligations on out
of state companies, such as the Company, which engage in electronic commerce. In
addition, any new operation in states outside Minnesota could subject shipments
into such states to state sales or use taxes under current or future laws. A
successful assertion by one or more states or any foreign country that the
Company should collect sales, use or other taxes on the sale of merchandise
could have a material adverse effect on the Company's business, financial
condition and results of operations.

CONTROL BY EXISTING STOCKHOLDERS. Upon completion of this offering, the
Company's executive officers, directors and principal stockholders and their
respective affiliates will beneficially own in the aggregate approximately
8,470,611, or 48.04% of the outstanding shares of Common Stock (46.76% if the
Underwriters' overallotment option is exercised in full). As a result, such
persons may have the ability to effectively control the Company and direct its
affairs and business, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying, deferring or preventing a change in control of the
Company, and making certain transactions more difficult or impossible absent the
support of such stockholders, including proxy contests, mergers involving the
Company, tender offers, open-market purchase programs or other purchases of
Common Stock that could give stockholders of the Company the opportunity to
realize a premium over the then prevailing market price for shares of Common
Stock.

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active market will develop or be
maintained. The initial public offering price was negotiated between the Company
and the Representatives of the Underwriters and may not be indicative of future
market prices. The trading price of the Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the economic performance and/or market valuations of other Internet,
online service or retail companies, announcements by the Company of significant
acquisitions, strategic partnerships, joint ventures or capital commitments,
additions or departures of key personnel, sales of Common Stock and other events
or factors, many of which are beyond the Company's control. In addition, the
stock market in general, and the Nasdaq National Market and the market for
Internet-related and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. The trading prices of many
technology companies' stocks are at or near historical highs and reflect price
earnings ratios substantially above historical levels. There can be no assurance
that these trading prices and price earnings ratios will be sustained. These
broad market and industry factors may materially and adversely affect the market
price of the Common Stock, regardless of the Company's actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a

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<PAGE>
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of significant
amounts of Common Stock in the public market after this offering or the
perception that such sales will occur could materially and adversely affect the
market price of the Common Stock or the future ability of the Company to raise
capital through an offering of its equity securities. Upon the completion of
this offering, the Company will have outstanding 16,913,715 shares of Common
Stock, based on the number of shares of Common Stock outstanding as of June 30,
1998, assuming (i) the issuance by the Company of shares of Common Stock offered
hereby, (ii) the automatic conversion of all outstanding shares of Series A
Preferred Stock into Common Stock upon the completion of this offering, (iii) no
exercise of options, warrants or other obligations to issue shares after June
30, 1998 and (iv) no exercise of the Underwriters' over-allotment option to
purchase 480,000 shares of Common Stock, except as otherwise noted. Of these
shares, the 3,200,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act. The remaining 13,713,715 shares of
Common Stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701 or
Regulation S as promulgated under the Securities Act. Holders, including all
officers and directors, of 12,355,651 shares of the Company's Common Stock and
an additional 1,309,653 shares issuable upon exercise of warrants and vested
options have agreed with the representatives of the Underwriters, subject to
certain exceptions, not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities are then owned by such person or are thereafter acquired
directly from the Company), or to enter into any swap or similar arrangement
that transfers, in whole or in part, the economic risks of ownership of the
Common Stock, without the prior written consent of BT Alex. Brown Incorporated
for a period of 180 days after the date of the Prospectus (the "Lock-Up
Agreements"). As a result of such contractual restrictions and the provisions of
Rule 144 and 701 or Regulation S, additional shares will be available for sale
in the public market as follows: (i) 980,806 shares of Common Stock currently
outstanding and 32,654 shares of Common Stock issuable upon exercise of
currently outstanding options will be eligible for sale 90 days after the date
of this Prospectus, (ii) 8,261,072 restricted securities will be eligible for
sale 180 days after the date of this Prospectus and (iii) the remainder of the
restricted securities will be eligible for sale from time to time thereafter
upon expiration of their respective one-year holding periods. After this
offering, the holders of approximately 8,081,506 shares of Common Stock and
options and warrants to purchase 1,034,416 shares of Common Stock will be
entitled to certain demand and piggyback registration rights with respect to
registration of such shares under the Securities Act. If such holders, by
exercising their demand or piggyback registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to include in a Company initiated registration shares held by
such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, after the date of this Prospectus, the Company intends to
file a Form S-8 registration statement under the Securities Act to register all
shares of Common Stock issuable under the Company's 1998 Stock Plan. Such
registration statement is expected to become effective not earlier than 180 days
after the effective date of this offering. Shares covered by such registration
statement will thereupon be eligible for sale in the public markets, subject to
Rule 144 limitations applicable to affiliates.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Upon completion of this
offering, the Company's Board of Directors will have the authority to issue up
to 5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue Preferred Stock, any such issuance, while providing

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<PAGE>
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the Company
and may discourage bids for the Common Stock at a premium over the market price
of the Common Stock and may affect adversely the market price of and the voting
and other rights of the holders of the Common Stock. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control of the Company. The Company's Amended and Restated Certificate
of Incorporation ("Restated Certificate of Incorporation") also provides for
staggered three-year terms for the members of the Board of Directors. The
Company's Restated Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering, any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called annual
or special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer of the Company. These provisions, and other provisions of the
Restated Certificate of Incorporation, the Company's Bylaws and Delaware
corporate law, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.

NO SPECIFIC PLAN FOR SIGNIFICANT PORTION OF PROCEEDS. The Company currently
has no specific plans for a significant portion of the net proceeds of the
offering. As a consequence, the Company's management will have the discretion to
allocate this portion of the net proceeds of this offering to uses that the
stockholders may not deem desirable, and there can be no assurance that these
proceeds can or will be invested to yield a significant return. Substantially
all of the proceeds of the offering will be invested in short-term,
interest-bearing, investment grade securities for an indefinite period of time.

DILUTION; ABSENCE OF DIVIDENDS. The initial public offering price will be
substantially higher than the book value per share of Common Stock. Investors
purchasing shares of Common Stock in this offering will incur immediate,
substantial dilution of $8.51 per share in the pro forma net tangible book value
of Common Stock. Additional dilution will occur upon the exercise of outstanding
options and warrants. The Company has never declared or paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future. The
Company's loan and security agreement and capital equipment leases prohibit the
payment of dividends without the consent of the respective lenders.

YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
year 2000 and lead to significant business delays and disruptions. While the
Company believes that the software applications that it uses or has developed
are year 2000 compliant, to the extent that any of these software applications
contain source code that is unable to appropriately interpret the upcoming
calendar year 2000, some level of modification or possible replacement of such
source code or applications will be necessary. The Company has analyzed the
software applications that it uses or has developed and, as a result, the
Company at this time does not anticipate any significant expense in ensuring
that they are year 2000 compliant. However, until the year 2000 arrives, the
Company cannot be absolutely certain that its analysis is correct. The Company
is currently unable to predict the extent to which the year 2000 issue will
affect its clients or suppliers, or the extent to which it would be vulnerable
to any failure by the clients or suppliers to remediate any year 2000 issues on
a timely basis. The failure of a client or a major supplier subject to the year
2000 to convert its systems on a timely basis or a conversion that is
incompatible with the Company's systems could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition the Company's business, financial condition and results of operations
may be materially adversely affected to the extent its end-users are unable to
use their credit cards due to the year 2000 issues that are not rectified by
their credit card vendors.

16
<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the 3,200,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $11.00 per share,
are estimated to be approximately $32,036,000 ($36,946,400 if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to use the net proceeds for general corporate
purposes, including continued investment in product development, expansion of
sales and marketing activities and working capital. The amounts and timing of
the Company's actual expenditures will depend upon numerous factors, including
the status of the Company's product development efforts, marketing and sales
activities, the amount of cash generated by the Company's operations and
competition. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds of the offering in short-term,
investment-grade, interest-bearing securities. See "Risk Factors--No Specific
Plans for Significant Portion of Proceeds."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any future earnings to support operations
and to finance the growth and development of the Company's business and does not
anticipate paying cash dividends for the foreseeable future.

17
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis and (ii) as adjusted to reflect the automatic
conversion of all outstanding shares of Series A Preferred Stock into Common
Stock upon the completion of this offering and the sale of 3,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity (1):
Preferred Stock; $0.01 par value; 1,500,000 shares authorized, 1,500,000 shares of
Series A Preferred Stock issued and outstanding, actual; 5,000,000 shares authorized,
no shares issued and outstanding, as adjusted......................................... $ 15 $ --
Common Stock; $0.01 par value; 66,666,667 shares authorized, 12,713,715 shares issued
and outstanding, actual; 45,000,000 shares authorized, 16,913,715 shares issued and
outstanding, as adjusted.............................................................. 127 169
Additional paid-in-capital.............................................................. 20,812 52,821
Deferred compensation................................................................... (823) (823)
Accumulated deficit..................................................................... (9,848) (9,848)
--------- -----------
Total stockholders' equity............................................................ 10,283 42,319
--------- -----------
Total capitalization................................................................ $ 10,283 $ 42,319
--------- -----------
--------- -----------
</TABLE>

- ------------------------

(1) Excludes (i) 1,532,087 shares of Common Stock issuable upon exercise of
options outstanding as of June 30, 1998, at a weighted average exercise
price of $2.16 per share, (ii) 803,008 shares of Common Stock issuable upon
exercise of warrants outstanding as of June 30, 1998, at a weighted average
exercise price of $2.52 per share, and (iii) 801,246 shares reserved for
future grants under the Company's stock option plan. See
"Management--Employee Benefit Plans" and Notes 3 and 4 of Notes to
Consolidated Financial Statements.

18
<PAGE>
DILUTION

The pro forma net tangible book value of the Company at June 30, 1998 was
$10,120,237 or $0.74 per share after giving effect to the conversion of
outstanding Series A Preferred Stock into 1,000,000 shares of Common Stock. Pro
forma net tangible book value per share represents the amount of the Company's
stockholders' equity less intangible assets divided by the total number of
shares of Common Stock outstanding on a pro forma basis for the period
immediately prior to this offering.

Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale by the Company of the 3,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share, after
deducting estimated underwriting discounts and commissions and offering
expenses, the pro forma net tangible book value of the Company as of June 30,
1998 would have been $42,156,237, or $2.49 per share. This represents an
immediate increase in pro forma net tangible book value of $1.75 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $8.51 per share to new investors purchasing shares at the assumed
initial public offering price. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 11.00
---------
Pro forma net tangible book value per share at June 30, 1998.............. $ .74
Increase per share attributable to new investors.......................... 1.75
---------
Pro forma net tangible book value per share after the offering.............. 2.49
---------
Net tangible book value dilution per share to new investors................. $ 8.51
---------
---------
</TABLE>

The following table sets forth on a pro forma basis as of June 30, 1998
after giving effort to the automatic conversion of all outstanding shares of
Series A Preferred Stock into Common Stock upon the closing of this offering,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new investors at an assumed initial public
offering price of $11.00 per share for shares purchased in this offering, before
deducting estimated underwriting discounts and commissions and offering
expenses:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 13,713,715 81% $ 20,520,651 37% $ 1.50
New investors................................. 3,200,000 19% 35,200,000 63% 11.00
------------- --------- ------------- ---------
Total....................................... 16,913,715 100.0% $ 55,720,651 100.0%
------------- --------- ------------- ---------
------------- --------- ------------- ---------
</TABLE>

The foregoing tables assume no exercise of outstanding stock options or
warrants and as of June 30, 1998, excludes (i) options to purchase 1,532,087
shares of Common Stock at a weighted average exercise price of $2.16 per share,
(ii) warrants to purchase 803,008 shares of Common Stock at a weighted average
exercise price of $2.52 per share and (iii) 801,246 shares reserved for future
grants under the Company's stock option plan. To the extent that outstanding
options or warrants are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans" and Notes 3 and 4 of Notes
to Consolidated Financial Statements.

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. The statement of operations data for the years
ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December
31, 1996 and 1997 have been derived from the audited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The statement
of operations data for the period from inception to December 31, 1994 and the
balance sheet data as of December 31, 1994 and 1995 are derived from audited
Financial Statements not included in this Prospectus and contain all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The statement of operations data for the six months ended June 30, 1997
and 1998 and the balance sheet data as of June 30, 1998 are derived from the
Company's unaudited Consolidated Financial Statements also included elsewhere in
this Prospectus. Such unaudited statements have been prepared on the same basis
as the audited Consolidated Financial Statements and in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of the Company for the unaudited interim periods. The
statement of operations data for the interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the year as a whole.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 9, SIX MONTHS ENDED
1994) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------- --------------------
1994 1995 1996 1997 1997 1998
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $ -- $ -- $ 111 $ 2,472 $ 461 $ 5,746
Cost of sales........................................ -- -- 95 2,052 379 4,791
------ --------- --------- --------- --------- ---------
Gross profit....................................... -- -- 16 420 82 955
Operating expenses:
Sales and marketing................................ -- 3 68 1,501 629 3,433
Product development and operations................. -- 130 230 1,528 415 1,611
General and administrative......................... 13 32 415 929 233 1,584
------ --------- --------- --------- --------- ---------
Total operating expenses......................... 13 165 713 3,958 1,277 6,628
------ --------- --------- --------- --------- ---------
Loss from operations................................. (13) (165) (697) (3,538) (1,195) (5,673)
Interest income, net............................... 5 22 8 53 19 150
------ --------- --------- --------- --------- ---------
Net loss............................................. $ (8) $ (143) $ (689) $ (3,485) $ (1,176) $ (5,523)
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Basic and diluted net loss per share (1)............. $ (0.00) $ (0.03) $ (0.13) $ (0.46) $ (0.18) $ (0.49)
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Shares used in per share computation (1)............. 5,333 5,333 5,333 7,514 6,438 11,279
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ JUNE 30,
1994 1995 1996 1997 1998
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 679 $ 487 $ 800 $ 2,126 $ 4,755
Short-term investments............................................... -- -- -- -- 4,934
Working capital (deficit)............................................ 667 478 (451) 1,244 7,852
Total assets......................................................... 783 635 1,202 3,405 12,697
Accumulated deficit.................................................. (8) (152) (840) (4,325) (9,848)
Total stockholders' equity (deficit)................................. 770 627 (58) 2,329 10,283
</TABLE>

- --------------------------

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.

20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS,
INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.

OVERVIEW

The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
was incorporated in February 1994 and commenced offering products for sale
through its clients' Web stores in August 1996. From inception through August
1996, the Company had no sales, and its activities related primarily to the
development of its CNS technology related to electronic commerce. In 1996, the
Company began to focus its business development efforts on building its
inventory of software products through contracts with software publishers and
had contracts with a total of 953 and 1,122 software publishers as of December
31, 1997 and June 30, 1998, respectively. In 1997, the Company began to develop
distribution relationships and had contracts with a total of 105 and 346 online
retailers as of December 31, 1997 and June 30, 1998, respectively. During the
six months ended June 30, 1998, the Company completed transactions for 787
software publishers and 112 online retailers.

The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either delivery through ESD or
shipment of the physical product to the end-user. The amount payable to the
software publisher or online retailer is reported as cost of sales. The Company
bears full credit risk with respect to substantially all sales. The Company
determines reserves for charge-backs using a percentage of sales based on
historical experience. As of June 30, 1998, the Company's reserve balance for
charge-backs totalled $82,000. Sales of software products that are delivered
through ESD accounted for 72% of sales for the six months ended June 30, 1998.
The Company maintains a supply of packaged software to meet the physical
delivery requirements of its clients, which supply is primarily held on
consignment.

The Company has a limited operating history upon which investors may
evaluate its business and prospects. Since inception, the Company has incurred
significant losses, and as of June 30, 1998, had an accumulated deficit of
approximately $9.8 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other things, maintain
existing and develop new relationships with software publishers and online
retailers, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so would

21
<PAGE>
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's current and future expense levels are
based largely on its planned operations and estimates of future sales. Sales and
operating results generally depend on the volume and timing of orders received,
which are difficult to forecast. The Company may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in sales would have an immediate adverse effect on the
Company's business, financial condition and results of operations. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company is unable to accurately forecast its sales and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.

RESULTS OF OPERATIONS

The following table sets forth consolidated statement of operations data for
the periods indicated as a percentage of revenues:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales.................................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................................ 85.6 83.0 82.2 83.4
--------- --------- --------- ---------
Gross profit........................................................... 14.4 17.0 17.8 16.6
Operating expenses:
Sales and marketing.................................................... 61.2 60.7 136.5 59.7
Product development and operations..................................... 207.2 61.8 90.0 28.0
General and administrative............................................. 373.9 37.6 50.5 27.6
--------- --------- --------- ---------
Total operating expenses............................................. 642.3 160.1 277.0 115.3
--------- --------- --------- ---------
Loss from operations..................................................... (627.9) (143.1) (259.2) (98.7)
Interest income, net................................................... 7.2 2.1 4.1 2.6
--------- --------- --------- ---------
Net loss................................................................. (620.7)% (141.0)% (255.1)% (96.1)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 AND 1998

SALES. The Company derives its revenue primarily from sales of third-party
software. The Company recognizes revenue from the sale of software products upon
delivery through ESD or shipment of the physical product to the end-user. Sales
are comprised of the gross selling price of software sold by the Company, net of
estimated returns, plus any outbound shipping and handling charges, as well as
gross revenue generated by certain merchandising activities. The Company bears
credit risk with respect to most sales. Sales increased from $461,000 for the
six months ended June 30, 1997 to $5.7 million for the six months ended June 30,
1998 primarily as a result of significant growth in the number of the Company's
software publisher and online retailer clients as well as increasing market
acceptance of ESD. International sales represented approximately 31% and 33% of
sales for the six months ended June 30, 1997 and 1998, respectively.

GROSS PROFIT. Cost of sales consists primarily of the amount payable to the
software publishers and online retailers for product sold to the end-user and
outbound and inbound shipping and distribution costs for physical product. Cost
of sales increased from $379,000 in the six months ended June 30, 1997 to $4.8
million in the six months ended June 30, 1998, reflecting the Company's growth
in sales. The Company's gross profit margin decreased from 17.8% in the six
months ended June 30, 1997 to 16.6% in the six months ended June 30, 1998, as a
result of the addition of certain lower margin software publisher clients during
the second half of 1997. The Company has historically generated higher gross
margins on sales through online retailer client Web stores compared to sales
through software publisher client Web

22
<PAGE>

stores. There can be no assurance, however, that the Company will continue to
generate higher gross margins on sales through online retailer client Web
stores. In each of the six months ended June 30, 1997 and 1998, less than 6% of
the Company's sales were generated through online retailer client Web stores.
The Company expects that an increasing percentage of its sales will be generated
through online retailers. The Company believes that Internet commerce and
related services will become more competitive in the near future. Accordingly,
the Company may reduce or alter its pricing structure and policies in the future
and any such change would reduce gross margins.

SALES AND MARKETING. Sales and marketing expense consists primarily of
personnel and related expenses, advertising and promotional expenses, bad debt
expense and credit card transaction fees. Sales and marketing expense increased
from $629,000 in the six months ended June 30, 1997 to $3.4 million in the six
months ended June 30, 1998. The increase resulted from expanding the sales and
marketing infrastructure required to increase the number of and provide support
to software publisher and online retailer clients. The primary components of
this increase were an increase in advertising and marketing expenditures of $1.4
million and an increase in wages and benefits of $576,000. As a percentage of
sales, sales and marketing expense decreased from 136.5% in the six months ended
June 30, 1997 to 59.7% in the six months ended June 30, 1998, primarily
reflecting the Company's growth in sales. The Company expects that sales and
marketing expense will continue to increase in absolute dollars as the Company
continues to build its sales and marketing infrastructure and to develop
marketing programs.

PRODUCT DEVELOPMENT AND OPERATIONS. Product development and operations
expense consists primarily of personnel and related expenses and consulting
associated with developing, enhancing and maintaining the Company's CNS and
related facilities, internal systems and telecommunications infrastructure as
well as customer service. Product development and operations expense increased
from $415,000 in the six months ended June 30, 1997 to $1.6 million in the six
months ended June 30, 1998. The increase was primarily related to increased
personnel and consulting costs related to developing, enhancing and maintaining
the Company's CNS and related facilities. The primary components of this
increase were an increase in wages and benefits of $604,000 and an increase in
consulting costs of $139,000. As a percentage of sales, product development and
operations expense decreased from 90.0% in the six months ended June 30, 1997 to
28.0% in the six months ended June 30, 1998, primarily reflecting the Company's
growth in sales. The Company believes that continued investment in product
development and operations is critical to attaining its strategic objectives
and, and as a result, expects product development and operations expenses will
continue to increase in absolute dollars. As a percentage of sales, these
expenses are expected to decrease as sales increase.

GENERAL AND ADMINISTRATIVE. General and administrative expense consists
principally of executive, accounting and administrative personnel and related
expenses, including deferred compensation expense, professional fees, and
recruiting expense. General and administrative expense increased from $233,000
in the six months ended June 30, 1997 to $1.6 million in the six months ended
June 30, 1998. The increase was due to increased personnel and related expenses
and increased professional fees. The primary components of this increase were an
increase in deferred compensation expense of $820,000 and an increase in wages
and benefits of $237,000. As a percentage of sales, general and administrative
expense decreased from 50.5% in the three months ended June 30, 1997 to 27.6% in
the six months ended June 30, 1998, primarily reflecting the Company's growth in
sales. The Company expects general and administrative expense, excluding the
impact of deferred compensation expense, to increase in absolute dollars in the
future, particularly as the Company continues to build infrastructure to support
growth and incurs costs associated with being a public company. As a percentage
of sales, these expenses are expected to decrease as sales increase.

INTEREST INCOME, NET. Interest income consists of earnings on the Company's
cash, cash equivalents and short-term investments, net of interest expense.
Interest income increased from $19,000 in the six months ended June 30, 1997 to
$150,000 in six months ended June 30, 1998. The increase was attributable

23
<PAGE>
to interest received on higher average cash and cash equivalent balances. The
Company expects interest income to increase as a result of the net proceeds from
this offering.

INCOME TAXES. The Company paid no income taxes in the six months ended June
30, 1997 or the six months ended June 30, 1998. The Company has incurred a net
loss for each period since inception. As of June 30, 1998, the Company had
approximately $8.7 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2009. Due to the uncertainty of
future profitability, a valuation allowance equal to the deferred tax asset has
been recorded. Certain changes in ownership resulting from the sales of Common
Stock will limit the future annual realization of the tax net operating loss
carryforwards to a specified percentage of the Company under Section 382 of the
Internal Revenue Code.

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

SALES. The Company had no sales in 1995, as it was still developing its
technology related to electronic commerce. The Company's sales increased from
$111,000 for the year ended December 31, 1996 to $2.5 million for the year ended
December 31, 1997 as a result of significant growth in the number of the
Company's software publisher and online retailer clients as well as the
increasing market acceptance of ESD. International sales accounted for 32% and
31% of total sales in the years ended December 31, 1996 and 1997, respectively.

GROSS PROFIT. Cost of sales increased substantially during 1997, reflecting
the Company's growth in sales. The Company's gross margin increased from 14.4%
for the year ended December 31, 1996 to 17.0% for the year ended December 31,
1997.

SALES AND MARKETING. Sales and marketing expense increased from $3,000 to
$68,000 to $1.5 million for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from additional sales and marketing personnel and
related expenses, increased advertising and promotional expense, increased bad
debt expense and increased credit card transaction fees due to the increased
sales. The primary components of the increase from 1996 to 1997 were an increase
in wages and benefits of $799,000 and an increase in advertising and marketing
expenditures of $315,000. As a percentage of sales, sales and marketing expense
decreased from 61.2% in the year ended December 31, 1996 to 60.7% for the year
ended December 31, 1997, primarily reflecting the Company's growth in sales.

PRODUCT DEVELOPMENT AND OPERATIONS. Product development and operations
expense increased from $130,000 to $230,000 to $1.5 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The increase was primarily
related to increased personnel and consulting costs related to developing,
enhancing and maintaining the Company's CNS and related facilities. The primary
components of the increase from 1996 to 1997 were an increase in wages and
benefits of $653,000 and an increase in consulting costs of $233,000. As a
percentage of sales, product development and operations expense decreased from
207.2% in the year ended December 31, 1996 to 61.8% for the year ended December
31, 1997, primarily reflecting the Company's growth in sales.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
from $32,000 to $415,000 to $929,000, for the years ended December 31, 1995,
1996 and 1997, respectively, primarily due to increased personnel related
expense and professional fees. As a percentage of sales, general and
administrative expense decreased from 373.9% in the year ended December 31, 1996
to 37.6% for the year ended December 31, 1997, primarily reflecting the
Company's growth in sales.

INTEREST INCOME, NET. Interest income decreased from $22,000 to $8,000 and
increased to $53,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from changes in average cash and cash equivalent
balances.

INCOME TAXES. The Company paid no income taxes in the years ended December
31, 1995, 1996 and 1997.

24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended June 30, 1998. In the
opinion of management, this information has been prepared substantially on the
same basis as the audited Consolidated Financial Statements appearing elsewhere
in this Prospectus, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited consolidated quarterly results of operations. The
consolidated quarterly data should be read in conjunction with the audited
Consolidated Financial Statements of the Company and the Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1998
------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales............................ $ 25 $ 86 $ 179 $ 282 $ 683 $ 1,328 $ 2,270
Cost of sales.................... 21 74 147 232 561 1,112 1,896
----- ----- --------- -------- ------------- ------------ ---------
Gross profit................... 4 12 32 50 122 216 374
Operating expenses:
Sales and marketing............ 25 38 270 359 246 626 1,060
Product development and
operations................... 55 118 169 246 530 583 703
General and administrative..... 112 241 81 152 294 402 208
----- ----- --------- -------- ------------- ------------ ---------
Total operating expenses..... 192 397 520 757 1,070 1,611 1,971
----- ----- --------- -------- ------------- ------------ ---------
Loss from operations............. (188) (385) (488) (707) (948) (1,395) (1,597)
Interest income, net........... 3 1 8 11 26 8 42
----- ----- --------- -------- ------------- ------------ ---------
Net loss......................... $(185) $(384) $(480) $(696) $ (922) $(1,387) $(1,555)
----- ----- --------- -------- ------------- ------------ ---------
----- ----- --------- -------- ------------- ------------ ---------

JUNE 30,
1998
---------

<S> <C>
Sales............................ $ 3,476
Cost of sales.................... 2,895
---------
Gross profit................... 581
Operating expenses:
Sales and marketing............ 2,373
Product development and
operations................... 908
General and administrative..... 1,376
---------
Total operating expenses..... 4,657
---------
Loss from operations............. (4,076)
Interest income, net........... 108
---------
Net loss......................... $(3,968)
---------
---------
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1998
------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 84.0 86.0 82.1 82.3 82.1 83.7 83.5
------------- ------------ --------- -------- ------------- ------------ ---------
Gross profit................... 16.0 14.0 17.9 17.7 17.9 16.3 16.5
Operating expenses:
Sales and marketing............ 100.0 44.2 150.8 127.3 36.0 47.1 46.7
Product development and
operations................... 220.0 137.2 94.4 87.2 77.7 43.9 31.0
General and administrative..... 448.0 280.2 45.3 53.9 43.0 30.3 9.2
------------- ------------ --------- -------- ------------- ------------ ---------
Total operating expenses..... 768.0 461.6 290.5 268.4 156.7 121.3 86.9
------------- ------------ --------- -------- ------------- ------------ ---------
Loss from operations............. (752.0) (447.6) (272.6) (250.7) (138.8) (105.0) (70.4)
Interest income, net........... 12.0 1.1 4.4 3.9 3.8 0.6 1.9
------------- ------------ --------- -------- ------------- ------------ ---------
Net loss......................... (740.0)% (446.5)% (268.2)% (246.8)% (135.0)% (104.4)% (68.5)%
------------- ------------ --------- -------- ------------- ------------ ---------
------------- ------------ --------- -------- ------------- ------------ ---------

JUNE 30,
1998
---------

<S> <C>
Sales............................ 100.0%
Cost of sales.................... 83.3
---------
Gross profit................... 16.7
Operating expenses:
Sales and marketing............ 68.2
Product development and
operations................... 26.1
General and administrative..... 39.7
---------
Total operating expenses..... 134.0
---------
Loss from operations............. (117.3)
Interest income, net........... 3.1
---------
Net loss......................... (114.2)%
---------
---------
</TABLE>

The Company's sales increased in each of the quarters presented as a result
of an increase in the number of the Company's software publisher and online
retailer clients as well as an increase in the market acceptance of ESD. Most
operating expense categories generally increased in absolute dollars over the
quarters presented, reflecting the increased spending on personnel and related
expenses, advertising and marketing, and developing, enhancing and maintaining
the Company's CNS and related facilities. Gross margin for the three months
ended December 31, 1997, March 31, 1998 and June 30, 1998 were lower than gross
margins in the first nine months of 1997 primarily as a result of the addition
of certain lower margin software publisher clients. Sales and marketing expenses
for the three months ended September 30, 1997 were lower than the generally
increasing quarter to quarter trend, primarily as a result of reduced
advertising and promotional expenses. General and administrative expenses have
varied widely in the periods indicated due to the timing and amounts of
professional fees, transactions costs and deferred compensation expense.

25
<PAGE>

The Company's quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside the Company's control. Factors that will influence the Company's
operating results include: (i) the Company's ability to retain existing software
publishers and online retailers as clients, to attract new software publishers
and online retailers as clients at a steady rate and to maintain software
publisher, online retailer and end-user satisfaction; (ii) the announcement or
introduction of new Web sites, Web stores, services and products by the Company
and its competitors; (iii) price competition and margin erosion; (iv) the level
of use of the Internet and consumer acceptance of the Internet for the purchase
of consumer products such as those offered by the Company; (v) the Company's
ability to upgrade and develop its systems and infrastructure, in particular its
CNS; (vi) the termination of any strategic accounts such as Corel Corporation,
from which the Company derives a significant portion of its sales; (vii)
technical difficulties or system downtime; (viii) the Company's ability to
attract new personnel in a timely and effective manner; (ix) the mix of sales
generated through software publisher client Web stores compared to online
retailer Web stores; (x) the failure of Internet bandwidth to increase over time
and/or an increase in the cost to end-users of obtaining or utilizing Internet
bandwidth; (xi) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure; (xii) certain U.S. and foreign government regulations; and
(xiii) economic conditions specific to the Internet and electronic commerce that
would result in the Internet not becoming a viable commercial marketplace. The
Company also may, as inducement to obtain certain strategic contracts, offer
certain economic terms to software publishers and online retailers which will
reduce its gross margins. As a result, the Company believes that it will
continue to incur operating losses in the future. Due to the foregoing factors,
the Company's annual or quarterly operating results may fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Common Stock would likely be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
the private placement of equity securities, which yielded an aggregate of $19.3
million of net proceeds through June 30, 1998.

Net cash used in operating activities in the years ended December 31, 1995,
1996 and 1997 and in the six months ended June 30, 1998 was $142,000, $409,000,
$2.6 million and $3.4 million, respectively. Net cash used for operating
activities in each of these periods was primarily the result of net losses,
offset in part by increases in accounts payable, accrued expenses and non-cash
expenses.

Net cash used in investing activities in the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998 was $50,000, $133,000,
$984,000 and $6.5 million, respectively. Net cash used in investing activities
in each of these periods was related to the purchases of property and equipment
and patent acquisition costs and the purchase of short-term investments in 1998.
The property and equipment purchased consisted primarily of computer hardware
and software.

Net cash provided by financing activities in the years ended December 31,
1995, 1996 and 1997 and in the six months ended June 30, 1998 was $0, $855,000,
$4.9 million and $12.6 million, respectively. The cash provided by financing
activities was the result of proceeds from the sale of convertible debentures
(subsequently converted into shares of Common Stock), sales of the Company's
Common Stock in 1996, 1997 and in the first six months of 1998 and the sale of
the Company's Series A Preferred Stock in April 1998.

As of June 30, 1998 the Company had approximately $4.8 million of cash and
cash equivalents and $4.9 million of short-term investments. The Company's
principal commitments consisted of obligations outstanding under operating
leases. Although the Company has no material commitments for capital
expenditures, it anticipates an increase in the rate of capital expenditures
consistent with its anticipated growth in operations, infrastructure and
personnel. The Company anticipates that it will expend approximately $3.0
million over the next 24 months on capital expenditures based on the Company's
current anticipated growth rate. The Company anticipates that it will continue
to add computer hardware resources, deploy additional commerce servers
worldwide, and relocate its primary office facility during the

26
<PAGE>

next twelve months. The Company further anticipates that it will expend
approximately $6.0 million over the next 24 months on product development based
on the Company's current anticipated growth rate in operations. There can be no
assurance, however that the Company's growth rate will continue at current
levels or that it will meet the Company's current expectations. The Company may
also use cash to acquire or license technology, products or businesses related
to the Company's current business. The Company also anticipates that it will
continue to experience significant growth in its operating expenses for the
foreseeable future and that its operating expenses will be a material use of the
Company's cash resources.

The Company believes that the net proceeds from this offering, together with
existing cash and cash equivalents will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the next
twenty-four months, although the Company may seek to raise additional capital
during that period. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. There can be
no assurance that financing will be available in amounts or on terms acceptable
to The Company, if at all. See "Risk Factors--Future Capital Needs; Uncertainty
of Additional Funding."

YEAR 2000 COMPLIANCE

The Company uses a significant number of computer software programs and
operating systems in its internal operations. The use of computer programs that
rely on two-digit date programs to perform computations and decision-making
functions may cause computer systems to malfunction in the year 2000 and lead to
significant business delays and disruptions. While the Company believes that the
software applications that it uses or has developed are year 2000 compliant, to
the extent that any of these software applications contain source code that is
unable to appropriately interpret the upcoming calendar year 2000, some level of
modification or possible replacement of such source code or applications will be
necessary. The Company has analyzed the software applications that it uses or
has developed and, as a result, the Company at this time does not anticipate any
significant expense in ensuring that they are year 2000 compliant. However,
until the year 2000 arrives, the Company cannot be absolutely certain that its
analysis is correct. The Company is currently unable to predict the extent to
which the year 2000 issue will affect its clients or suppliers, or the extent to
which it would be vulnerable to any failure by clients or suppliers to remediate
any year 2000 issues on a timely basis. The failure of a major client or
supplier subject to the year 2000 to convert its systems on a timely basis or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition the Company's business, financial condition and results
of operations may be materially adversely affected to the extent its end-users
are unable to use their credit cards due to year 2000 issues that are not
rectified by their credit card vendors.

27
<PAGE>
BUSINESS

Digital River is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
has developed a technology platform that allows it to provide a suite of
electronic commerce services to its software publisher and online retailer
clients, including ESD. The Company also provides data mining and merchandising
services to assist clients in increasing Internet page view traffic to, and
sales through, their Web stores. Rather than maintaining its own branded Web
store that would compete with its clients, Digital River provides an outsourcing
solution that allows its clients to promote their own brands while leveraging
Digital River's investment in infrastructure and technology. As of June 30,
1998, the Company had contracts with 1,122 software publisher clients and 346
online retailer clients, including Corel Corporation, Cyberian Outpost, Inc.,
Lotus Development Corporation, Micro Warehouse, Inc., Network Associates, Inc.
and Symantec Corporation, and maintained a database of more than 123,000
software products from its various software publisher clients, including more
than 18,000 software titles and more than 105,000 digital images and fonts.
Through June 30, 1998, the Company had completed more than 172,000 transactions
for more than 124,000 unique end-users.

Digital River's proprietary CNS technology serves as the platform for the
Company's solutions. The CNS incorporates custom software applications that
enable ESD, Web store authoring, fraud prevention, export control, merchandising
programs and online registration, and features a database of more than 123,000
software products. Using its CNS platform, the Company creates Web stores for
its clients that replicate the look and feel of such clients' own Web sites.
End-users can browse for products and make purchases online, and, once purchases
are made, the Company delivers the products directly to the end-user, primarily
through ESD. The Company also provides transaction processing services and
collects and maintains critical information about end-users. This information
can later be used by the Company's clients to facilitate add-on or upgrade sales
and for other direct marketing purposes. The Company actively manages direct
marketing campaigns for its clients, and also delivers purchase information and
Web store traffic statistics to its clients on a regular basis.

INDUSTRY BACKGROUND

GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE.

The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically. A number of factors have contributed to the growth of the
Internet and its commercial use, including: (i) the large and growing installed
base of personal computers in homes and businesses; (ii) improvements in network
infrastructure and bandwidth; (iii) easier and cheaper access to the Internet;
(iv) increased awareness of the Internet among consumer and business users; and
(v) the rapidly expanding availability of online content and commerce which
increases the value to users of being connected to the Internet. According to
International Data Corporation ("IDC"), the number of Internet users worldwide
will grow from an estimated 69 million at the end of 1997 to an estimated 320
million by 2002.

The increasing functionality, accessibility and overall usage of the
Internet have made it an attractive commercial medium. Online retailers can
interact directly with end-users and can frequently adjust their featured
selections, shopping interfaces and pricing. The ability to reach and serve a
large and global group of end-users electronically from a central location and
the potential for personalized low-cost customer interaction provide additional
economic benefits for online retailers. Unlike traditional retail channels,
online retailers do not have the burdensome costs of managing and maintaining a
significant physical retail store infrastructure or the continuous printing and
mailing costs of catalog marketing. Because of these advantages, online
retailers have the potential to build large, global customer bases quickly and
to achieve superior economic returns over the long term. An increasingly broad
base of products is being sold successfully online, including computers, travel
services, brokerage services, automobiles and music, as well as software
products. IDC estimates that the total value of goods and services purchased
over the Web worldwide will increase from an estimated $12.4 billion in 1997 to
an estimated $133.0 billion in 2000.

28
<PAGE>
THE RETAIL SOFTWARE MARKET.

The Company believes that the market for retail software is large and will
continue to grow. According to the Software Publishers Association, sales of PC
applications software in the United States and Canada reached $10.6 billion in
1996. The traditional channels for the retail sale of software products are
highly fragmented and include regional and national superstore retail chains,
catalog companies and small single location stores. The superstores and catalog
companies carry hundreds to thousands of software products, while the single
location stores generally carry only a limited number.

Traditional sales channels have inherent limitations and disadvantages for
software publishers, retailers and end-users. A significant limitation of
physical retail stores is the limited amount of available shelf space. As a
result, competition for shelf space is intense, and often only the major
software publishers are able to effectively distribute their software products.
Even these publishers usually cannot offer their total available product
offerings in retail stores. In addition, software publishers typically must
grant generous rights of return because of the high cost of inventory and the
risk of inventory obsolescence. As a result, software publishers effectively
bear the risk of any difference between projected and actual sales, creating
uncertainty as to future sales and revenue recognition risks. Physical retailers
must also make significant investments in real estate, personnel and
inventories. Similarly, direct mail distribution is constrained by practical
catalog size limitations, which restrict both the number of products and the
information about those products that can be included in a catalog. Direct mail
distribution also involves printing expenses, mailing costs, inherent delays in
reacting to price and product changes and low response rates. With both physical
retail and direct mail distribution, there is a significant lead time between
the development or upgrading of software and its introduction into the market.
Finally, traditional sales channels are typically characterized by low end-user
registration rates, and provide software publishers little information on end-
user behavior, demographics and product demand.

ADVANTAGES OF ESD.

The Internet provides a compelling solution that addresses many of the
limitations of traditional distribution methods. The Internet is particularly
well-suited for the distribution of most software because software products can
be purchased and delivered quickly, conveniently and cost-effectively to an end-
user's home or office computer through ESD. The Company believes that ESD is an
effective means of delivery today for most software applications. Although
current Internet bandwidth restrictions render ESD less effective as a means of
delivery today for especially large software application programs, the Company
believes that as Internet bandwidth increases, ESD will become increasingly
attractive even for such software titles. Accordingly, the Company believes that
ESD will represent an increasing share of online software sales and will be
critical to online retailers' success. In addition, unlike physical retail
stores or catalogs, shelf space on the Internet is virtually unlimited, enabling
software publishers to offer the full range of their software products. ESD
significantly reduces or eliminates many of the costs in the distribution chain,
including manufacturing, packaging, shipping and warehousing costs, such as
costs related to returns and inventory management.

OPPORTUNITY FOR ELECTRONIC COMMERCE OUTSOURCING.

The Company believes that the market for software sales online continues to
grow rapidly. Jupiter Communications, LLC estimates that the market for software
sales online will increase from an estimated $69 million in 1997 to an estimated
$2.3 billion by 2002. However, unlike established physical distribution channels
for shrink-wrapped software, there is currently no established, comprehensive
electronic distribution source for online retailers. The distribution of
software products via ESD is complex and requires significant up-front and
ongoing investments in secure, reliable and scaleable systems. Accordingly, the
Company believes that a substantial market opportunity exists for a
comprehensive, cost-effective, outsourced electronic commerce solution that
provides software publishers and online retailers with access to a critical mass
of software products and a robust distribution and transaction network.

29
<PAGE>
THE DIGITAL RIVER SOLUTION

The Company has developed a technology platform that enables it to provide a
comprehensive suite of electronic commerce services to its software publisher
and online retailer clients, including ESD. The Company also leverages its
merchandising expertise to increase traffic and sales for its clients. Rather
than maintaining its own branded Web store that would compete with its clients,
Digital River provides an outsourcing solution for ESD and merchandising
services that enables its clients to promote their own brands while leveraging
Digital River's investment in infrastructure. In addition, this approach enables
Digital River to leverage its clients' brand investments and the traffic at its
clients' sites to maximize the number of transactions completed through Digital
River.

The following illustrates the process through which an end-user purchases
software products from a client using the Company's CNS technology platform:

[GRAPHIC]

PICTORIAL FLOWCHART DEPICTING A PURCHASE OF
SOFTWARE THROUGH THE COMPANY'S CENTRAL NETWORK
SERVER ("CNS"), SHOWING THE TRANSACTION PROCESSING
AND OTHER VALUE-ADDED SERVICES PROVIDED BY THE
COMPANY.

30
<PAGE>
BENEFITS TO SOFTWARE PUBLISHERS. The Company's electronic commerce solution
enables software publishers to offer the complete library of their software
products directly to end-users from their Web stores and through the Company's
network of online retailers. This benefit is particularly significant for
smaller software publishers who have limited market access through traditional
distribution methods. The Company's solution also provides major software
publishers a channel for their underdistributed products permitting them to
offer online their complete product catalog. In addition, through its 100%
end-user registration and data warehousing, Digital River provides software
publishers with valuable end-user information that can facilitate targeted
marketing, upgrade notification and sophisticated merchandising strategies.
Finally, by exploiting the distribution relationships Digital River has
developed with a large network of online retailers, software publishers can
reduce or eliminate the need for multiple retailer relationships, thereby
lowering administrative costs and reducing the number of master copies of their
software in existence for distribution.

BENEFITS TO ONLINE RETAILERS. Online retailers can use Digital River's
robust CNS technology to sell software products online, without having to build
and maintain their own electronic commerce infrastructure. In addition, Digital
River enables online retailers to offer their end-users access to virtually all
of Digital River's inventory of more than 123,000 software products, without the
burden of developing and maintaining relationships with hundreds of software
publishers. Like software publishers, online retailers enjoy the cost savings
from online fulfillment and the database marketing benefits offered by Digital
River. Online retailers can effectively outsource electronic commerce
functionality while building their own brands online. Online retailers also
eliminate the cost and risk associated with carrying inventory and the risk of
inventory obsolescence. The Company also allows niche market and high traffic
Web sites to become online retailers at minimal cost.

BENEFITS TO END-USERS. Digital River's solution emphasizes convenience by
allowing end-users to purchase and receive software products online distributed
through ESD twenty-four hours a day, seven days a week ("24x7"), from their home
or office. End-users are not required to make a trip to the store, can act
immediately on a purchase impulse, and can locate software products that are
difficult to find. Because Digital River has a global reach, it can deliver an
extremely broad selection to end-users in rural, international or other
locations that cannot support retail stores. Software products purchased online
can either be quickly and conveniently downloaded and installed through ESD or
delivered physically. Using the Company's sophisticated search engine
technology, end-users visiting retailers' online Web stores can access virtually
all of Digital River's inventory of more than 123,000 software products.
End-users also benefit from the protection of Digital River's archiving service,
through which the Company guarantees replacement of software in the event of
accidental destruction through computer error or malfunction. End-users also
benefit from Digital River's 24x7 ESD support and readily available upgrades.

STRATEGY

The Company's objective is to become the leading provider of comprehensive
electronic commerce outsourcing solutions to software publishers and online
retailers. The Company intends to achieve its objective through the following
key strategies:

DEVELOP AND EXPAND RELATIONSHIPS WITH SOFTWARE PUBLISHERS. The Company
plans to continue to build its inventory of software products through additional
contractual relationships with software publishers. As of June 30, 1998, the
Company had signed contracts with 1,122 software publishers, representing more
than 123,000 software products and 870 Web stores. The Company believes that its
ability to develop Web hosting relationships with its software publisher clients
increases its reach to end-users and provides the basis for a long term
relationship with its software publisher clients. The Company further believes
that the large number of software products offered by the Company from its
software publisher clients will be critical to the Company's ability to deliver
a compelling inventory of products to online retailer clients.

AGGRESSIVELY EXPAND NETWORK OF ONLINE RETAILERS. The Company believes that
by increasing the number of points of entry to its CNS, Digital River will
increase the number of transactions over its

31
<PAGE>

network. Accordingly, in addition to expanding and developing relationships with
software publishers, the Company seeks to expand aggressively its network of
online retailer clients. Online retailer clients include traditional store-based
and mail order retailers with a Web presence, online retailers dedicated to
online commerce, as well as high traffic or niche Web site operators desiring to
add electronic commerce functionality. The Company had contracts with 346 online
retailers as of June 30, 1998. The Company's model enables it to leverage its
clients' marketing resources to direct traffic to its software distribution
network. The Company expects online retailers to represent an increasing
percentage of its sales.

PROVIDE COMPLEMENTARY SOLUTIONS. Digital River intends to continue to be a
neutral provider of cost-effective outsourcing solutions that complement the
business models of its software publisher and online retailer clients. The
Company does not maintain its own branded Web store. Instead, the Company
provides an outsourcing solution that enables its clients to promote their own
brands while leveraging Digital River's investment in infrastructure and
technology. Digital River therefore leverages its clients' investments in their
brands to generate sales. The Company may co-invest with its clients from time
to time to help drive traffic to its clients' Web stores and to Digital
River-assisted transactions.

PROVIDE CLIENTS VALUE-ADDED SERVICES. The Company believes its growing data
warehouse of end-user purchasing information provides it with a powerful tool to
assist clients with value-added services, such as targeted advertising,
promotions and direct response merchandising. The Company offers merchandising
and marketing programs, customer support and communications programs,
advertising placement services, and Web store design services. The Company
intends to continue to expand its programs and believes that these programs help
build stronger partnerships with its software publisher and online retailers,
while enabling its clients to increase sales of software on their sites.

MAINTAIN TECHNOLOGY LEADERSHIP. The Company believes that its CNS
technology has given it a competitive advantage in the market for ESD
outsourcing solutions. The Company will continue to invest in and enhance its
CNS technology in order to increase redundancy, reliability and bandwidth, to
expand services and to reduce costs. By leveraging its fixed-cost
infrastructure, Digital River will improve its ability to provide low cost, high
value services to its clients while utilizing the latest technology.

EXPAND INTERNATIONALLY. Digital River will continue to expand
internationally to gain access to additional software publishers, online
retailers and end-users. The Company intends to replicate its domestic strategy
by building its inventory of international and foreign language software
products and expanding its distribution through software publishers and online
retailers. The Company believes that significant opportunities exist
internationally to increase sales and to further leverage its scaleable
infrastructure.

SERVICES

The Company provides a broad range of services to its software publisher and
online retailer clients, including Web store hosting, ESD, physical fulfillment
and merchandising services.

WEB STORE HOSTING. The Company hosts the Web stores for all of its online
retailer clients and for those software publisher clients that choose this
option. The Company's outsourcing solution is mission-critical for many of its
software publisher and online retailer clients. Therefore, the Company has a
data center that is designed to provide its clients with the performance they
require for continuous Web store operations. The data center features redundant,
high speed connections to the Internet, 24x7 security and monitoring, back-up
generators and dedicated power.

Digital River can quickly and efficiently create Web stores for its clients,
which can be accessed easily by clicking on a "buy button" on a client's
existing Web site. The end-user is then transferred to a Web store hosted on
Digital River's CNS, which replicates the look and feel of the client Web site.
The end-user can then shop for products and make purchases online. By
replicating the look and feel of its clients' Web sites, Digital River supports
clients in conducting electronic commerce under their own brands. Digital
River's solution allows clients to choose either ESD or physical delivery, and
clients also benefit from Digital River's 24x7 ESD customer support and
archiving services. The transaction information is captured

32
<PAGE>
and added to Digital River's data warehouse. The Company's ability to retrieve
and manipulate this information creates a powerful data mining tool, which can
be used for targeted merchandising to end-users through e-mails, banner
presentations and special offers.

ESD SERVICES. The Company offers clients access to its ESD capabilities to
permit delivery of software products to an end-user's computer via the Internet.
ESD eliminates many of the costs that exist in the physical distribution chain,
such as manufacturing, packaging, shipping, warehousing and inventory carrying
and handling costs. Delivery is fulfilled when a copy is made from the master on
the Company's CNS and is then securely downloaded to the end-user via the
Internet. Digital River's ESD distribution model not only reduces costs, thereby
increasing margins available to software publishers and online retailers, but
also solves the shelf space problem constraining product availability and sales.
While most software publishers use the Company's Web hosting services, certain
software publishers use only the Company's ESD services, which provide them with
online distribution through the Company's extensive network of online retailers.

PHYSICAL FULFILLMENT SERVICES. In addition to distribution through ESD, the
Company offers clients physical distribution services. The Company maintains an
inventory of physical products, generally on consignment from its clients that
select this option, for shipment to end-users. The Company believes physical
fulfillment services are important to its ability to provide a comprehensive
electronic commerce outsourcing solution.

MERCHANDISING SERVICES. The Company offers a range of merchandising
services to its clients to help them drive additional traffic to their Web
stores. Software publisher and online retailer clients are provided with
detailed electronic and hard copy reports of transactions on their Web stores,
as well as end-user marketing information about visits to their Web stores. The
CNS captures Web page visits, banner and pricing information and other data that
can be used by the software publishers and online retailers to analyze their Web
stores' success.

The Company also offers advanced merchandising services to assist software
publishers and online retailers in increasing response rates for their marketing
efforts. These services include e-mail campaigns for special promotions, upgrade
notification programs, and the presentation of complementary products, bundled
products or other programs designed to increase average order size based on a
targeted end-user profile. The Company participates in co-op dollar and market
development fund programs with its clients and buys selected banner placements
in bulk to support clients' promotional campaigns. In addition, Digital River
tests and analyzes merchandising techniques, such as promotional pricing and
banner advertising, based on information gathered in the CNS data warehouse.

CLIENTS

The Company distributes software products through a network of software
publishers and online retailers. Online retailer clients include traditional
store-based and direct mail retailers with a Web presence, online retailers
dedicated to online commerce, as well as high traffic or niche Web site
operators desiring to add electronic commerce functionality. In a typical online
retailer contract, the Company is responsible for (i) a payment to the online
retailer based on a percentage of net sales of software products that the
Company distributes through the online retailer's Web site, (ii) the processing
of payments made by end-users, (iii) the delivery of the software products to
end-users, (iv) the payment of applicable credit card transaction fees, (v) the
payment and filing of applicable sales taxes and (vi) the distribution of a
report to the online retailer detailing sales activity processed by the Company.
The Company expects to support traditional physical retailers in developing
their online stores for the sale of software products online. While most
software publishers use the Company's Web hosting services, certain software
publishers use only the Company's ESD services, which provide them with online
distribution through the Company's extensive network of online retailers. In a
typical software publisher contract, the Company is responsible for (i) the
maintenance of master copies of software products in a secure format for
distribution to end-users, (ii) a payment to the software publisher for the cost
of software products that the

33
<PAGE>

Company distributes through either a retailers' Web site or through the
publisher's host Web site, (iii) the processing of payments made by end-users,
(iv) the delivery of software products to end-users, (v) the payment of
applicable credit card transaction fees, (vi) the payment and filing of
applicable sales taxes and (vii) the distribution of a report to the software
publisher detailing sales activity processed by the Company.

As of June 30, 1998, the Company had 1,122 contracts with software
publishers and 346 contracts with online retailers. Typically, there is some
delay between signing contracts and gathering the necessary materials to bring a
new client online. As of June 30, 1998, the Company had 920 software publishers
and 239 online retailers connected to its CNS. During the six-month period ended
June 30, 1998, the Company completed transactions for 787 software publishers
and 112 online retailers. The Company's clients include:

<TABLE>
<CAPTION>
SOFTWARE PUBLISHERS ONLINE RETAILERS
- ------------------------------------------------ ---------------------------
<S> <C>
WEB HOSTING AND ESD SERVICES Babbage's, Etc. LLC
Corel Corporation BuySafe, Inc.
Dragon Systems, Inc. Channel MarketMakers
Extensis Corporation Cyberian Outpost, Inc.
JASC, Inc. Damark International, Inc.
Ulead Systems, Inc. Micro Warehouse, Inc.
Shopping.com
ESD SERVICES ONLY Software Warehouse plc
Cendant Corporation Planet Direct
Lotus Development Corporation US WEST Internet
Network Associates, Inc.
QUALCOMM Incorporated
Symantec Corporation
</TABLE>

Revenues attributable to sales of software products of Corel Corporation
accounted for 18% and 15% of the Company's sales for the year ended December 31,
1997 and the six months ended June 30, 1998, respectively. Revenues attributable
to sales of software products of JASC, Inc. accounted for 10% of the Company's
sales for the six months ended June 30, 1998.

SALES AND MARKETING

The Company markets its services directly to software publishers and online
retailers. The Company does not operate its own Web store because of its
strategy to serve as a neutral provider of electronic commerce outsourcing
solutions. This strategy allows the Company to avoid competing with its clients.
Generally, the Company's direct marketing to end-users focuses on supporting the
marketing and promotional efforts of its clients in driving traffic to their Web
stores. This direct marketing effort leverages the Company's extensive data
warehouse, which enables the Company to create and quickly implement marketing
programs targeted at specific end-user segments. By providing consistent quality
service, branding client order pages with its name and logo, billing credit card
transactions under the Digital River name and engaging in brand positioning,
advertising and promotion, the Company intends to establish the Digital River
brand as a trusted name for ESD and electronic commerce outsourcing solutions
among software publishers, online retailers and end-users.

The Company's sales and marketing organization is divided into three groups:
the Strategic Sales Group, the Product Management Group and the Account
Development Group. The Strategic Sales Group focuses on large software
publishers and online retailers, including traditional physical retailers, with
significant online revenue potential. These sales are typically complex in
nature and involve a lengthy sales cycle. The Product Management Group focuses
on all other software publishers and online retailers. Generally, these sales
involve a much shorter sales cycle, are managed primarily through a telesales
effort and result in the new client selecting one of the Company's standard
programs. The Account Development

34
<PAGE>

Group serves existing clients and provides them with merchandising and database
marketing assistance designed to increase revenues. As of June 30, 1998, the
Company had 28 employees engaged in sales and marketing. See "Risk
Factors--Client Concentration; Lengthy Sales Cycle."

The Company currently markets its services to clients via direct marketing,
print advertising, trade show participation and other media events. The Company
plans to increase its expenditures on direct marketing and print advertising, as
well as introducing online advertising efforts directed at potential clients.

TECHNOLOGY

Digital River delivers its electronic commerce outsourcing solution using
its proprietary CNS technology, which enables the sale and distribution of
software products via the Internet.

ARCHITECTURE. The Company's scaleable CNS is designed to handle tens of
thousands of different Web stores and millions of software products. The CNS
consists of a pool of network servers and a proprietary software application
that serves dynamic Web pages using an Oracle database. The Company's CNS was
designed to scale to support growth by adding CPUs, memory, disk drives and
bandwidth without substantial changes to the application. The CNS software code
is written in modular layers, enabling the Company to quickly adapt in response
to industry changes, including bandwidth opportunities, payment processing
changes, international requirements for taxes and export screening, new
technologies such as Java, XML, DHTML, VRML, SET, banking procedures and
encryption technologies. The CNS product search system allows end-users to
search for items across millions of potential products and thousands of
categories specific to various product specifications, while maintaining a fast
page response that is acceptable to the end-user. The Company uses sophisticated
database indexing coupled with a dynamic cache system to provide flexibility and
speed. These caches help increase the overall speed of each page and facilitate
complex searches across the entire inventory of software products. The CNS has
also been designed to index, retrieve and manipulate all transactions that flow
through the system, including detailed commerce transaction and end-user
interaction data. This enables the Company to create proprietary market profiles
of each end-user and groups of end-users that can be used to create
merchandising campaigns. The Company's CNS is also used for internal purposes,
including reporting and maintenance for fraud detection and prevention, physical
shipping, return authorizations, back order processing and full transaction
auditing and reporting capabilities for all commerce functions.

WEB STORE MAINTENANCE. Clients' Web stores are built and maintained using
the CNS centralized management system. Global changes that affect all Web stores
or groups of Web stores can be made as easily as changes to an individual Web
store. Client Web stores include a main store and may optionally include several
"focus stores" and "channel sites" to which highly targeted traffic may be
routed. Clients may also link specific locations on their Web stores to detailed
product or category areas of the stores, in order to better target their
end-users' interests.

SECURITY. Digital River's security systems apply both to access to internal
systems and to illegal access to commerce data via the Internet. Internally,
logins and passwords are maintained for all systems, with additional logins,
passwords and IP access control granted on an individual basis to only the
required commerce areas the person is responsible for. Firewalls prevent
unauthorized access from outside. The Company relies on certain encryption and
authentication technology licensed from third parties to provide secure
transmission of confidential information, such as end-user credit card numbers.
Unix, Oracle and Web server security additionally restrict access from the
outside to the appropriate transaction data. The CNS security system is designed
not to interfere with the end-user experience. Product wrappers, clearing-house
processing, and additional password mechanisms that negatively impact ESD
performance are not needed. The CNS security system never allows direct access
to the clients' products and ensures that an end-user requests ESD through a
valid page and has purchased the product. See "Risk Factors-- Electronic
Commerce Security Risks."

35
<PAGE>
DATA CENTER OPERATIONS. Continuous data center operations are crucial to
the Company's success. All transaction data is backed up periodically and all
inventory data is archived and kept in fireproof storage facilities. The
Company's network software constantly monitors clients' Web stores and internal
system functions and notifies systems engineers if any unexpected conditions
arise. The Company currently leases four T1 lines from multiple vendors and
maintains a policy of adding additional lines if more than 50% of its bandwidth
capacity is utilized. Accordingly, if one line fails the other lines are able to
assume the capacity of the failed line. The Company's data center is located in
a single location in Edina, Minnesota. The data center currently incorporates
redundant systems consisting of additional servers and arrays. The Company
currently has no automatic switchover, although it has plans to implement
further redundancy in the future. See "Risk Factors--Risk of Capacity
Constraints; Limited Redundant Systems; System Development Risks."

PRODUCT DEVELOPMENT

Digital River's product development strategy is to enhance the technology
and features of its CNS. To this end, the Company has numerous development
projects in process including, but not limited to, recoverable downloading,
Internet optimization tools, end-user profiling and collaboration technologies
and online interactive customer service. Product development and operations
expenses (which include customer service, data center operations and
telecommunications infrastructure) were $130,000, $230,000, $1.5 million and
$1.6 million in 1995, 1996, 1997 and the first six months of 1998, respectively.
As of June 30, 1998, the Company employed 21 persons in product development.

To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the CNS and the underlying network
infrastructure. The Internet and the online commerce industry are characterized
by rapid technological change, 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 the Company's existing CNS proprietary technology and systems
obsolete. The Company's success will depend, in part, on its ability to both
license and internally develop leading technologies useful in its business,
enhance its existing services, develop new services and technology that address
the increasingly sophisticated and varied needs of its clients, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of the CNS technology and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully use new technologies
effectively or adapt its proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. If the Company
is unable, for technical, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions, client requirements or emerging
industry standards, its business, financial condition and results of operations
could be materially adversely affected. See "Risk Factors--Rapid Technological
Change."

COMPETITION

The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future,
particularly in the area of electronic sale and distribution of software
products. The Company currently competes directly with other providers of
electronic commerce solutions, including CyberSource Corporation, Preview
Software Corporation, Release Software Corporation and TechWave, Inc. The
Company also competes indirectly with software companies that offer tools and
services for electronic commerce, including companies that provide a broad range
of Internet and server solutions such as Microsoft Corporation and Netscape
Communications Corporation, as well as a large number of companies that provide
tools and services enabling one or more of the transaction processing functions
of electronic commerce, such as transaction control, data security, customer
interaction and database marketing. In addition to direct competition with other
transaction processing providers and enablers and indirect competition with
other providers of electronic commerce software and systems, the Company also
competes with companies that sell and distribute software products via the
Internet, including online retailers such as CNET, Inc., Ingram Micro Inc. and
software.net Corporation, as well as

36
<PAGE>
companies such as AltaVista (a subsidiary of Digital Equipment Corporation),
America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc. and Yahoo!
Inc., which specialize in electronic commerce or derive a substantial portion of
their revenues from electronic commerce and may themselves offer, or provide
means for others to offer, software products.

INTELLECTUAL PROPERTY

The Company regards trademarks, copyrights, trade secrets and other
intellectual property as critical to its success, and relies on trademark, trade
secret protection and confidentiality and/or license agreements with its
employees, clients, partners and others to protect its proprietary rights. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
proprietary technology, inventions and improvements that are important to the
development of its business. Proprietary rights relating to the Company's
technologies will be protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or are
effectively maintained as trade secrets. While the Company currently has twelve
patent applications pending in the United States, none have yet been issued and
there can be no assurance that any pending patent applications now or hereafter
filed by, or licensed to, the Company will result in patents being issued. The
Company has filed certain petitions to correct certain fee deficiencies for its
pending patent applications and there can be no assurance that such petitions
can be granted or that the Company will elect to pursue these applications. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves complex legal
and factual questions and, therefore, their validity and enforceability cannot
be predicted with certainty. There can be no assurance that any of the Company's
patent applications, if issued, will not be challenged, invalidated, held
unenforceable or circumvented, or that the rights granted thereunder will
provide proprietary protection or competitive advantages to the Company against
competitors with similar technology. Furthermore, there can be no assurance that
others will not independently develop similar technologies or duplicate any
technology developed by the Company. The Company has one registered trademark
for "Digital River." Effective trademark and trade secret protection may not be
available in every country in which the

37
<PAGE>
Company's products and services are made available online. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's trade secrets, trademarks, trade dress and similar proprietary rights.
In addition, there can be no assurance that others will not independently
develop substantially equivalent intellectual property. A failure by the Company
to protect its intellectual property in a meaningful manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
management and technical resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations.

EMPLOYEES

As of June 30, 1998, the Company employed 76 people, including eight in
administration, 40 in product development and operations and 28 in sales and
marketing. The Company also employs independent contractors and other temporary
employees. None of the Company's employees is represented by a labor union, and
the Company considers its employee relations to be good. Competition for
qualified personnel in the Company's industry is intense, particularly among
software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire and
retain qualified personnel.

FACILITIES

The Company currently leases approximately 6,400 and 7,000 square feet of
office and warehouse space, respectively from Tech Squared in Edina, Minnesota.
Obligations under the lease from Tech Squared will continue through December 31,
1998 or until a party is found to sublease the office space, whichever is
earlier. The Company will continue to pay for warehouse space from Tech Squared
as long as it continues to utilize any of the space. Rent for the warehouse
space will be calculated pursuant to a formula based on square footage utilized.
The Company has also entered into a sublease agreement, effective July 15, 1998,
for approximately 32,900 square feet of office and warehouse space in Eden
Prairie, Minnesota. This sublease agreement expires on July 31, 2003. The
Company believes that its facilities will be adequate to accommodate the
Company's needs for the foreseeable future.

LEGAL PROCEEDINGS

From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. The Company presently is
not subject to any material legal proceedings.

38
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information regarding the Company's executive
officers, key employees and directors as of June 30, 1998.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Joel A. Ronning.................... 42 President, Chief Executive Officer and Director
Robert E. Strawman................. 38 Chief Financial Officer and Treasurer
Kelly J. Wical..................... 41 Chief Technology Officer
Draper M. Jaffray.................. 36 Vice President of Business Development
Gregory R.L. Smith................. 31 Secretary and Controller
Randy J. Womack.................... 34 Chief Information Officer
Timothy C. Choate.................. 33 Director
Thomas F. Madison (1)(2)........... 62 Director
Charles E. Reese, Jr............... 44 Director
Christopher J. Sharples............ 51 Director
Perry W. Steiner (1)(2)............ 32 Director
J. Paul Thorin (1)(2).............. 54 Director
</TABLE>

- ------------------------

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

Mr. Ronning founded the Company in February 1994 and has been President and
Chief Executive Officer and a director of the Company since that time. Since May
1995, Mr. Ronning has served as Chairman of the Board of Directors of Tech
Squared, a direct catalog marketer of software and hardware products. From May
1995 to July 1998, Mr. Ronning served as Chief Executive Officer, Chief
Financial Officer and Secretary of Tech Squared. From May 1995 to August 1996,
Mr. Ronning also served as the President of Tech Squared. Mr. Ronning is the
founder of MacUSA, Inc., a wholly-owned subsidiary of Tech Squared, and has
served as a director and Chief Executive Officer of MacUSA, Inc. since April
1990. Mr. Ronning also serves as a director of the Software Publishers
Association.

Mr. Strawman joined the Company in April 1998 as Chief Financial Officer and
Treasurer. From September 1995 to April 1998, Mr. Strawman served as Director of
Finance and Vice President of Finance for Caribou Coffee Company, Inc., a
gourmet coffee retailer. From 1989 to 1995, Mr. Strawman held various financial
positions at Software Etc. Stores, Inc., a specialty retailer of software, most
recently as Chief Financial Officer.

Mr. Wical joined the Company in April 1997 as Chief Technology Officer. From
1992 to April 1997, Mr. Wical was Director of Development and Chief
Scientist/Architect of the ConText Server Division of Oracle Corporation. From
1987 to 1992, Mr. Wical was co-founder and Vice President of Research and
Development for Artificial Linguistics, Inc., a developer of text management
software.

Mr. Jaffray joined the Company in December 1996 as Vice President of
Business Development. From January 1996 to December 1996, Mr. Jaffray was a
partner in The Firm, a computer products manufacturers representative. From 1991
to 1995, Mr. Jaffray served as Director of Sales for Tech Squared.

Mr. Smith joined the Company as Controller in June 1997 and has served as
Secretary and Controller since December 1997. From November 1995 to June 1997,
Mr. Smith was Manager, External Reporting and Investor Relations at Secure
Computing Corporation, a developer of network and Internet security products.
From June 1988 to November 1995, Mr. Smith held various positions with Ernst &
Young LLP.

Mr. Womack joined the Company in October 1997 as Chief Information Officer.
From May 1997 to September 1997, Mr. Womack was Director of Engineering at Xerox
Corporation. From 1992 to 1997,

39
<PAGE>
Mr. Womack held various positions, including Development Manager at Oracle
Corporation. From 1989 to 1992, Mr. Womack was Director of Technical Services at
Artificial Linguistics, Inc.

Mr. Choate has served as a director of the Company since May 1998. Mr.
Choate has been Chairman of FreeShop International, Inc. since its inception in
June 1997 and has been President and Chief Executive Officer since March 1998.
Mr. Choate co-founded Online Interactive, Inc., the original parent company of
FreeShop International, Inc., in June 1994, and served as President, Chief
Executive Officer and Chairman until February, 1997 and Chairman until July
1997. Mr. Choate served as a Vice President of Micro Warehouse, Inc. from July
1997, when it acquired Online Interactive, Inc., until February 1998. From
February 1991 to May 1994, Mr. Choate held various positions at Softdisk
Publishing, LLC, most recently as President. From February 1989 until February
1991, Mr. Choate was a Senior Marketing Manager at Prodigy Services Company.

Mr. Madison has served as a director of the Company since August 1996. Since
January 1993 he has been the President and Chief Executive Officer of MLM
Partners, a consulting and small business investment company. From February 1994
to September 1994, Mr. Madison served as Vice Chairman and Chief Executive
Officer at Minnesota Mutual Life Insurance Company. From June 1987 to December
1992, Mr. Madison was President of US WEST Communications Markets, a division of
US WEST, Inc. Mr. Madison also serves on the Boards of Directors of Valmont
Industries Inc., Eltrax Systems, Inc., Minnegasco Division of Houston
Industries, ACI Telecentrics, Span Link Communications and Delaware Group of
Funds.

Mr. Reese has served as a director of the Company since July 1996. In August
1996, Mr. Reese joined Tech Squared, Inc. as President and Chief Operating
Officer and has served as a director of Tech Squared since April 1996. From
April 1995 to August 1996, Mr. Reese served as Vice President of Sales and
Marketing for the Weidt Group, Inc., a privately-held custom software
development firm specializing in Internet Web site design and development. From
July 1987 to April 1995, Mr. Reese served as Vice President of Sales at
Lasermaster Corp., a manufacturer and seller of high-resolution plain paper
typesetters, chemical-free image setters and large format color printers.

Mr. Sharples has served as a director of the Company and Digital River Ltd.,
a wholly-owned subsidiary of the Company, since April 1998. Since 1973, Mr.
Sharples has served as a director of GNI Ltd., a firm specializing in the
derivatives market, which he co-founded in 1972. Since 1995, Mr. Sharples has
been Chairman of Lombard Street Research, an economic research firm. Since
November 1996, Mr. Sharples has been the Chairman of Datastream International
Ltd., a supplier of on-line historical financial and economic information to
investment professionals. Since 1981, Mr. Sharples has been the Chairman of ICV
Ltd, a financial information company. Both Datastream International Ltd. and ICV
Ltd. are subsidiaries of Primark Corporation, a information services company.
From 1987 to 1995, Mr. Sharples was Chairman of the Association of Futures
Brokers & Dealers and the Securities and Futures Authority, front line
regulatory organizations designated under the laws of Great Britain.

Mr. Steiner has served as a director of the Company since April 1998. In
January 1997, Mr. Steiner joined Wasserstein Perella & Co., Inc., an investment
banking firm, as Vice President and currently serves as Vice President of
Wasserstein Perella Ventures, Inc., the general partner of Wasserstein, Adelson
Ventures, L.P., a venture capital fund. From June 1993 to December 1996, Mr.
Steiner was a principal of TCW Capital, a group of leveraged buyout funds
managed by Trust Company of the West.

Mr. Thorin has served as a director of the Company since June 1996. Since
April 1996, Mr. Thorin has served as Vice President and General Counsel of
Fujitsu America Inc., a subsidiary of Fujitsu Limited and since June 1997 as its
Vice President and General Counsel. From April 1990 to March 1996, Mr. Thorin
held the position of Associate Corporate Counsel of Fujitsu America Inc.

40
<PAGE>
BOARD COMPOSITION

The Company currently has authorized seven directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon the
closing of this offering, the terms of office of the Board of Directors will be
divided into three classes: the Class I term will expire at the annual meeting
of stockholders to be held in 1999; the Class II term will expire at the annual
meeting of stockholders to be held in 2000; and the Class III, term will expire
at the annual meeting of stockholders to be held in 2001. The Class I directors
will be Messrs. Madison and Reese, the Class II directors will be Messrs. Choate
and Sharples and the Class III directors will be Messrs. Ronning, Steiner and
Thorin. At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Company's Restated Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
the Company. Although directors of the Company may be removed for cause by the
affirmative vote of the holders of a majority of the Common Stock, the Company's
Restated Certificate of Incorporation provides that holders of two-thirds of the
Common Stock must vote to approve the removal of a director without cause. There
are no family relationships among any of the directors and executive officers of
the Company.

BOARD COMMITTEES

The Audit Committee consists of Messrs. Madison, Steiner and Thorin. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent public accountants, reviews the results and scope of
the audit and other services provided by the Company's independent public
accountants and reviews and evaluates the Company's control functions.

The Compensation Committee consists of Messrs. Madison, Steiner and Thorin.
The Compensation Committee administers the issuance of stock under the Company's
1998 Stock Option Plan, makes recommendations regarding the Company's various
incentive compensation and benefit plans and determines salaries for the
executive officers and incentive compensation for employees and consultants of
the Company.

DIRECTOR COMPENSATION

Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for certain expenses
incurred in connection with attendance at Board and Committee meetings. From
time to time, certain non-employee directors of the Company have received grants
of options to purchase shares of the Company's Common Stock. In June 1996, Mr.
Thorin was granted an option to purchase 13,333 shares of the Company's Common
Stock at an exercise price of $0.38 per share. In September 1996, Messrs.
Madison and Reese were granted options to purchase 53,333 and 13,333 shares of
the Company's Common Stock, respectively, each at an exercise price of $1.13 per
share. In April 1998, Messrs. Madison, Reese and Thorin were granted options to
purchase 1,867, 467 and 467 shares of the Company's Common Stock, respectively,
each at an exercise price of $3.00 per share. In May 1998, Mr. Choate was
granted an option to purchase 5,000 shares of the Company's Common Stock at an
exercise price of $3.00 per share. The Company may compensate non-employee
directors in the future for their attendance at Board and Committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to April 1998, the Company did not have a Compensation Committee of
the Board of Directors, and the entire Board participated in all compensation
decisions, except that Mr. Ronning did not

41
<PAGE>
participate in decisions relating to his compensation. In April 1998, the Board
formed the Company's Compensation Committee to review and recommend to the Board
the compensation and benefits for the Company's executive officers and
administer the Company's stock option plan. Certain of the Company's directors,
or affiliated entities, have purchased securities of the Company. See "Certain
Transactions" and "Principal Stockholders."

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1997 to the Company's Chief Executive Officer
and all other executive officers receiving compensation in excess of $100,000 in
fiscal 1997 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#)
- ---------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Joel A. Ronning ...................................................... $ 140,000 --
President and Chief Executive Officer
Draper M. Jaffray .................................................... 120,000 80,267
Vice President of Business Development
</TABLE>

- ------------------------

(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers which
are available generally to all salaried employees of the Company and certain
perquisites and other personal benefits received by the Named Executive
Officers, which do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding stock options granted
by the Company during the fiscal year ended December 31, 1997 to each of the
Named Executive Officers:

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
-------------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENTAGE OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION
UNDERLYING GRANTED IN EXERCISE TERM($)(4)
OPTIONS FISCAL 1997 PRICE --------------------------
NAME GRANTED(#)(1) (%)(2) ($/SH)(3) EXPIRATION DATE 5%($) 10%($)
- --------------------- ------------- --------------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning...... -- -- -- -- -- --
Draper M. Jaffray.... 80,000 16.1% $ 1.13 2/4/07 $ 1,343,427 $ 2,192,493
267 .1 1.69 6/26/07 4,334 7,167
</TABLE>

- ------------------------

(1) The options become exercisable at a rate of 25% on the first anniversary of
the vesting commencement date and 25% annually thereafter and expire ten
years from the date of grant, or earlier upon termination of employment.

(2) Based on an aggregate of 496,817 shares subject to options granted to
employees, directors of and consultants to the Company in the fiscal year
ended December 31, 1997, including the Named Executive Officers.

42
<PAGE>
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.

(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers. The potential realizable value is calculated by assuming
that the assumed initial public offering price of $11.00 per share
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price. The potential realizable value
computation is net of the applicable exercise price, but does not take into
account applicable federal or state income tax consequences and other
expenses of option exercises or sales of appreciated stock.

RECENT OPTION GRANTS. Since December 31, 1997, the Company has granted
options to purchase 433,333, 80,000 and 26,667 shares of Common Stock, each at
an exercise price of $3.00 per share, to Messrs. Ronning, Strawman and Wical,
respectively. With the exception of the grant to Mr. Ronning which becomes
exercisable at a rate of 25% on the date of grant and 18.75% annually
thereafter, all grants made to the above executive officers become exercisable
at a rate of 25% on the first anniversary of the vesting commencement date and
25% annually thereafter.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1997 YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the Named
Executive Officers at December 31, 1997:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE- MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE ------------------------------ --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE($) EXERCISABLE($) UNEXERCISABLE($)
- --------------------- ------------- ----------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning...... -- -- 160,000 53,333 $1,700,000 $ 566,663
Draper M. Jaffray.... -- -- 20,000 60,267 197,500 595,000
</TABLE>

- ------------------------

(1) Value of unexercised in-the-money options are based on a value of $11.00 per
share, the assumed initial public offering price minus the per share
exercise price, multiplied by the number of shares underlying the option.

EMPLOYMENT AGREEMENT

In May 1998, the Company entered into an employment and non-competition
agreement (the "Employment Agreement") with Joel A. Ronning, the Company's
President and Chief Executive Officer. The term of the Employment Agreement is
for a period of two years (the "Expiration Date") with automatic one-year
renewals if not terminated prior to the Expiration Date (as extended in
connection with any renewed term). Mr. Ronning's compensation pursuant to the
Employment Agreement consists of a base salary of $140,000 per year, with an
increase to not less than $225,000 upon the successful completion of the
Company's initial public offering. In addition, in 1998, Mr. Ronning will
receive a bonus consisting of (i) 50% of his base salary upon the successful
completion of the Company's initial public offering and (ii) 50% of his base
salary upon the Company achieving certain revenue milestones in 1998. Future
annual bonuses will be determined at the discretion of the Board. In the event
of Mr. Ronning's termination under certain circumstances, including termination
upon a change in control of the Company, he will be entitled to termination
payments equal to his base salary at the time of termination plus a weighted
three year average of his annual bonus amount. In addition, any unvested and
unexercised stock options held by Mr. Ronning will immediately vest and become
exercisable. Mr. Ronning has also agreed

43
<PAGE>
not to compete with the Company, for a period of twelve months following
termination under certain circumstances, in countries or territories where the
Company conducts business.

EMPLOYEE BENEFIT PLANS

1998 STOCK OPTION PLAN. The Company's 1998 Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors in June 1998 as an amendment and
restatement of the Amended and Restated 1994 Stock Option Plan which had been
adopted in December 1997. There is currently an aggregate of 2,333,333 shares of
Common Stock authorized for issuance under the Option Plan.

The Option Plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee-directors) of the Company and its
affiliates. The Option Plan also provides for the grant of nonstatutory stock
options to such employees as well as to directors and consultants of the Company
and its affiliates.

The Board (or a Committee appointed by the Board) administers the Option
Plan and determines both the recipients of options and the type of options to be
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof. The terms of options granted under the Option
Plan generally may not exceed 10 years. While the Board determines the exercise
price of options, the exercise price for an incentive stock option may not be
less than 100% of the fair market value of the Common Stock on the date of the
option grant. Options vest at the rate specified in the option agreement.

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. In addition, the aggregate
fair market value, determined at the time of grant, of the shares of Common
Stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under the Option Plan and
all other option plans of the Company and its affiliates) may not exceed
$100,000.

When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no employee may be granted options under the Option Plan
covering more than 333,333 shares of Common Stock in any calendar year.

If there is any sale of all or substantially all of the Company's assets,
any merger, any reverse merger or any consolidation in which the Company is not
the surviving corporation, any surviving entity may assume or substitute for all
outstanding options under the Option Plan. If the surviving entity does not do
so, the vesting and exercisability of options held by persons still serving the
Company or an affiliate will be accelerated. However, if the Company and the
other party to such transaction agree that such transaction is to be treated as
a "pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the accelerated vesting of options will
not occur to the extent that the Company's independent public accountants and
such other party's independent public accountants separately determine in good
faith that such acceleration would preclude the use of "pooling of interests"
accounting. In any event, all options will terminate if not exercised prior to
such sale of assets, merger, reverse merger or consolidation.

If there is an acquisition by certain persons, entities or groups of 50% or
more of the Company's stock, then the exercisability and vesting of options held
by persons still serving the Company or an affiliate also will be accelerated
but the options will not automatically terminate if not exercised prior to such
acquisition (unless such options otherwise expire by their terms).

Generally, an optionee may not transfer an option other than by will or the
laws of descent or distribution. An optionee whose service to the Company and
its affiliates ceases for any reason (other than by death or permanent and total
disability) may exercise an option, as to vested shares, in the three-month

44
<PAGE>
period following such cessation (unless such option expires sooner or later by
its terms). An optionee may exercise an option, as to vested shares, for up to
one year after the optionee's service to the Company and its affiliates ceases
due to death or disability (unless such option expires sooner or later by its
terms).

Shares subject to options that have expired or otherwise terminated without
having been exercised in full again become available for the grant of options
under the Option Plan.

As of the date of this Prospectus, there has been no exercise of options
granted under the Option Plan, options to purchase 1,532,087 shares of Common
Stock were outstanding and 801,246 shares remained available for future grant.
The Option Plan will terminate in June 2008 unless sooner terminated by the
Board.

401(K) PLAN. In 1997, the Company established a defined contribution
retirement plan (the "401(k) Plan") covering all employees of the Company
meeting minimum age and service requirements. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
15% of their annual compensation or the statutorily prescribed annual limit
allowable under Internal Revenue Service Regulations and to have that amount
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions by the Company on behalf of all participants
in the 401(k) Plan. The Company currently provides a matching contribution of
50% of an employee's contribution on an annual basis. Company matching
contributions vest 100% upon completion of two years of service by the employee.
The 401(k) Plan is intended to qualify under Section 401(k) of the Code so that
contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and that contributions by the Company will be deductible by the
Company when made. The trustee of the 401(k) Plan invests the assets of the
401(k) Plan at the direction of each participant based on certain investment
options.

INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY

The Company's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for
(i) any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit. Such limitation of liability does
not apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by law. The Company's Bylaws also permit it to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
Bylaws would permit indemnification. The Company has obtained officer and
director liability insurance with respect to liabilities arising out of certain
matters, including matters arising under the Securities Act.

The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.

45
<PAGE>
CERTAIN TRANSACTIONS

TRANSACTIONS WITH TECH SQUARED, INC.

Joel A. Ronning is currently the Chairman of the Board of Directors of Tech
Squared, Inc. and owns approximately 49% of Tech Squared's outstanding Common
Stock as of June 30, 1998. In December 1995, Mr. Ronning issued an option to
MacUSA, Inc., a wholly owned subsidiary of Tech Squared, to purchase 3,200,000
shares of the Company's Common Stock held by him for $1.00. The option is not
transferable and is exercisable at any time through December 31, 2000. During
the term of the option, Mr. Ronning has agreed to vote the 3,200,000 shares as
directed by the Board of Directors of MacUSA, Inc. In addition, MacUSA, Inc. has
agreed to reimburse Mr. Ronning for any tax liability that he may incur in
connection with the transfer of the option or the shares of Digital River stock
issuable upon exercise thereunder. If MacUSA, Inc. exercises its option to
purchase Mr. Ronning's interest in Digital River, it will own approximately
18.92% of the outstanding capital stock of the Company after the completion of
this offering. In addition, some of Mr. Ronning's time is spent fulfilling his
duties as Chairman of the Board of Directors of Tech Squared.

Mr. Reese, a director of the Company, is also President and Chief Operating
Officer of Tech Squared.

Tech Squared currently provides office and warehouse space and certain
administrative, financial and software product fulfillment services for the
Company. Charges for these services totalled approximately $168,000 and $171,000
for fiscal 1997 and the six months ended June 30, 1998, respectively.

TRANSACTIONS WITH FUJITSU LIMITED

Fujitsu Limited ("Fujitsu"), which will own approximately 12.97% of the
outstanding capital stock of the Company after the completion of this offering,
purchased 2,133,333 shares of Common Stock for $800,000 pursuant to a Stock
Purchase Agreement between the Company and Fujitsu, dated August 1994 (the
"Stock Purchase Agreement"). Under the terms of the Stock Purchase Agreement and
related agreements, Fujitsu obtained certain rights and guarantees including,
but not limited to the following: a security interest in the Company's Common
Stock held by Mr. Ronning; covenants requiring Fujitsu's approval for certain
major business transactions and decisions; registration rights; right of first
refusal on future equity offerings of the Company; right to designate two
members of the Company's Board of Directors; a right of first refusal or an
option to purchase the Company's technology in the event of a bonafide third
party offer or change in control, respectively; and a perpetual, exclusive and
royalty-free license to use, develop, market and distribute certain encryption
technologies, unrelated to the current encryption technologies utilized by the
Company relating to ESD, in the Asia-Pacific region. Prior to the Modification
Agreement (as defined below), the covenants requiring Fujitsu's approvals for
certain major business transactions and decisions were to terminate in August
2001 and substantially all other rights, with the exception of the registration
rights and technology license, were to terminate following an initial public
offering or change in control.

In December 1997, Fujitsu and the Company entered into the Fujitsu
Modification Agreement (the "Modification Agreement") pursuant to which, in
exchange for receiving 60,000 shares of Common Stock, Fujitsu agreed to
relinquish its rights under the Stock Purchase Agreement (the "Prior Rights")
except for the right to (i) designate, provided that Fujitsu's ownership
percentage in the Company is not less than 10% and the Company has not initiated
a public offering, one member to the Company's Board of Directors, (ii) retain
its prior registration rights and (iii) retain a perpetual, exclusive and
royalty-free license to use, develop, market and distribute certain encryption
technologies, unrelated to the current encryption technologies utilized by the
Company relating to ESD, in the Asia-Pacific region. In addition, pursuant to
the terms of the Modification Agreement, the Company and Mr. Ronning agreed to
execute and deliver a non-competition agreement. See "Management--Employment
Agreement."

46
<PAGE>
Mr. Thorin, a director of the Company, is also Vice President and General
Counsel of Fujitsu America, Inc., a subsidiary of Fujitsu.

TRANSACTIONS WITH CHRISTOPHER J. SHARPLES

Christopher J. Sharples, a director and stockholder of the Company, has
purchased, in the aggregate, 1,234,666 shares of Common Stock for an aggregate
purchase price of $3,704,000 or $3.00 per share. Mr. Sharples will own
approximately 7.84% of the outstanding capital stock of the Company after the
completion of this offering. In addition, in February 1998, Mr. Sharples and
another stockholder (the "Sharples Team") have entered into a preliminary
agreement with the Company (the "International Agreement") whereby the Sharples
Team will help establish and oversee the international operations of the
Company, to be based in the United Kingdom, for a term of three years. As
consideration for their services, Mr. Sharples and the other stockholder each
received a warrant issuable for 100,000 shares of Common Stock, at a purchase
price of $3.00 per share. The International Agreement also requires the Company
to designate Mr. Sharples as a member of the Company's Board of Directors.

TRANSACTIONS WITH WASSERSTEIN, ADELSON VENTURES, L.P.

In April 1998, Wasserstein, Adelson Ventures, L.P. ("Wasserstein") purchased
1,500,000 shares of Series A Preferred Stock from the Company at a purchase
price of $2.00 per share. In connection with the purchase of the Series A
Preferred Stock, the Company issued to Wasserstein a warrant to purchase 50,000
shares of Common Stock at $3.00 per share. The Warrant can be exercised
immediately and expires in April 2003.

In connection with certain advisory services provided by Wasserstein to the
Company, the Company issued to Wasserstein a conditional warrant (the
"Conditional Warrant") that is exercisable, at any time after the date of the
Company's initial public offering and on or before the fifth anniversary of the
initial public offering. If the Company consummates its initial public offering
on or prior to December 31, 1998, the Conditional Warrant will represent the
right to purchase 100,000 shares of Common Stock at $3.00 per share. If the
Company consummates its initial public offering after December 31, 1998 but on
or prior to March 31, 1999 at a price per share greater than $22.50, then the
Conditional Warrant will represent the right to purchase 33,333 Shares of Common
Stock at $3.00 per share.

Each of the above warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant under certain circumstances including stock dividends, stock splits,
reorganizations, reclassifications and consolidations. Wasserstein is also
entitled to certain rights with respect to the registration of such shares
underlying the warrants under the Securities Act.

Mr. Steiner, a director of the Company is also Vice President of Wasserstein
Perella Ventures, Inc., the general partner of Wasserstein.

47
<PAGE>
OTHER TRANSACTIONS

Listed below are the directors, executive officers and five percent
stockholders who have acquired shares of the Company's Common Stock or Series A
Preferred Stock:

<TABLE>
<CAPTION>
SHARES OF
SHARES OF SERIES A
COMMON PREFERRED AGGREGATE
STOCK STOCK CONSIDERATION($)
------------ ---------- ---------------
<S> <C> <C> <C>
Tech Squared, Inc. (1)........................... 3,200,000 1
Fujitsu Limited (2).............................. 2,193,333 800,000
Wasserstein, Adelson Ventures, L.P. (3) (4)...... 150,000 1,500,000 3,001,250
Joel A. Ronning (1) (5).......................... 3,270,175 200,000
Robert E. Strawman............................... 2,666 7,600
Kelly J. Wical................................... 3,508 10,000
Draper M. Jaffray................................ 1,666 4,750
Gregory R.L. Smith............................... 2,400 6,840
Randy J. Womack.................................. 18,771 53,498
Thomas F. Madison................................ 33,333 95,000
Christopher J. Sharples (6)...................... 1,334,666 3,704,000
Perry W. Steiner (3) (4)......................... 150,000 1,500,000 3,001,250
</TABLE>

- ------------------------

(1) Includes 3,200,000 shares of Common Stock which MacUSA, Inc., a wholly-owned
subsidiary of Tech Squared, has the right to acquire, at a purchase price of
$1.00, from Mr. Ronning pursuant to the terms of a stock option agreement
entered into between Mr. Ronning and MacUSA, Inc. in December 1995.

(2) Includes 60,000 shares of Common Stock received as part of the Modification
Agreement as consideration to Fujitsu Limited for relinquishing the Prior
Rights.

(3) Share amounts shown for Wasserstein, Adelson Ventures, L.P. and Mr. Steiner
have been aggregated. See "Principal Stockholders."

(4) Includes 50,000 shares of Common Stock issuable, at a purchase price of
$3.00 per share, pursuant to a warrant purchased for $750 and 100,000 shares
of Common Stock issuable, at a purchase price of $3.00 per share, pursuant
to a conditional warrant purchased for $500. The shares of Series A
Preferred Stock will convert into 1,000,000 shares of Common Stock upon
consummation of the offering. See "Principal Stockholders."

(5) The Company issued 3,200,000 shares of Common Stock to Mr. Ronning in August
1994 as consideration for rights to certain technology contributed to the
Company by Mr. Ronning.

(6) Includes 541,666, 166,666 and 526,333 shares of Common Stock registered in
the name of Latour Trustees (Jersey) Limited, Latour Trustees (Jersey)
Limited and Mark Henry Murray as Trustees of the Murray 1987 Settlement and
Wilbro Nominees Limited, respectively. Of the 541,666 shares of Common Stock
registered in the name of Latour Trustees (Jersey) Limited, 41,666 of such
shares are held by Mr. Sharples' wife. Of the 526,333 shares of Common Stock
registered in the name of Wilbro Nominees Limited, 5,000 of such shares are
held by Mr. Sharples' children. Also, includes 100,000 shares of Common
Stock issuable, at a purchase price of $3.00 per share, pursuant to a
warrant issued to Mr. Sharples as consideration for entering into the
International Agreement.

The holder of the Company's Series A Preferred Stock and certain holders of
Common Stock are entitled to certain registration rights with respect to the
Common Stock issued or issuable upon conversion thereof. See "Description of
Capital Stock--Registration Rights."

48
<PAGE>
The Company intends to enter into indemnification agreements with its
directors and executive officers for the indemnification of and advancement of
expenses to such persons to the fullest extent permitted by law. The Company
also intends to execute such agreements with its future directors and executive
officers.

The Company believes that the foregoing transactions were in its best
interest and were made on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All future transactions between
the Company and any of its officers, directors or principal stockholders will be
approved by a majority of the independent and disinterested members of the Board
of Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes of the Company.

49
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by (i)
each of the Company's Named Executive Officers, (ii) each of the Company's
directors, (iii) each holder of more than 5% of the Company's Common Stock and
(iv) all current directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING
- ---------------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Joel A. Ronning (2) (3) .................................................... 3,591,841 25.59% 20.84%
c/o Digital River, Inc.
5198 West 76th Street
Edina, Minnesota 55439

Tech Squared, Inc. (3) ..................................................... 3,200,000 23.33 18.92
5198 West 76th Street, Suite 220
Edina, Minnesota 55439

Fujitsu Limited ............................................................ 2,193,333 15.99 12.97
1-1 Kamikodanaka 4-Chome
Nakahara-Ku
Kawasaki 211 Japan

Christopher J. Sharples (4) ................................................ 1,334,666 9.66 7.84
GNI Ltd.
25 Dowgate Hill
London EC4R 2GN
United Kingdom

Wasserstein, Adelson Ventures, L.P. (5) .................................... 1,150,000 8.30 6.74
31 West 52nd Street
New York New York 10019

Draper M. Jaffray (6) ...................................................... 21,732 * *

Timothy C. Choate (7) ...................................................... 5,000 * *

Thomas F. Madison (8) ...................................................... 88,533 * *

Charles E. Reese, Jr. (9) .................................................. 13,800 * *

Perry W. Steiner (5) ....................................................... 1,150,000 8.30 6.74

J. Paul Thorin (10) ........................................................ 13,800 * *

All directors and executive officers as a group (12 persons) (11) .......... 8,470,611 58.69 48.04
</TABLE>

- ------------------------

* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Beneficial ownership also
includes shares of stock subject to options and warrants currently
exercisable or exercisable within 60 days of June 30, 1998. Percentage of
beneficial ownership is based on 13,713,715 shares of Common Stock
outstanding as of June 30, 1998 and 16,913,715 shares of Common Stock
outstanding after the completion of this offering.

50
<PAGE>

(2) Includes 321,666 shares Mr. Ronning has the right to acquire pursuant to
options exercisable within 60 days of June 30, 1998.

(3) Includes 3,200,000 shares MacUSA, Inc., a wholly-owned subsidiary of Tech
Squared, has the right to acquire from Mr. Ronning pursuant to a stock
option agreement entered into between Mr. Ronning and MacUSA, Inc. in
December 1995. During the term of the option, Mr. Ronning has agreed to
vote such 3,200,000 shares at the discretion of MacUSA, Inc.

(4) Includes 541,666, 166,666 and 526,333 shares registered in the name of
Latour Trustees (Jersey) Limited, Latour Trustees (Jersey) Limited and Mark
Henry Murray as Trustees of the Murray 1987 Settlement and Wilbro Nominees
Limited, respectively. Of the 541,666 shares of Common Stock registered in
the name of Latour Trustees (Jersey) Limited, 41,666 of such shares are
held by Mr. Sharples' wife. Of the 526,333 shares of Common Stock
registered in the name of Wilbro Nominees Limited, 5,000 of such shares are
held by Mr. Sharples' children. Also includes 100,000 shares Mr. Sharples
has the right to acquire pursuant to a warrant exercisable within 60 days.

(5) Includes 50,000 shares Wasserstein, Adelson Ventures, L.P. has the right to
acquire pursuant to a warrant exercisable within 60 days and 100,000 shares
issuable to Wasserstein, Adelson Ventures, L.P. pursuant to a warrant which
is exercisable upon the completion of the Company's initial public
offering. Mr. Steiner is a Vice President of Wasserstein Perella Ventures,
Inc., the general partner of Wasserstein, Adelson Ventures, L.P. and
disclaims beneficial ownership of shares held by Wasserstein, Adelson
Ventures, L.P. except to the extent of his pro rata pecuniary interest
therein.

(6) Includes 20,066 shares issuable upon exercise of options exercisable within
60 days of June 30, 1998.

(7) Includes 5,000 shares issuable upon exercise of options exercisable within
60 days of June 30, 1998.

(8) Includes 55,200 shares issuable upon exercise of options exercisable within
60 days of June 30, 1998.

(9) Includes 13,800 shares issuable upon exercise of options exercisable within
60 days of June 30, 1998.

(10) Includes 13,800 shares issuable upon exercise of options exercisable
within 60 days of June 30, 1998.

(11) Includes 469,531 shares issuable upon exercise of options exercisable
within 60 days of June 30, 1998 and 250,000 shares subject to warrants.
Also includes shares held by entities affiliated with certain directors of
the Company as described in footnote 5 above.

51
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 45,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share
("Preferred Stock").

COMMON STOCK

As of June 30, 1998, there were 13,713,715 shares of Common Stock
outstanding held of record by approximately 120 stockholders (which includes
shares of Preferred Stock that will be converted into Common Stock upon
completion of this offering).

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution, or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive rights and no right to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon the completion
of this offering will be, fully paid and non-assessable.

PREFERRED STOCK

Upon the closing of this offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of Preferred Stock, $0.01 par value, in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional, or special rights and the qualifications, limitations, or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion, or other rights
that could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued with terms calculated to
delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting and other rights of the holders of Common Stock.
Upon the completion of this offering, there will be no shares of Preferred Stock
outstanding and the Company has no current plans to issue any of the Preferred
Stock.

WARRANTS

As of June 30, 1998, the Company had outstanding warrants to purchase an
aggregate of 803,008 shares of the Company's Common Stock. The warrants expire
at various times ranging from December 2001 to May 2003. Generally, each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon the exercise of the warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications, consolidations and certain dilutive issuances of securities
at prices below the then existing warrant exercise price. All warrants are
currently exercisable, except for one warrant to purchase 100,000 shares, which
only becomes exercisable upon the completion of the Company's initial public
offering.

52
<PAGE>
REGISTRATION RIGHTS

Pursuant to agreements between the Company and the holders (or their
permitted transferees) ("Holders") of approximately 8,081,506 shares of Common
Stock (assuming the conversion of all outstanding Preferred Stock upon the
completion of this offering) and options and warrants to purchase 1,034,416
shares of Common Stock, the Holders are entitled to certain rights with respect
to the registration of such shares under the Securities Act. If the Company
proposes to register its Common Stock under the Securities Act, subject to
certain exceptions, the Holders are entitled to notice of the registration and
are entitled at the Company's expense to include such shares therein, provided
that the managing underwriters have the right to limit the number of such shares
included in the registration. The Holders do not have registration rights with
respect to this offering. In addition, certain of the Holders may require the
Company, at its expense, on no more than one occasion, to file a registration
statement under the Securities Act with respect to their shares of Common Stock.
Such rights may not be exercised until six months after the completion of this
offering. Further, Holders may require the Company, once every 12 months and at
the Company's expense, to register the shares on Form S-3 when such form becomes
available to the Company, subject to certain conditions and limitations.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

The Company's Restated Certificate of Incorporation and Bylaws also require
that, effective upon the closing of this offering, any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. The Company's Restated
Certificate of Incorporation also provides for the classification of the Board
of Directors into three classes, only one of which will be elected at each
annual meeting, and specifies that the authorized number of directors may be
changed only by resolution of the Board of Directors. These provisions, which
require the vote of stockholders holding at least two-thirds of the outstanding
shares to amend, may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. See "Management--Board
Composition."

TRANSFER AGENT AND REGISTRAR

Norwest Bank Minnesota, N.A. has been appointed as the transfer agent and
registrar for the Company's Common Stock.

53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, the Company will have outstanding
16,913,715 shares of Common Stock, based on the number of shares of Common Stock
outstanding as of June 30, 1998, assuming (i) the issuance by the Company of
shares of Common Stock offered hereby, (ii) the automatic conversion of all
outstanding shares of series A Preferred Stock into Common Stock upon the
completion of this offering, (iii) no exercise of options, warrants or other
obligations to issue shares after June 30, 1998 and (iv) no exercise of the
Underwriters' over-allotment option to purchase 480,000 shares of Common Stock,
except as otherwise noted. Of these shares, the 3,200,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act.
The remaining 13,713,715 shares of Common Stock held by existing stockholders
are restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 or Regulation S as promulgated under the
Securities Act. Holders, including all officers and directors, of 12,355,651
shares of the Company's Common Stock and an additional 1,309,653 shares issuable
upon exercise of warrants and vested options have agreed with the
representatives of the Underwriters, subject to certain exceptions, not to
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by such person or are thereafter acquired directly from the Company),
or to enter into any swap or similar arrangement that transfers, in whole or in
part, the economic risks of ownership of the Common Stock, without the prior
written consent of BT Alex. Brown Incorporated for a period of 180 days after
the date of the Prospectus (the "Lock-Up Agreements"). As a result of such
contractual restrictions and the provisions of Rule 144 and 701 or Regulation S,
additional shares will be available for sale in the public market as follows:
(i) 980,806 shares of Common Stock currently outstanding and 32,654 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale 90 days after the date of this Prospectus, (ii) 8,261,072
restricted securities will be eligible for sale 180 days after the date of this
Prospectus and (iii) the remainder of the restricted securities will be eligible
for sale from time to time thereafter upon expiration of their respective
one-year holding periods.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any holder, including an affiliate of the Company,
of restricted securities as to which at least one year has elapsed since the
later of the date of the holder's acquisition of such shares from the Company or
from an affiliate, would be entitled within any three-month period to sell a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 166,137 shares immediately after the
closing of this offering assuming no exercise of the Underwriters'
over-allotment option) or the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the date
on which notice of the sale is filed with the Commission. Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who beneficially owns restricted securities is entitled to sell
such shares under Rule 144(k) without regard to the limitations described above,
provided that at least two years have elapsed since the later of the date the
shares were acquired from the Company or from an affiliate of the Company. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of that rule.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the

54
<PAGE>
Company before this offering, along with the shares acquired upon exercise of
such options. Securities issued in reliance on Rule 701 are deemed to be
restricted securities and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates, subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.

The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
1998 Stock Option Plan. See "Management-- Employee Benefit Plans." Such
registration statement is expected to be filed and become effective not earlier
than 180 days after the effective date of this offering. Accordingly, shares
registered under such registration statement will, subject to rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market, unless such shares are subject to vesting restrictions with the
Company. As of June 30, 1998, options to purchase 1,532,087 shares of Common
Stock were issued and outstanding. See "Management--Employee Benefit Plans."

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or will continue after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
As described herein, only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.

55
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their representatives BT Alex. Brown Incorporated, BancAmerica Robertson
Stephens and Bear, Stearns & Co. Inc. (the "Representatives"), have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------
<S> <C>
BT Alex. Brown Incorporated......................................................
BancAmerica Robertson Stephens...................................................
Bear, Stearns & Co. Inc..........................................................
----------
Total.......................................................................... 3,200,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such shares
are purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives.

The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 480,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to 3,200,000, and the Company will be obligated,
pursuant to the option to sell such shares to the Underwriters. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares on the same terms as those on which the 3,200,000
shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

Each of the officers and directors and certain stockholders of the Company,
holding in the aggregate 12,355,651 shares of Common Stock, have agreed not to
offer, sell, contract to sell or otherwise dispose of (or enter into any
transaction which is designed to, or could be expected to, result in the
disposition of any portion of) any Common Stock for a period of 180 days after
the date of this Prospectus, without the prior written consent of BT Alex. Brown
Incorporated. Such consent may be given at any time without public notice. The
Company has entered into a similar agreement, except that it may issue, and
grant options or warrants to purchase, shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock,
pursuant to the exercise of outstanding options and warrants and the Company's
issuance of options and stock granted under the existing stock and stock
purchase plans.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

56
<PAGE>
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiation among the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present stage
of the Company's development and other factors deemed relevant.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the Common Stock. Specifically, the Underwriters may over-allot
shares of the Common Stock in connection with this offering, thereby creating a
short position in the Underwriters' syndicate account. Additionally, to cover
such over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP, Palo Alto and San Francisco, California and
certain other legal matters will be passed upon for the Company by Messerli &
Kramer P.A., Minneapolis, Minnesota. Certain legal matters related to the
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three year period ended December 31, 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part of the Registration Statement
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The address of the site is http://www.sec.gov.

57
<PAGE>
DIGITAL RIVER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2

Consolidated Balance Sheets as of December 31, 1996, 1997 and June 30, 1998 (unaudited).................... F-3

Consolidated Statements of Operations for the years ended December 31, 1995, 1996, 1997 and for the six
months ended June 30, 1997 and 1998 (unaudited).......................................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996, 1997
and for the six months ended June 30, 1998 (unaudited)................................................... F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996, 1997 and for the six
months ended June 30, 1997 and 1998 (unaudited).......................................................... F-6

Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Digital River, Inc.:

We have audited the accompanying consolidated balance sheets of Digital
River, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital River, Inc. and
Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
March 6, 1998 (except with respect to
the reverse stock split described
in Note 3, as to which the date is July 14, 1998)

F-2
<PAGE>
DIGITAL RIVER, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- JUNE 30, PRO FORMA
1998 STOCKHOLDERS'
----------- EQUITY AT
(UNAUDITED) JUNE 30, 1998
(NOTE 3)
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 800 $ 2,126 $ 4,755
Short-term investments.......................................... -- -- 4,934
Accounts receivable, net allowance of $0, $20 and $82........... 4 94 196
Prepaid expenses and other...................................... 5 100 381
--------- --------- -----------
Total current assets.......................................... 809 2,320 10,266
--------- --------- -----------

Property and equipment:
Property and equipment.......................................... 115 1,035 2,553
Accumulated depreciation........................................ (8) (132) (284)
--------- --------- -----------
Net property and equipment.................................... 107 903 2,269
Other assets...................................................... 286 182 162
--------- --------- -----------
Total assets.................................................. $ 1,202 $ 3,405 $ 12,697
--------- --------- -----------
--------- --------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Convertible debentures.......................................... $ 998 $ -- $ --
Accounts payable................................................ 112 720 1,844
Accrued payroll................................................. 30 197 467
Due to related party............................................ 67 46 55
Other accrued liabilities....................................... 53 113 48
--------- --------- -----------
Total current liabilities..................................... 1,260 1,076 2,414
--------- --------- -----------

Commitments and contingencies (Note 6)

Stockholders' equity (deficit):
Preferred stock, $.01 par value; 1,500,000 shares authorized;
1,500,000 shares of Series A preferred stock issued and
outstanding................................................... -- -- 15 $ --
Common stock, $.01 par value; 66,666,667 shares authorized;
5,333,333, 9,241,881 and 12,713,715 shares issued and
outstanding................................................... 53 92 127 137
Additional paid-in capital...................................... 729 6,562 20,812 20,817
Deferred compensation........................................... -- -- (823) (823)
Accumulated deficit............................................. (840) (4,325) (9,848) (9,848)
--------- --------- ----------- -------------
Total stockholders' equity (deficit).......................... (58) 2,329 10,283 $ 10,283
--------- --------- ----------- -------------
-------------
Total liabilities and stockholders' equity (deficit)........ $ 1,202 $ 3,405 $ 12,697
--------- --------- -----------
--------- --------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE>
DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Cost of sales................................. -- 95 2,052 379 4,791
--------- --------- --------- ----------- -----------
Gross profit................................ -- 16 420 82 955

Operating expenses:
Sales and marketing......................... 3 68 1,501 629 3,433
Product development and operations.......... 130 230 1,528 415 1,611
General and administrative.................. 32 415 929 233 1,584
--------- --------- --------- ----------- -----------
Total operating expenses.................. 165 713 3,958 1,277 6,628
--------- --------- --------- ----------- -----------
Loss from operations.......................... (165) (697) (3,538) (1,195) (5,673)

Interest income, net...................... 22 8 53 19 150
--------- --------- --------- ----------- -----------
Net loss...................................... $ (143) $ (689) $ (3,485) $ (1,176) $ (5,523)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------

Basic and diluted net loss per share.......... $ (0.03) $ (0.13) $ (0.46) $ (0.18) $ (0.49)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------

Basic and diluted weighted average common
shares outstanding.......................... 5,333 5,333 7,514 6,438 11,279
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK STOCKHOLDERS'
----------------- -------------------- PAID-IN DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
--------- ------ ----------- ------ ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994......... -- $-- 5,333 $ 53 $ 725 $-- $ (8) $ 770
Net loss......................... -- -- -- -- -- -- (143) (143)
--------- ------ ----------- ------ ------- ------------ ----------- -------------

Balance, December 31, 1995......... -- -- 5,333 53 725 -- (151) 627
Issuance of warrant in exchange
for financing services......... -- -- -- -- 4 -- -- 4
Net loss......................... -- -- -- -- -- -- (689) (689)
--------- ------ ----------- ------ ------- ------------ ----------- -------------

Balance, December 31, 1996......... -- -- 5,333 53 729 -- (840) (58)
Convertible debentures exchanged
for common stock............... -- -- 1,018 10 987 -- -- 997
Sales of common stock............ -- -- 2,831 28 4,746 -- -- 4,774
Common stock issued in Fujitsu
agreement...................... -- -- 60 1 100 -- -- 101
Net loss......................... -- -- -- -- -- -- (3,485) (3,485)
--------- ------ ----------- ------ ------- ------------ ----------- -------------

Balance, December 31, 1997......... -- -- 9,242 92 6,562 -- (4,325) 2,329
Sales of common stock
(unaudited).................... -- -- 3,472 35 9,757 -- -- 9,792
Sales of preferred stock
(unaudited).................... 1,500 15 -- -- 2,810 -- -- 2,825
Deferred compensation related to
stock options and warrants
(unaudited).................... -- -- -- -- 1,683 (1,683) -- --
Deferred compensation expense
(unaudited).................... -- -- -- -- -- 860 -- 860
Net loss (unaudited)............. -- -- -- -- -- -- (5,523) (5,523)
--------- ------ ----------- ------ ------- ------------ ----------- -------------

Balance, June 30, 1998
(unaudited)...................... 1,500 $ 15 12,714 $127 $20,812 $ (823) $(9,848) $10,283
--------- ------ ----------- ------ ------- ------------ ----------- -------------
--------- ------ ----------- ------ ------- ------------ ----------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>
DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................................ $ (143) $ (689) $ (3,485) $ (1,176) $ (5,523)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 5 35 195 59 259
Deferred compensation expense..................... -- -- -- -- 860
Common stock granted to Fujitsu................... -- -- 101 -- --
Change in operating assets and liabilities;
Accounts receivable and prepaid expenses........ 1 (9) (184) (35) (383)
Accounts payable................................ (9) 108 607 50 1,124
Accrued payroll and other accrued liabilities... 4 79 227 74 205
Due to related party............................ -- 67 (21) (39) 9
--------- --------- --------- ----------- -----------
Net cash used in operating activities......... (142) (409) (2,560) (1,067) (3,449)
--------- --------- --------- ----------- -----------

Investing activities:
Purchases of short-term investments................. -- -- -- -- (4,894)
Purchases of equipment.............................. (9) (105) (920) (324) (1,578)
Patent acquisition costs............................ (41) (28) (64) (42) (23)
--------- --------- --------- ----------- -----------
Net cash used in investing activities......... (50) (133) (984) (366) (6,495)
--------- --------- --------- ----------- -----------

Financing activities:
Sales of preferred and common stock................. -- -- 4,774 1,776 12,617
Proceeds from convertible debentures................ -- 998 147 -- --
Payment of debt issuance costs and other............ -- (143) (51) -- (44)
--------- --------- --------- ----------- -----------
Net cash provided by financing activities..... -- 855 4,870 1,776 12,573
--------- --------- --------- ----------- -----------

Net increase (decrease) in cash and cash
equivalents......................................... (192) 313 1,326 343 2,629

Cash and cash equivalents,
beginning of period................................. 679 487 800 800 2,126
--------- --------- --------- ----------- -----------

Cash and cash equivalents, end of period.............. $ 487 $ 800 $ 2,126 $ 1,143 $ 4,755
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------

Noncash investing and financing activities:
Convertible debentures exchanged for common stock,
net of direct costs............................... $ -- $ -- $ 998 $ 998 $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Digital River, Inc., a Delaware corporation, and its wholly owned
subsidiaries (collectively, the Company) have developed a technology platform
that allows it to provide a suite of electronic commerce services to its
software publisher and online retailer clients, including electronic software
delivery. Through contractual relationships with software publishers and online
retailers, the Company offers software products for sale via the Internet.

The Company was incorporated in February 1994, and was considered a
development stage company through August 1996. The Company conducted its first
online sale through a clients' Web store in August 1996 and is still in the
early stages of development. The Company has experienced significant losses
since inception and has experienced significant negative cash flows from
operations. The Company anticipates that operating expenses will continue to
increase, resulting in continuing net losses and negative cash flows from
operations for the foreseeable future.

The Company's prospects must be considered in light of the risks frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. To
address these risks, the Company must, among other things, maintain existing and
develop new relationships with independent software publishers and online
retailers, maintain and increase its client base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, provide superior customer service
and order fulfillment, respond to competitive developments, and attract, retain
and motivate qualified personnel. There can be no assurance that the Company
will be successful in addressing such risks, and the failure to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Digital River,
Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.

INTERIM FINANCIAL STATEMENTS

The consolidated balance sheet as of June 30, 1998 and the related
consolidated statements of operations and cash flows for the six months ended
June 30, 1997 and 1998, and the consolidated statement of stockholders' equity
(deficit) for the six months ended June 30, 1998 are unaudited. Such unaudited
statements have been prepared on the same basis as the audited consolidated
financial statements and in the opinion of management include all adjustments
(consisting of only normal recurring adjustments) necessary for the fair
presentation of the results for the interim periods presented. The results of
operations for the unaudited six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire 1998 fiscal year.

CASH AND CASH EQUIVALENTS

The Company considers all short-term, highly liquid investments, primarily
money market accounts, that are readily convertible into known amounts of cash
and that have original maturities of three months or less to be cash
equivalents.

F-7
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)

SHORT-TERM INVESTMENTS

At June 30, 1998, short-term investments represent U.S. government treasury
bills maturing in less than one year and classified as available-for-sale. At
June 30, 1998, amortized cost approximated fair value and unrealized gains and
losses were insignificant.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and is being depreciated under the
straight-line method using lives of three to seven years. Impairment losses are
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Impairment losses are measured
by comparing the fair value of the assets, as determined by discounting the
future cash flows at a market rate of interest, to their carrying amount.

PATENTS AND ORGANIZATION COSTS

The costs of developing patents are amortized over a three-year period
utilizing the straight-line method of amortization once the patent application
is filed. Organization costs are being amortized using the straight-line method
over five years. Patents and organizational costs are included in other assets
on the accompanying consolidated balance sheets, net of accumulated amortization
of $33,000, $104,000 and $138,000 as of December 31, 1996, 1997 and June 30,
1998.

DEBT ISSUANCE COSTS

Debt issuance costs represent direct financing costs incurred in 1996 to
issue convertible debentures. These costs totalling $147,413 are included in
other assets as of December 31, 1996 and were offset against paid-in capital
upon the conversion of the convertible debentures to common stock in 1997.

REVENUE RECOGNITION

The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either the electronic delivery or
shipment of the physical product to the end-user. The amount payable to the
software publisher or online retailer is reported as cost of sales. The Company
bears full credit risk with respect to substantially all sales. Sales to foreign
clients accounted for 32% and 31% of sales for the years ended December 31, 1996
and 1997, respectively, and 31% and 33% for each of the six months ended June
30, 1997 and 1998. One client accounted for 18% of sales for the year ended
December 31, 1997. For the six months ended June 30, 1998 there were two
significant clients which comprised 15% and 10% of sales for the period.

F-8
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
ADVERTISING COSTS

The costs of advertising are charged to sales and marketing expense as
incurred. For the years ended December 31, 1996 and 1997, the Company incurred
advertising expense of $7,000 and $292,000, respectively. No advertising expense
was incurred in 1995. Advertising expense totalled $167,000 and $1,109,000 for
the six months ended June 30, 1997 and 1998.

PRODUCT DEVELOPMENT

Costs associated with the development of new products and services are
charged to operations as incurred. Those costs totalled $130,000, $230,000, and
$1,393,000 for the three years ended December 31, 1995, 1996 and 1997,
respectively. Product development costs totalled $368,000 and $946,000 for the
six months ended June 30, 1997 and 1998, respectively.

NET LOSS PER SHARE

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," during 1997. All prior loss per share amounts are
presented in accordance with the new standard. Basic loss per common share is
computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the year. The computation of diluted earnings per
common share, formerly referred to as fully diluted earnings per share, is
similar to the computation of basic loss per common share, except that the
denominator is increased for the assumed conversion of convertible securities
and the exercise of dilutive options using the treasury stock method. The
weighted average shares used in computing basic and diluted loss per share were
the same for the three years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 and 1998. Options, warrants and the Series A
Preferred Stock totalling 0, 344,210, 1,056,642, 712,480 and 3,335,095 for the
three years ended December 31, 1995, 1996 and 1997 and the six months ended June
30, 1997 and 1998, respectively, were excluded from the computation of earnings
per share as their effect is antidilutive.

Pro forma net loss per share, assuming the conversion of all shares of
Series A preferred stock, issued in April 1998, into common stock upon the
consummation of the initial public offering, was $(0.48) for the six months
ended June 30, 1998.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has released SFAS No. 130,
"Reporting Comprehensive Income," effective for the fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes

F-9
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)

standards for reporting and display in the financial statements of total net
income and the components of all other nonowner changes in equity, referred to
as comprehensive income. The Company adopted SFAS No. 130 on January 1, 1998.
There was no impact to the Company as a result of the adoption of SFAS No. 130,
as there is no difference between the Company's net loss reported and the
comprehensive net loss for SFAS No. 130 for the periods presented.

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which is effective for fiscal years beginning after December
15, 1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company believes that the
adoption of SOP 98-1 will have no material impact on its financial condition or
results of operations.

During April 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which is
effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires
companies to expense as incurred all start-up, preopening, and organizational
costs that are not otherwise capitalizable as long-lived assets. The Company
believes that the adoption of SOP 98-5 will have no material impact on its
financial condition or results of operations.

2. INCOME TAXES:

Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates. No income taxes were paid in any of the years
presented.

As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $4,300,000. These income tax net operating loss carryforwards
expire beginning in the year 2009. Because of the uncertainty of future
profitability, a valuation allowance equal to the deferred tax asset has been
recorded.

The components of deferred income taxes are as follows:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards........................................... $ 294 $ 1,489
Nondeductible reserves and accruals........................................ 3 11
Depreciation and amortization.............................................. 5 5
Valuation allowance........................................................ (302) (1,505)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>

Ownership changes resulting from the conversion of debentures to common
stock and the issuance of additional equity will limit future annual realization
of the tax net operating loss carryforwards to a specified percentage of the
value of the Company under Section 382 of the Internal Revenue Code.

F-10
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

3. STOCKHOLDERS' EQUITY:

STOCK SPLITS

The Company effected an 8-for-1 split of its common stock in September, 1997
in the form of a stock dividend and on July 14, 1998 the Company declared a
2-for-3 reverse stock split of its common stock. All common share, per share and
weighted average share information has been restated to reflect the splits.

SERIES A PREFERRED STOCK

Series A preferred stock is convertible into common stock on a 2-for-3 basis
at the option of the holder. Upon the consummation of the Company's first
underwritten stock offering, the Series A preferred stock will be automatically
converted to common stock. Unaudited pro forma stockholders' equity reflects the
assumed conversion of the preferred stock into common stock as of June 30, 1998.

Each share of Series A preferred stock has voting rights equivalent to
common shares. The Series A preferred stock also has a liquidation preference at
a fixed amount over common shares. Dividends are payable only to the extent that
dividends are declared on the Company's common stock.

CONVERTIBLE DEBENTURES

During 1996 the Company issued convertible debentures totalling $998,000.
These debentures were converted to common stock in February 1997 at a conversion
rate of $1.13 per share.

WARRANTS

Warrants to purchase 263,832 shares of common stock issued principally in
conjunction with sales of common stock at exercise prices ranging from $1.13 to
$3.00 per share were outstanding as of December 31, 1997. All warrants are
exercisable for a period of five years from their respective purchase dates.
Warrants to purchase 803,008 shares of common stock at exercise prices ranging
from $1.13 to $3.00 per share were outstanding as of June 30, 1998.

In connection with certain advisory services provided by the preferred
stockholder to the Company, the Company issued a conditional warrant (the
"Conditional Warrant") that is exercisable, at any time after the date of the
Company's initial public offering and on or before the fifth anniversary of the
initial public offering. If the Company consummates its initial public offering
on or prior to December 31, 1998, the Conditional Warrant will represent the
right to purchase 100,000 shares of Common Stock at $3.00 per share. If the
Company consummates its initial public offering after December 31, 1998 but on
or prior to March 31, 1999 at a price per share greater than $22.50, then the
Conditional Warrant will represent the right to purchase 33,333 Shares of Common
Stock at $3.00 per share. The conditional warrant has been included in the
outstanding warrants as of June 30, 1998.

4. STOCK OPTIONS:

The Company's 1998 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in June 1998 as an amendment and restatement of the Amended
and Restated 1994 Stock Option Plan which had been adopted in 1997. The Option
Plan provides for the granting of stock options to purchase

F-11
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

4. STOCK OPTIONS: (CONTINUED)

up to 2,333,333 shares of common stock. Options granted to employees under the
plan expire no later than ten years after the date of grant. The exercise price
must be at least 100% of the fair market value of the shares at the date of
grant for incentive options. The Option Plan covers both incentive and
nonstatutory stock options. 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 all the stock of the Company, expire no
later than five years from the grant date unless the option exercise price is at
least 110% of the fair market value of the stock.

A summary of change in outstanding options under the Option Plan is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING $/SHARE
----------- -----------
<S> <C> <C>
Balance, December 31, 1995............................................ -- $ --
Grants.............................................................. 338,665 0.60
----------- -----

Balance, December 31, 1996............................................ 338,665 0.60
Grants.............................................................. 496,817 1.66
Cancelled........................................................... (42,672) 1.69
----------- -----

Balance, December 31, 1997............................................ 792,810 1.20
Grants (unaudited).................................................. 768,611 3.18
Cancelled (unaudited)............................................... (29,334) 2.64
----------- -----
Balance, June 30, 1998 (unaudited).................................... 1,532,087 $ 2.16
----------- -----
----------- -----
</TABLE>

A summary of information about stock options outstanding at December 31,
1997 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ------------------------
EXERCISE NUMBER WEIGHTED AVG. NUMBER WEIGHTED
PRICE OUTSTANDING LIFE REMAINING EXERCISABLE AVG. PRICE
- ------------ ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
$ 0.38 239,999 4 years 186,666 $0.38
1.13 183,999 9 years 94,667 1.13
1.69 342,142 9.5 years -- --
3.00 26,670 10 years -- --
- ------------ ----------- -------------- ----------- -----
$ 0.38-3.00 792,810 8 years 281,333 $0.63
- ------------ ----------- -------------- ----------- -----
- ------------ ----------- -------------- ----------- -----
</TABLE>

The Company recorded deferred compensation for the difference between the
grant price and the deemed fair value of the Company's common stock on options
to purchase 467,800 shares at exercise prices of $3.00 to $9.00 during May and
June 1998.

The Company has elected to apply the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, the Company
accounts for stock-based compensation using the

F-12
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

4. STOCK OPTIONS: (CONTINUED)
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Compensation cost for stock options is measured as the excess, if any, of the
fair value of the Company's common stock at the date of grant over the stock
option exercise price. Had compensation costs for these plans been determined
consistent with SFAS No. 123, the Company's net loss would have been adjusted to
the following pro forma amounts:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net loss:
As reported.............................................................. $ (689) $ (3,485)
Pro forma................................................................ (704) (3,565)

Basic and diluted net loss per share:
As reported.............................................................. (0.13) (0.46)
Pro forma................................................................ (0.13) (0.47)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used: risk-free interest rates of 6%; no expected dividends;
expected lives of five years; and a volatility factor of 1.1 and .7 in 1996 and
1997, respectively. The weighted average fair value of the options granted in
1996 and 1997 was $.48 and $1.04, respectively.

5. RELATED-PARTY TRANSACTIONS:

As of June 30, 1998, the Company's President owned 49% of Tech Squared, Inc.
(Tech Squared) where he spends a portion of his time working as Tech Squared's
Chairman. Tech Squared, through a wholly-owned subsidiary, holds an option to
purchase 3,200,000 shares of the Company's common stock for $1.00 from the
Company's President. The Company currently conducts its operations in leased
facilities of Tech Squared. Rent and other direct expenses, including direct
labor costs, paid to Tech Squared totalled $52,000 and $160,000 in 1996 and
1997, respectively. No amounts were due under this arrangement in 1995. Rent and
other direct expenses totalled $48,000 and $124,000 for the six months ended
June 30, 1997 and 1998.

During 1997, Tech Squared began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays Tech
Squared a fulfillment fee. In 1997, Tech Squared billed Digital River $8,000 for
these services. For the six months ended June 30, 1997 and 1998, the Company was
billed $0 and $47,000 for such services.

In February 1998, two stockholders, one of which is a director of the
Company, entered into an agreement with the Company whereby the stockholders
will help establish and oversee the international operations for the Company for
a term of three years. As consideration for entering into the agreement, the
stockholders each received warrants to purchase 100,000 shares of common stock,
at $3.00 per share.

F-13
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

5. RELATED-PARTY TRANSACTIONS: (CONTINUED)

Deferred compensation has been reflected for the estimated fair value of the
services and will be recognized over the term of the agreement.

6. COMMITMENTS AND CONTINGENCIES:

In connection with an investment in the Company in 1994, Fujitsu Limited
(Fujitsu) obtained certain rights with respect to the Company's common stock and
the operations of the Company's business. In December, 1997, in exchange for the
issuance of 60,000 shares of the Company's common stock, Fujitsu agreed to
relinquish its rights with certain exceptions. Fujitsu retained the right to
designate one member to the Company's board of directors as long as its
ownership percentage is not less than 10% of the Company's common stock,
retained its prior share registration rights and retained certain technology
rights. In 1997, The Company recorded a charge to expense for the fair value of
the common shares issued totalling $101,250, based upon the most recent private
placement price per share of $1.69. As of June 30, 1998, Fujitsu held 16% of the
common stock of the Company.

The United States Department of State and Department of Commerce restrict
the export of encrypting technology outside the United States. Although Digital
River does not currently believe its method of conducting business is impacted
to any significant degree by these restrictions, any significant change in these
rules or interpretations or any failure by Digital River to comply with existing
or future restrictions could have a material adverse impact on the business of
Digital River.

F-14
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(CONTINUED)

7. SUBSEQUENT EVENT (UNAUDITED):

The Company has filed with the Securities and Exchange Commission a Form S-1
Registration Statement for the sale of 3,200,000 shares of common stock
(excluding the underwriter's overallotment option to purchase an additional
480,000 shares of common stock). The proceeds from the offering will be used for
general corporate purposes, including continued investment in product
development, expansion of sales and marketing activities and working capital.

F-15
<PAGE>
[Illustrations]

PICTORIAL DEPICTION OF THE DIGITAL RIVER CLIENT
NETWORK, DEPICTING HOW END-USERS ARE CONNECTED TO
DIGITAL RIVER'S CNS THROUGH EITHER SOFTWARE
PUBLISHER OR ONLINE RETAILER CLIENTS.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 28
Management..................................... 39
Certain Transactions........................... 46
Principal Stockholders......................... 50
Description of Capital Stock................... 52
Shares Eligible for Future Sale................ 54
Underwriting................................... 56
Legal Matters.................................. 57
Experts........................................ 57
Additional Information......................... 57
Index to Consolidated Financial Statements..... F-1
</TABLE>

--------------

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

3,200,000 SHARES

[LOGO]

COMMON STOCK

----------------

P R O S P E C T U S
----------------

BT ALEX. BROWN

BANCAMERICA ROBERTSON STEPHENS

BEAR, STEARNS & CO. INC.

, 1998

- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee, the NASD filing fee and the Nasdaq
National Market application fee.

<TABLE>
<S> <C>
Registration fee.................................................. $ 13,028
NASD filing fee................................................... 4,916
Nasdaq National Market listing fee................................ 90,000
Blue sky qualification fee and expenses........................... 5,000
Printing and engraving expenses................................... 125,000
Legal fees and expenses........................................... 350,000
Accounting fees and expenses...................................... 100,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous..................................................... 2,056
---------
Total......................................................... $ 700,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law, (ii) the Company may, in its discretion, indemnify
other officers, employees and agents as set forth in the Delaware General
Corporation Law, (iii) to the fullest extent permitted by the Delaware General
Corporation Law, the Company is required to advance all expenses incurred by its
directors and executive officers in connection with a legal proceeding (subject
to certain exceptions), (iv) the rights conferred in the Bylaws are not
exclusive, (v) the Company is authorized to enter into indemnification
agreements with its directors, officers, employees and agents and (vi) the
Company may not retroactively amend the Bylaws provisions relating to indemnity.

The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes legally
obligated to pay (including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a director or
officer of the Company or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933, as amended (the "Act"), or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

(a) Since February 9, 1994, the Registrant has sold and issued the following
unregistered securities:

(1) From February 9, 1994 to May 31, 1998, the Company sold an aggregate
of 12,713,715 shares of Common Stock to certain investors for an aggregate
purchase price of $17,520,651.

II-1
<PAGE>

(2) From February 9, 1994 to June 30, 1998, the Company granted stock
options to employees, directors and consultants covering an aggregate of
1,532,087 shares of the Company's Common Stock (net of cancellations), at
exercise prices varying from $0.38 to $3.00. To date there have been no
exercise of any options.

(3) From February 9, 1994 to June 30, 1998, the Company has issued
warrants to purchase 803,008 shares of Common Stock with a weighted average
exercise price of $2.52.

(4) In April 1998, the Company sold 1,500,000 shares of the Company's
Series A Preferred Stock to Wasserstein, Adelson Ventures, L.P. for an
aggregate purchase price of $3,000,000.

The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Act in reliance upon
Section 4(2) of the Act, Regulation D promulgated thereunder, Regulation S
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Act,
as transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transactions.
All recipients had adequate access, through their relationship with the Company,
to information about the Registrant.

(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement.

**3.1 Certificate of Incorporation of the Registrant, as currently in effect.

3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as currently in effect.

**3.3 Bylaws of the Registrant, as currently in effect.

3.4 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon completion of this offering.

3.5 Form of Amended and Restated Bylaws of the Registrant to be filed upon
completion of this offering.

*3.6 Certificate of Amendment of Certificate of Incorporation of the
Registrant, filed as of , 1998.

*4.1 Specimen Stock Certificate.

*5.1 Opinion of Cooley Godward LLP.

**10.1 Form of Indemnity Agreement between Registrant and each of its directors
and executive officers.

10.2 1998 Stock Option Plan.

**+10.3 Distributor Agreement dated April 23, 1997 by and between Corel
Corporation and the Registrant.

10.4 Employment and Non-Competition Agreement effective May 25, 1998 by and
between Joel A. Ronning and the Registrant.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
**10.5 Fujitsu Modification Agreement dated December 11, 1997 by and between Joel
A. Ronning, the Registrant, Fujitsu Limited and MacUSA, Inc.

**10.6 Heads of Agreement for International Agreement dated February 25, 1998 by
and between Christopher J. Sharples, David A. Taylor and the Registrant.

10.7 Stock Subscription Warrant for Shares of Common Stock dated February 26,
1998 by and between Christopher Sharples and Registrant.

**10.8 Termination of Lease Letter dated April 30, 1998 by and between Tech
Squared, Inc. and Registrant.

*10.9 Services Agreement dated , 1998 by and between Tech Squared,
Inc. and Registrant.

10.10 Stock Option Agreement dated December 28, 1995 by and between Joel A.
Ronning and MacUSA, Inc.

10.11 Form of Registration Rights Agreement by and between Wasserstein, Adelson
Ventures, L.P., certain other investors and Registrant.

10.12 Form of Conditional Warrant to Purchase Common Stock dated April 22, 1998
by and between Wasserstein, Adelson Ventures, L.P. and Registrant.

10.13 Form of Warrant to Purchase Common Stock by and between certain investors
and Registrant.

10.14 Form of Registration Rights Agreement by and between certain investors and
Registrant.

**10.15 Consent to Assignment and Assumption of Lease dated April 22, 1998 by and
between CSM Investors, Inc., IntraNet Integration Group, Inc. and
Registrant.

**21.1 Subsidiaries of Digital River, Inc.

23.1 Consent of Independent Public Accountants.

*23.2 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).

**24.1 Power of Attorney. Reference is made to the signature page.

27.1 Financial Data Schedule.
</TABLE>

- ------------------------

* To be filed by amendment.

+ Confidential treatment requested for portions of these exhibits. Omitted
portions have been filed separately with the Securities and Exchange
Commission.

** Previously filed as an Exhibit to the Registration Statement.

(b) FINANCIAL STATEMENT SCHEDULES.

Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the Consolidated
Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Registrant
pursuant to the provisions described in Item 14 or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of the registration statement as of the time it was declared effective, (2)
for the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof, and (3) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Edina, State of Minnesota, on the 15th day of July 1998.

DIGITAL RIVER, INC.

By: /s/ JOEL A. RONNING
-----------------------------------------
Joel A. Ronning
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ JOEL A. RONNING Officer and Director
- ------------------------------ (Principal Executive July 15, 1998
Joel A. Ronning Officer)

Chief Financial Officer
/s/ ROBERT E. STRAWMAN and Treasurer (Principal
- ------------------------------ Financial and Accounting July 15, 1998
Robert E. Strawman Officer)

*THOMAS F. MADISON
- ------------------------------ Director July 15, 1998
Thomas F. Madison

*CHARLES E. REESE, JR.
- ------------------------------ Director July 15, 1998
Charles E. Reese, Jr.

*CHRISTOPHER J. SHARPLES
- ------------------------------ Director July 15, 1998
Christopher J. Sharples

*PERRY W. STEINER
- ------------------------------ Director July 15, 1998
Perry W. Steiner

*J. PAUL THORIN
- ------------------------------ Director July 15, 1998
J. Paul Thorin

*TIMOTHY C. CHOATE
- ------------------------------ Director July 15, 1998
Timothy C. Choate

<TABLE>
<S> <C> <C> <C>
*By: /s/ ROBERT E. STRAWMAN
-------------------------
Robert E. Strawman
(ATTORNEY-IN-FACT)
</TABLE>

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement.

**3.1 Certificate of Incorporation of the Registrant, as currently in effect.

3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, as currently in effect.

**3.3 Bylaws of the Registrant, as currently in effect.

3.4 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed upon
completion of this offering.

3.5 Form of Amended and Restated Bylaws of the Registrant to be filed upon completion of this offering.

*3.6 Certificate of Amendment of Certificate of Incorporation of the Registrant, filed as of ,
1998.

*4.1 Specimen Stock Certificate.

*5.1 Opinion of Cooley Godward LLP.

**10.1 Form of Indemnity Agreement between Registrant and each of its directors and executive officers.

10.2 1998 Stock Option Plan.

**+10.3 Distributor Agreement dated April 23, 1997 by and between Corel Corporation and the Registrant.

10.4 Employment and Non-Competition Agreement effective May 25, 1998 by and between Joel A. Ronning and the
Registrant.

**10.5 Fujitsu Modification Agreement dated December 11, 1997 by and between Joel A. Ronning, the Registrant,
Fujitsu Limited and MacUSA, Inc.

**10.6 Heads of Agreement for International Agreement dated February 25, 1998 by and between Christopher J.
Sharples, David A. Taylor and the Registrant.

10.7 Stock Subscription Warrant for Shares of Common Stock dated February 26, 1998 by and between
Christopher Sharples and Registrant.

**10.8 Termination of Lease Letter dated April 30, 1998 by and between Tech Squared, Inc. and Registrant.

*10.9 Services Agreement dated , 1998 by and between Tech Squared, Inc. and Registrant.

10.10 Stock Option Agreement dated December 28, 1995 by and between Joel A. Ronning and MacUSA, Inc.

10.11 Form of Registration Rights Agreement by and between Wasserstein, Adelson Ventures, L.P., certain
other investors and Registrant.

10.12 Form of Conditional Warrant to Purchase Common Stock dated April 22, 1998 by and between Wasserstein,
Adelson Ventures, L.P. and Registrant.

10.13 Form of Warrant to Purchase Common Stock by and between certain investors and Registrant.

10.14 Form of Registration Rights Agreement by and between certain investors and Registrant.

**10.15 Consent to Assignment and Assumption of Lease dated April 22, 1998 by and between CSM Investors, Inc.,
IntraNet Integration Group, Inc. and Registrant.

**21.1 Subsidiaries of Digital River, Inc.
</TABLE>

<PAGE>

*23.2 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).

**24.1 Power of Attorney. Reference is made to the signature page.

27.1 Financial Data Schedule.
</TABLE>

- ------------------------

* To be filed by amendment.

+ Confidential treatment requested for portions of these exhibits. Omitted
portions have been filed separately with the Securities and Exchange
Commission.

** Previously filed as an Exhibit to the Registration Statement.

(b) FINANCIAL STATEMENT SCHEDULES.

Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the Consolidated
Financial Statements or Notes thereto.

<PAGE>

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DIGITAL RIVER, INC.

The undersigned, the President of DIGITAL RIVER, INC., a Delaware
corporation (the "Corporation"), does hereby certify that by Consent in Lieu
of Meeting of the Board of Directors and Shareholders dated April 21, 1998,
the following resolutions were adopted by the Board of Directors and a
majority of the shareholders of the Corporation in accordance with the
applicable provisions of the Delaware Statutes:

RESOLUTIONS AUTHORIZING AMENDMENT OF
CERTIFICATE OF INCORPORATION

WHEREAS, it is in the best interests of the Corporation to amend its
Certificate of Incorporation to provide for the creation of a class of
preferred stock;

NOW, THEREFORE, IT IS HEREBY RESOLVED, that the Certificate of
Incorporation of the Corporation is amended by deleting Article 4 in full and
replacing it with the following:

"ARTICLE 4.

CAPITAL STOCK

The Corporation is authorized to issue one hundred million (100,000,000)
shares of all classes, consisting of (i) ninety eight million five hundred
thousand (98,500,000) shares of Common Stock, One Cent ($.01) per share par
value (the "Common Stock"), and (ii) one million five hundred thousand
(1,500,000) shares of Preferred Stock, One Cent ($.01) per share par value
(the "Preferred Stock"), to be held, sold, and paid for at such times and in
such manner as the Board of Directors may from time to time determine, in
accordance with the laws of the State of Delaware. Of the Preferred Stock,
one million five hundred thousand (1,500,000) shares shall be designated as
"Series A Preferred Stock." The Series A Preferred Stock shall have the
following designations, preferences, and other rights:

1. DIVIDENDS. The holders of Series A Preferred Stock shall be
entitled to share in any dividends declared and paid upon or
set aside for the Common Stock of the Corporation, pro rata in
accordance with the number of shares of Common Stock into which
such shares of Series A Preferred Stock are then convertible
pursuant to Section 4.

2. LIQUIDATION.

a. Upon a Liquidation (as defined below), after payment or
provision for payment of the debts and other liabilities of
the Corporation, the holders of Series A Preferred Stock
shall be entitled to receive, out of the remaining assets of
the Corporation available for distribution to its
stockholders, with respect to each share of Series A
Preferred Stock an amount (the

<PAGE>

"Preference Amount") equal to the sum of (i) $2.00 and
(ii) all declared but unpaid dividends payable with
respect to such share under Section 1, before any
distribution shall be made to the holders of the Common
Stock or any other class of capital stock of the
Corporation ranking junior to the Series A Preferred
Stock. If upon any Liquidation the assets of the
Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of
Series A Preferred Stock the full Preference Amounts to
which they shall be entitled, the holders of Series A
Preferred Stock shall share pro rata in any distribution
of assets in accordance with such full Preference Amounts.

b. "Liquidation" means any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation, other than any dissolution, liquidation or
winding up in connection with any reincorporation of the
Corporation in another jurisdiction.

3. VOTING RIGHTS.

a. Each share of Series A Preferred Stock shall entitle the
holder thereof to such number of votes as shall equal the
number of whole and fractional shares of Common Stock into
which such share of Series A Preferred Stock is then
convertible pursuant to Section 4. Except as provided in
paragraphs (b) and (c) below, the holders of Series A
Preferred Stock shall be entitled to vote on all matters as
to which holders of Common Stock shall be entitled to vote,
in the same manner and with the same effect as such holders
of Common Stock, voting together with the holders of Common
Stock as one class.

b. As long as all the Series A Preferred Stock is outstanding,
the Corporation shall not, without the affirmative consent
or approval of the holders of a majority of the shares of
Series A Preferred Stock then outstanding, voting separately
as a class:

i. in any manner alter or change the powers, preferences,
or rights, or qualifications, limitations or
restrictions thereof, of the shares of Series A
Preferred Stock as to affect them adversely;

ii. in any other manner alter or amend the Certificate of
Incorporation or By-laws of the Corporation as to
directly adversely affect the rights of the holders of
Series A Preferred Stock set forth in such documents;
or

iii. agree to, or permit any subsidiary of the Corporation
to agree to, any provision in any agreement that would
impose any restrictions on the right of the holders of
Series A Preferred Stock to convert

<PAGE>

any share of Series A Preferred Stock or otherwise
prohibit or impede the Corporation from honoring the
exercise of any rights the holders of the Series A
Preferred Stock now have or may hereafter have.

c. As long as all the Series A Preferred Stock is outstanding,
the holders of a majority of all shares of Series A
Preferred Stock then outstanding shall be entitled, as a
class and to the exclusion of the holders of all other
shares of capital stock of the Corporation, to nominate for
election and elect one member of the Board of Directors of
the Corporation (the "Board") and each successor of such
member. Each member of the Board nominated and elected
under this paragraph may be removed at any time by, and only
by, the holders of a majority of all shares of Series A
Preferred Stock then outstanding.

4. OPTIONAL CONVERSION.

a. Upon the terms set forth in this Section, each holder of
shares of Series A Preferred Stock shall have the right, at
such holder's option, at any time and from time to time, to
convert any of such shares into the number of fully paid and
nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the product of $2.00 and the number
of shares of Series A Preferred Stock being converted, by
(ii) the Conversion Price (as defined below), as last
adjusted and then in effect, by surrender of the
certificates representing the shares of Series A Preferred
Stock to be converted. The conversion price per share at
which shares of Common Stock shall be issuable upon
conversion of shares of Series A Preferred Stock (the
"Conversion Price") shall be $2.00, subject to adjustment as
set forth in paragraph (b) below. Upon such conversion, any
declared and unpaid dividends on such converted shares of
Series A Preferred Stock shall be canceled.

b. The Conversion Price shall be subject to adjustment from
time to time as follows:

i. If the Corporation shall at any time or from time to
time issue or be deemed to have issued any shares of
Common Stock other than Excluded Stock (as defined
in clause (iii) below) without consideration or for
a consideration per share less than the Conversion
Price in effect immediately prior to the issuance of
such Common Stock, then the Conversion Price in
effect immediately prior to each such issuance shall
forthwith be lowered to a price equal to the
quotient obtained by dividing:

<PAGE>

(i) an amount equal to the sum of (x) the total
number of shares of Common Stock outstanding
immediately prior to such issuance, multiplied
by the Conversion Price in effect immediately
prior to such issuance, and (y) the
consideration received by the Corporation upon
such issuance; by

(ii) the total number of shares of Common Stock
outstanding immediately after the issuance of
such Common Stock.

ii. In the case of the issuance of options to purchase
or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for
Common Stock, or options to purchase or rights to
subscribe for such convertible or exchangeable
securities ("Equity Securities"), the aggregate
maximum number of shares of Common Stock deliverable
upon exercise or conversion of such Equity
Securities shall be deemed to have been issued at
the time such Equity Securities were issued and for
a consideration equal to the consideration received
by the Corporation for any such Equity Securities,
plus the additional consideration, if any, to be
received by the Corporation upon the conversion or
exercise of such Equity Securities.

iii. "Excluded Stock" means (1) shares of Common Stock
reserved for issuance (including, without
limitation, upon exercise of options or warrants) as
set forth on Section 2.5 of the Securities Purchase
Agreement dated April 22, 1998 (the "Securities
Purchase Agreement"), pursuant to which the Series A
Preferred Stock was being issued; (2) shares of
Common Stock issued upon conversion of shares of
Series A Preferred Stock; (3) shares of Common Stock
issued upon exercise of the Warrants issued by the
Corporation under the Securities Purchase Agreement;
(4) shares of Common Stock issued by the Corporation
as a stock dividend or upon any subdivision,
split-up or combination of shares of Common Stock;
and (5) securities that were declared to be
"Excluded Stock" for purposes of this Section by the
holders of a majority of the shares of Series A
Preferred Stock.

iv. If, at any time after the Original Issuance Date,
the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record
date for the determination of holders of Common
Stock entitled to receive such stock dividend,
subdivision or split-up, the

<PAGE>

Conversion Price shall be appropriately decreased so
that the number of shares of Common Stock issuable
on conversion of each share of Series A Preferred
Stock shall be increased in proportion to such
increase in outstanding shares.

v. If, at any' time after the Original Issuance Date,
the-- number of shares of Common Stock outstanding
is decreased by a combination of the outstanding
shares of Common Stock, then, following the record
date for such combination, the Conversion Price
shall be appropriately increased so that the number
of shares of Common Stock issuable on conversion of
each share of Series A Preferred Stock shall be
decreased in proportion to such decrease in
outstanding shares.

vi. In the event of any capital reorganization of the
Corporation, any reclassification of the stock of
the Corporation (other than a change in par value or
from par value to no par value or from no par value
to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or
any consolidation or merger of the Corporation, each
share of Series A Preferred Stock shall after such
reorganization, reclassification, consolidation, or
merger be convertible into the kind and number of
shares of stock or other securities or property of
the Corporation or of the corporation resulting from
such consolidation or surviving such merger to which
the holder of the number of shares of Common Stock
deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation or
merger) upon conversion of such share of Series A
Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation or
merger. The provisions of this clause shall
similarly apply to successive reorganizations,
reclassifications, consolidations or mergers.

c. The Corporation shall reserve, and at all times from and
after the date of Original Issuance Date keep reserved, free
from preemptive rights, out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting
the conversion of the shares of Series A Preferred Stock,
sufficient shares of Common Stock to provide for the
conversion of all outstanding shares of Series A Preferred
Stock.

d. At any time the Corporation makes or fixes a record date for
the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in
securities of the Corporation other than shares of Common
Stock, provision shall be made so that each holder of shares
of Series A Preferred Stock shall receive upon conversion
thereof, in addition to the shares of Common Stock
receivable thereupon, the

<PAGE>

number of securities of the Corporation which it would
have received had its shares of Series A Preferred Stock
been converted into shares of Common Stock on the date of
such event and had such holder thereafter, during the
period from the date of such event to and including the
date of conversion, retained such securities receivable
by it pursuant to this paragraph during such period,
subject to the sum of all other adjustments called for
during such period under this Section with respect to the
rights of such holder of shares of Series A Preferred
Stock.

5. MANDATORY CONVERSION.

a. Upon the consummation of the first underwritten public
offering for the account of the Corporation of Common Stock
pursuant to a registration statement filed under the
Securities Act of 1933, as amended, at an offering price per
share of Common Stock to the public of not less than $5.00
(as appropriately adjusted for stock dividends, subdivision,
split- ups, combination of shares, or similar events) and
with gross aggregate proceeds to the Corporation of not less
than $15,000,000 (a "Qualified Public Offering"), each share
of Series A Preferred Stock then outstanding shall, by
virtue of and simultaneously with such Qualified Public
Offering, be deemed automatically converted into the number
of fully paid and nonassessable shares of Common Stock equal
to the quotient obtained by dividing (i) $2.00 by (ii) the
Conversion Price, as last adjusted and then in effect.

b. As promptly as practicable after the date of consummation of
any Qualified Public Offering and the delivery to the
Corporation of the certificate or certificates for the
shares of Series A Preferred Stock which have been
converted, duly endorsed or assigned in blank to the
Corporation (if required by it), the Corporation shall issue
and deliver to or upon the written order of each holder of
Series A Preferred Stock, to the place designated by such
holder, a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled.
The person in whose name the certificate or certificates for
Common Stock are to be issued shall be deemed to have become
a stockholder of record on the date of such Qualified Public
Offering and on such date the shares of Series A Preferred
Stock shall cease to be outstanding, whether or not the
certificates representing such shares have been received by
the Corporation.

(b) Unless otherwise provided, a shareholder has one (1) vote for
each share held.

<PAGE>

FURTHER RESOLVED, that the President of the Corporation is hereby
authorized and directed to execute a Certificate of Amendment attesting to
the adoption of the foregoing amendment and to cause such Certificate of
Amendment to be filed in the office of the Secretary of State of the State of
Delaware.

IN WITNESS WHEREOF, I have subscribed my name this 21st day of April, 1998.

/s/ Joel Ronning
-----------------------------------
Joel Ronning
President

Attest:

/s/ Gregory R. Smith
- -----------------------------------
Name: Gregory R. Smith
Title: Secretary

<PAGE>

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL RIVER, INC.

Joel A. Ronning does hereby certify:

1. He is the President and Chief Executive Officer of Digital River,
Inc., a corporation organized and existing under the laws of the state of
Delaware.

2. The name of the corporation is Digital River, Inc. and the original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on September 25, 1997.

3. The Certificate of Incorporation of the Corporation is hereby amended
and restated as follows:

The name of the corporation is Digital River, Inc. (the "Corporation" or
the "Company").

II.

The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, and the name of the
registered agent of the Corporation in the State of Delaware at such address is
the Corporation Trust Company.

III.

The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.

IV.

A. The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is Fifty
Million (50,000,000) shares. Forty Five Million (45,000,000) shares shall be
Common Stock, each having a par value of one cent ($.01). Five Million
(5,000,000) shares shall be Preferred Stock, each having a par value of one
cent ($.01).

B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to

<PAGE>

establish from time to time the number of shares constituting any such series
or any of them; and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of
shares of any series shall be decreased in accordance with the foregoing
sentence, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number
of shares of such series.

A. For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:

(1) The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.

(2) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the Corporation's initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of
the Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.

Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

(3) Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time (i) with cause by the affirmative vote of the holders of a
majority of the voting power of all then-outstanding shares of voting stock,
entitled to vote at an election of directors (the "Voting Stock") or (ii)
without cause by the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all the outstanding shares
of the Voting Stock.

<PAGE>

(4) Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.

B. (1) Subject to paragraph (g) of Section 43 of the Bylaws, and
notwithstanding the fact that some lesser percentage may be specified by law,
the Bylaws may be altered or amended or new Bylaws adopted by the affirmative
vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then-outstanding shares of the Voting Stock. The Board of
Directors shall also have the power to adopt, amend, or repeal Bylaws.

(2) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.

(3) No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering. Following the closing of
the Initial Public Offering no action shall be taken by the stockholders by
written consent.

(4) Special meetings of the stockholders of the Corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors shall fix.

(5) Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.

VI.

A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then

<PAGE>

the liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.

B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.

VII.

A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, except as
provided in paragraph B. of this Article VII, and all rights conferred upon the
stockholders herein are granted subject to this reservation.

B. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required by law,
this Restated Certificate of Incorporation or any Preferred Stock Designation,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock, voting together as a single class, shall be required to alter,
amend or repeal Articles V, VI, and VII.

The foregoing Amended and Restated Certificate of Incorporation has been
duly approved by the Board of Directors.

The foregoing Amended and Restated Certificate of Incorporation has been
duly approved by the vote of the stockholders in accordance with Sections 242
and 245 of the Delaware General Corporation Law. The number of shares voting
in favor of the amendment equaled or exceeded the vote required.

<PAGE>

IN WITNESS WHEREOF, the undersigned have signed this certificate this _____
day of ______________, 1998, and hereby affirm and acknowledge under penalty of
perjury that the filing of this Amended and Restated Certificate of
Incorporation is the act and deed of Digital River, Inc.

DIGITAL RIVER, INC.

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

ATTEST:

- ------------------------
Gregory R.L. Smith
Secretary

<PAGE>

AMENDED AND RESTATED BYLAWS

DIGITAL RIVER, INC.

(A DELAWARE CORPORATION)

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
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<S> <C>
Article I Offices . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office.. . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices.. . . . . . . . . . . . . . . . . . . . 1
Article II Corporate Seal . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Corporate Seal. . . . . . . . . . . . . . . . . . . . 1
Article III Stockholders' Meetings. . . . . . . . . . . . . . . . . 1
Section 4. Place Of Meetings.. . . . . . . . . . . . . . . . . . 1
Section 5. Annual Meetings . . . . . . . . . . . . . . . . . . . 2
Section 6. Special Meetings. . . . . . . . . . . . . . . . . . . 3
Section 7. Notice Of Meetings. . . . . . . . . . . . . . . . . . 4
Section 8. Quorum. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Adjournment And Notice Of Adjourned Meetings. . . . . 5
Section 10. Voting Rights . . . . . . . . . . . . . . . . . . . . 5
Section 11. Joint Owners Of Stock.. . . . . . . . . . . . . . . . 5
Section 12. List Of Stockholders. . . . . . . . . . . . . . . . . 6
Section 13. Action Without Meeting. . . . . . . . . . . . . . . . 6
Section 14. Organization. . . . . . . . . . . . . . . . . . . . . 7
Article IV Directors. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 15. Number And Term Of Office.. . . . . . . . . . . . . . 7
Section 16. Powers. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 17. Classes Of Directors. . . . . . . . . . . . . . . . . 7
Section 18. Vacancies.. . . . . . . . . . . . . . . . . . . . . . 8
Section 19. Resignation.. . . . . . . . . . . . . . . . . . . . . 8
Section 20. Removal.. . . . . . . . . . . . . . . . . . . . . . . 9
Section 21. Meetings. . . . . . . . . . . . . . . . . . . . . . . 9
(a) Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . 9
(b) Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . 9
(c) Special Meetings . . . . . . . . . . . . . . . . . . . . . . . 9
(d) Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
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<S> <C>
(e) Notice Of Meetings . . . . . . . . . . . . . . . . . . . . . . 9
(f) Waiver Of Notice . . . . . . . . . . . . . . . . . . . . . . .10
Section 22. Quorum And Voting.. . . . . . . . . . . . . . . . . .10
Section 23. Action Without Meeting. . . . . . . . . . . . . . . .10
Section 24. Fees And Compensation.. . . . . . . . . . . . . . . .10
Section 25. Committees. . . . . . . . . . . . . . . . . . . . . .11
(a) Executive Committee. . . . . . . . . . . . . . . . . . . . . .11
(b) Other Committees . . . . . . . . . . . . . . . . . . . . . . .11
(c) Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
(d) Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 26. Organization. . . . . . . . . . . . . . . . . . . . .12
Article V Officers. . . . . . . . . . . . . . . . . . . . . . . . .12
Section 27. Officers Designated.. . . . . . . . . . . . . . . . .12
Section 28. Tenure And Duties Of Officers.. . . . . . . . . . . .12
(a) General. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
(b) Duties Of Chairman Of The Board Of Directors . . . . . . . . .13
(c) Duties Of President. . . . . . . . . . . . . . . . . . . . . .13
(d) Duties Of Vice Presidents. . . . . . . . . . . . . . . . . . .13
(e) Duties Of Secretary. . . . . . . . . . . . . . . . . . . . . .13
(f) Duties Of Chief Financial Officer. . . . . . . . . . . . . . .13
Section 29. Delegation Of Authority . . . . . . . . . . . . . . .14
Section 30. Resignations. . . . . . . . . . . . . . . . . . . . .14
Section 31. Removal.. . . . . . . . . . . . . . . . . . . . . . .14
Article VI Execution Of Corporate Instruments And Voting Of
Securities Owned By The Corporation. . . . . . . . . . .14
Section 32. Execution Of Corporate Instruments. . . . . . . . . .14
Section 33. Voting Of Securities Owned By The Corporation.. . . .15
Article VII Shares Of Stock . . . . . . . . . . . . . . . . . . . .15
Section 34. Form And Execution Of Certificates. . . . . . . . . .15
Section 35. Lost Certificates.. . . . . . . . . . . . . . . . . .16
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
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<S> <C>
Section 36. Transfers.. . . . . . . . . . . . . . . . . . . . . .16
Section 37. Fixing Record Dates.. . . . . . . . . . . . . . . . .16
Section 38. Registered Stockholders.. . . . . . . . . . . . . . .17
Article VIII Other Securities Of The Corporation. . . . . . . . . .18
Section 39. Execution Of Other Securities.. . . . . . . . . . . .18
Article IX Dividends. . . . . . . . . . . . . . . . . . . . . . . .18
Section 40. Declaration Of Dividends. . . . . . . . . . . . . . .18
Section 41. Dividend Reserve. . . . . . . . . . . . . . . . . . .19
Article X Fiscal Year . . . . . . . . . . . . . . . . . . . . . . .19
Section 42. Fiscal Year.. . . . . . . . . . . . . . . . . . . . .19
Article XI Indemnification. . . . . . . . . . . . . . . . . . . . .19
Section 43. Indemnification Of Directors, Executive Officers,
Other Officers, Employees And Other Agents. . . . . .19
(a) Right to Indemnification . . . . . . . . . . . . . . . . . . .19
(b) Prepayment of Expenses . . . . . . . . . . . . . . . . . . . .20
(c) Claims. . . . .. . . . . . . . . . . . . . . . . . . . . . . .20
(d) Non-Exclusivity Of Rights. . . . . . . . . . . . . . . . . . .20
(e) Other Sources. . . . . . . . . . . . . . . . . . . . . . . . .20
(f) Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . .20
(g) Amendment or Repeal. . . . . . . . . . . . . . . . . . . . . .20
(h) Other Indemnification and Prepayment of Expenses . . . . . . .21
Article XII Notices . . . . . . . . . . . . . . . . . . . . . . . .21
Section 44. Notices.. . . . . . . . . . . . . . . . . . . . . . .21
(a) Notice To Stockholders . . . . . . . . . . . . . . . . . . . .21
(b) Notice To Directors. . . . . . . . . . . . . . . . . . . . . .21
(c) Affidavit Of Mailing . . . . . . . . . . . . . . . . . . . . .21
(d) Time Notices Deemed Given. . . . . . . . . . . . . . . . . . .21
(e) Methods Of Notice. . . . . . . . . . . . . . . . . . . . . . .21
(f) Failure To Receive Notice. . . . . . . . . . . . . . . . . . .21
(g) Notice To Person With Whom Communication Is Unlawful . . . . .22
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
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<S> <C>
(h) Notice To Person With Undeliverable Address. . . . . . . . . .22
Article XIII Amendments . . . . . . . . . . . . . . . . . . . . . .22
Section 45. Amendments. . . . . . . . . . . . . . . . . . . . . .22
Article XIV Loans To Officers . . . . . . . . . . . . . . . . . . .23
Section 46. Loans To Officers . . . . . . . . . . . . . . . . . .23
</TABLE>

<PAGE>
AMENDED AND RESTATED BYLAWS
OF
DIGITAL RIVER, INC.

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of
the corporation in the State of Delaware shall be in the City of Wilmington.

SECTION 2. OTHER OFFICES. The corporation shall also have
and maintain an office or principal place of business at such place as may be
fixed by the Board of Directors, and may also have offices at such other
places, both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation
may require.

ARTICLE II

CORPORATE SEAL

SECTION 3. CORPORATE SEAL. If the Board of Directors
adopts a corporate seal such seal shall consist of a die bearing the name of
the corporation and the inscription, "Corporate Seal-Delaware." Said seal
may be used by causing it or a facsimile thereof to be impressed or affixed
or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS' MEETINGS

SECTION 4. PLACE OF MEETINGS. Meetings of the
stockholders of the corporation shall be held at such place, either within or
without the State of Delaware, as may be designated from time to time by the
Board of Directors, or, if not so designated, then at the office of the
corporation required to be maintained pursuant to Section 2 hereof.

SECTION 5. ANNUAL MEETINGS

(a) The annual meeting of the stockholders of the
corporation, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at
such time as may be designated from time to time by the Board of Directors.

(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be:
(A) specified in the notice of meeting (or any

1
<PAGE>

supplement thereto) given by or at the direction of the Board of Directors,
(B) otherwise properly brought before the meeting by or at the direction of
the Board of Directors, or (C) otherwise properly brought before the meeting
by a stockholder. For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has
been changed by more than thirty (30) days from the date contemplated at the
time of the previous year's proxy statement, notice by the stockholder to be
timely must be so received not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the sixtieth (60th) day prior to such
annual meeting or, in the event public announcement of the date of such
annual meeting is first made by the corporation fewer than seventy (70) days
prior to the date of such annual meeting, the close of business on the tenth
(10th) day following the day on which public announcement of the date of such
meeting is first made by the corporation. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on
the corporation's books, of the stockholder proposing such business, (iii)
the class and number of shares of the corporation which are beneficially
owned by the stockholder, (iv) any material interest of the stockholder in
such business and (v) any other information that is required to be provided
by the stockholder pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a
stockholder proposal. Notwithstanding the foregoing, in order to include
information with respect to a stockholder proposal in the proxy statement and
form of proxy for a stockholder's meeting, stockholders must provide notice
as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at any annual meeting except in accordance with the procedures
set forth in this paragraph (b). The chairman of the annual meeting shall,
if the facts warrant, determine and declare at the meeting that business was
not properly brought before the meeting and in accordance with the provisions
of this paragraph (b), and, if he should so determine, he shall so declare at
the meeting that any such business not properly brought before the meeting
shall not be transacted.

(c) Only persons who are nominated in accordance with
the procedures set forth in this paragraph (c) shall be eligible for election
as directors. Nominations of persons for election to the Board of Directors
of the corporation may be made at a meeting of stockholders by or at the
direction of the Board of Directors or by any stockholder of the corporation
entitled to vote in the election of directors at the meeting who complies
with the notice procedures set forth in this paragraph (c). Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the
Secretary of the corporation in accordance with the provisions of paragraph
(b) of this Section 5. Such

2
<PAGE>

stockholder's notice shall set forth (i) as to each person, if any, whom the
stockholder proposes to nominate for election or re-election as a director:
(A) the name, age, business address and residence address of such person, (B)
the principal occupation or employment of such person, (C) the class and
number of shares of the corporation which are beneficially owned by such
person, (D) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nominations are to be made by the
stockholder, and (E) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written
consent to being named in the proxy statement, if any, as a nominee and to
serving as a director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b) of
this Section 5. At the request of the Board of Directors, any person
nominated by a stockholder for election as a director shall furnish to the
Secretary of the corporation that information required to be set forth in the
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless
nominated in accordance with the procedures set forth in this paragraph (c).
The chairman of the meeting shall, if the facts warrant, determine and
declare at the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if he should so determine, he
shall so declare at the meeting, and the defective nomination shall be
disregarded.

(d) For purposes of this Section 5, "public
announcement" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or
in a document publicly filed by the corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.

SECTION 6. SPECIAL MEETINGS

(a) Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i) the Chairman
of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the
Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption), and shall be
held at such place, on such date, and at such time as the Board of Directors
shall fix.

(b) If a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The Board of Directors shall determine the time and place of such
special meeting, which shall be held not less than thirty-five (35) nor more
than one hundred twenty (120) days after the date of the receipt of the
request. Upon determination of the time and place of the meeting, the
officer receiving the request shall cause notice to be given to the
stockholders entitled to vote, in accordance with the provisions of

3
<PAGE>

Section 7 of these Bylaws. If the notice is not given within sixty (60) days
after the receipt of the request, the person or persons requesting the
meeting may set the time and place of the meeting and give the notice.
Nothing contained in this paragraph (b) shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action
of the Board of Directors may be held.

SECTION 7. NOTICE OF MEETINGS Except as otherwise
provided by law or the Certificate of Incorporation, written notice of each
meeting of stockholders shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled
to vote at such meeting, such notice to specify the place, date and hour and
purpose or purposes of the meeting. Notice of the time, place and purpose of
any meeting of stockholders may be waived in writing, signed by the person
entitled to notice thereof, either before or after such meeting, and will be
waived by any stockholder by his attendance thereat in person or by proxy,
except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Any
stockholder so waiving notice of such meeting shall be bound by the
proceedings of any such meeting in all respects as if due notice thereof had
been given.

SECTION 8. QUORUM. At all meetings of stockholders,
except where otherwise provided by statute or by the Certificate of
Incorporation, or by these Bylaws, the presence, in person or by proxy duly
authorized, of the holders of a majority of the outstanding shares of stock
entitled to vote shall constitute a quorum for the transaction of business.
In the absence of a quorum, any meeting of stockholders may be adjourned,
from time to time, either by the chairman of the meeting or by vote of the
holders of a majority of the shares represented thereat, but no other
business shall be transacted at such meeting. The stockholders present at a
duly called or convened meeting, at which a quorum is present, may continue
to transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum. Except as otherwise
provided by law, the Certificate of Incorporation or these Bylaws, all action
taken by the holders of a majority of the vote cast, excluding abstentions,
at any meeting at which a quorum is present shall be valid and binding upon
the corporation; PROVIDED, HOWEVER, that directors shall be elected by a
plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors.
Where a separate vote by a class or classes or series is required, except
where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes
cast, including abstentions, by the holders of shares of such class or
classes or series shall be the act of such class or classes or series.

SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS.
Any meeting of stockholders, whether annual or special, may be adjourned from
time to time either by the

4
<PAGE>

chairman of the meeting or by the vote of a majority of the shares casting
votes, excluding abstentions. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the meeting.

SECTION 10. VOTING RIGHTS

(a) For the purpose of determining those stockholders
entitled to vote at any meeting of the stockholders, except as otherwise
provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders.

(b) Every person entitled to vote or execute consents
shall have the right to do so either in person or by an agent or agents
authorized by a proxy granted in accordance with Delaware law. An agent so
appointed need not be a stockholder. No proxy shall be voted after three (3)
years from its date of creation unless the proxy provides for a longer
period.

SECTION 11. JOINT OWNERS OF STOCK. If shares or other
securities having voting power stand of record in the names of two (2) or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety, or otherwise, or if two (2) or
more persons have the same fiduciary relationship respecting the same shares,
unless the Secretary is given written notice to the contrary and is furnished
with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting
shall have the following effect: (a) if only one (1) votes, his act binds
all; (b) if more than one (1) votes, the act of the majority so voting binds
all; (c) if more than one (1) votes, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionally, or may apply to the Delaware Court of Chancery for relief as
provided in the General Corporation Law of Delaware, Section 217(b). If the
instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.

SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place
where the meeting is to be held. The list shall be produced and kept at the
time and place of meeting during the whole time thereof and may be inspected
by any stockholder who is present.

5
<PAGE>

SECTION 13. ACTION WITHOUT MEETING.

(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.

(b) Every written consent shall bear the date of
signature of each stockholder who signs the consent, and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated consent delivered to the
corporation in the manner herein required, written consents signed by a
sufficient number of stockholders to take action are delivered to the
corporation by delivery to its registered office in the State of Delaware,
its principal place of business or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders
are recorded. Delivery made to a corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested.

(c) Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing. If the action which is
consented to is such as would have required the filing of a certificate under
any section of the General Corporation Law of the State of Delaware if such
action had been voted on by stockholders at a meeting thereof, then the
certificate filed under such section shall state, in lieu of any statement
required by such section concerning any vote of stockholders, that written
consent has been given in accordance with Section 228 of the General
Corporation Law of Delaware.

(d) Notwithstanding the foregoing, no such action by
written consent may be taken following the closing of the initial public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "1933 Act"), covering the offer and sale of
Common Stock of the corporation (the "Initial Public Offering").

SECTION 14. ORGANIZATION.

(a) At every meeting of stockholders, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed or is
absent, the President, or, if the President is absent, a chairman of the
meeting chosen by a majority in interest of the stockholders entitled to
vote, present in person or by proxy, shall act as chairman. The Secretary,
or, in his absence, an Assistant Secretary directed to do so by the
President, shall act as secretary of the meeting.

(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject
to such rules and regulations of the Board of Directors, if

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any, the chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as,
in the judgment of such chairman, are necessary, appropriate or convenient
for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those
present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies
and such other persons as the chairman shall permit, restrictions on entry to
the meeting after the time fixed for the commencement thereof, limitations on
the time allotted to questions or comments by participants and regulation of
the opening and closing of the polls for balloting on matters which are to be
voted on by ballot. Unless and to the extent determined by the Board of
Directors or the chairman of the meeting, meetings of stockholders shall not
be required to be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

SECTION 15. NUMBER AND TERM OF OFFICE. The authorized
number of directors of the corporation shall be fixed in accordance with the
Certificate of Incorporation. Directors need not be stockholders unless so
required by the Certificate of Incorporation. If for any cause, the
directors shall not have been elected at an annual meeting, they may be
elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.

SECTION 16. POWERS. The powers of the corporation shall be
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the
Certificate of Incorporation.

SECTION 17. CLASSES OF DIRECTORS.

(a) Subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the Initial Public Offering,
the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the Initial Public Offering, the
term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a
full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.

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(b) Prior to the Initial Public Offering, subsection (a)
of this Bylaw shall not apply and all directors shall be designated of the
same class, each director shall hold office until the next annual meeting and
the directors shall be elected at each annual meeting of the stockholders to
hold office until the next annual meeting.

Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or
until his death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.

SECTION 18. VACANCIES. Unless otherwise provided in the
Certificate of Incorporation, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other causes
and any newly created directorships resulting from any increase in the number
of directors shall, unless the Board of Directors determines by resolution
that any such vacancies or newly created directorships shall be filled by
stockholders, be filled only by the affirmative vote of a majority of the
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for
which the vacancy was created or occurred and until such director's successor
shall have been elected and qualified. A vacancy in the Board of Directors
shall be deemed to exist under this Bylaw in the case of the death, removal
or resignation of any director.

SECTION 19. RESIGNATION. Any director may resign at any
time by delivering his written resignation to the Secretary, such resignation
to specify whether it will be effective at a particular time, upon receipt by
the Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the
Board of Directors. When one or more directors shall resign from the Board
of Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation
or resignations shall become effective, and each Director so chosen shall
hold office for the unexpired portion of the term of the Director whose place
shall be vacated and until his successor shall have been duly elected and
qualified.

SECTION 20. REMOVAL. Subject to the rights of the holders
of any series of Preferred Stock and the limitations imposed by law, the
Board of Directors or any individual director may be removed from office at
any time with cause by the affirmative vote of the holders of at least a
majority of the voting power of all the then-outstanding shares of voting
stock of the corporation, entitled to vote at an election of directors (the
"Voting Stock") or may be removed without cause by the affirmative vote of
the holders of sixty-six and two-thirds percent (66 2/3%) of all the
then-outstanding shares of Voting Stock.

SECTION 21. MEETINGS.

(a) ANNUAL MEETINGS The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such

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meeting is held. No notice of an annual meeting of the Board of Directors
shall be necessary and such meeting shall be held for the purpose of electing
officers and transacting such other business as may lawfully come before it.

(b) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place
within or without the State of Delaware which has been designated by
resolution of the Board of Directors or the written consent of all directors.

(c) SPECIAL MEETINGS. Unless otherwise restricted by
the Certificate of Incorporation, special meetings of the Board of Directors
may be held at any time and place within or without the State of Delaware
whenever called by the Chairman of the Board, the President or any two of the
directors.

(d) TELEPHONE MEETINGS. Any member of the Board of
Directors, or of any committee thereof, may participate in a meeting by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence in person
at such meeting.

(e) NOTICE OF MEETINGS. Notice of the time and place of
all special meetings of the Board of Directors shall be orally or in writing,
by telephone, including a voice messaging system or other system or
technology designed to record and communicate messages, facsimile, telegraph
or telex, or by electronic mail or other electronic means, during normal
business hours, at least twenty-four (24) hours before the date and time of
the meeting, or sent in writing to each director by first class mail, charges
prepaid, at least three (3) days before the date of the meeting. Notice of
any meeting may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.

(f) WAIVER OF NOTICE. The transaction of all business
at any meeting of the Board of Directors, or any committee thereof, however
called or noticed, or wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present and
if, either before or after the meeting, each of the directors not present
shall sign a written waiver of notice. All such waivers shall be filed with
the corporate records or made a part of the minutes of the meeting.

SECTION 22. QUORUM AND VOTING.

(a) Unless the Certificate of Incorporation requires a
greater number and except with respect to indemnification questions arising
under Section 43 hereof, for which a quorum shall be one-third of the exact
number of directors fixed from time to time in accordance

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with the Certificate of Incorporation, a quorum of the Board of Directors
shall consist of a majority of the exact number of directors fixed from time
to time by the Board of Directors in accordance with the Certificate of
Incorporation; PROVIDED, HOWEVER, at any meeting whether a quorum be present
or otherwise, a majority of the directors present may adjourn from time to
time until the time fixed for the next regular meeting of the Board of
Directors, without notice other than by announcement at the meeting.

(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different
vote be required by law, the Certificate of Incorporation or these Bylaws.

SECTION 23. ACTION WITHOUT MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting, if all members of
the Board of Directors or committee, as the case may be, consent thereto in
writing, and such writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.

SECTION 24. FEES AND COMPENSATION. Directors shall be
entitled to such compensation for their services as may be approved by the
Board of Directors, including, if so approved, by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, for attendance at
each regular or special meeting of the Board of Directors and at any meeting
of a committee of the Board of Directors. Nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee, or otherwise and receiving
compensation therefor.

SECTION 25. COMMITTEES.

(a) EXECUTIVE COMMITTEE. The Board of Directors may
appoint an Executive Committee to consist of one (1) or more members of the
Board of Directors. The Executive Committee, to the extent permitted by law
and provided in the resolution of the Board of Directors shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to (i)
approving or adopting, or recommending to the stockholders, any action or
matter expressly required by Delaware the General Corporation Law to be
submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.

(b) OTHER COMMITTEES. The Board of Directors may, from
time to time, appoint such other committees as may be permitted by law. Such
other committees appointed by the Board of Directors shall consist of one (1)
or more members of the Board of Directors and shall have such powers and
perform such duties as may be prescribed by the resolution or

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<PAGE>

resolutions creating such committees, but in no event shall any such
committee have the powers denied to the Executive Committee in these Bylaws.

(c) TERM. Each member of a committee of the Board of
Directors shall serve a term on the committee coexistent with such member's
term on the Board of Directors. The Board of Directors, subject to the
provisions of subsections (a) or (b) of this Bylaw may at any time increase
or decrease the number of members of a committee or terminate the existence
of a committee. The membership of a committee member shall terminate on the
date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason
remove any individual committee member and the Board of Directors may fill
any committee vacancy created by death, resignation, removal or increase in
the number of members of the committee. The Board of Directors may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee, and, in
addition, in the absence or disqualification of any member of a committee,
the member or members thereof present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.

(d) MEETINGS. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 25 shall be held at such times
and places as are determined by the Board of Directors, or by any such
committee, and when notice thereof has been given to each member of such
committee, no further notice of such regular meetings need be given
thereafter. Special meetings of any such committee may be held at any place
which has been determined from time to time by such committee, and may be
called by any director who is a member of such committee, upon written notice
to the members of such committee of the time and place of such special
meeting given in the manner provided for the giving of written notice to
members of the Board of Directors of the time and place of special meetings
of the Board of Directors. Notice of any special meeting of any committee
may be waived in writing at any time before or after the meeting and will be
waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized
number of members of any such committee shall constitute a quorum for the
transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.

SECTION 26. ORGANIZATION. At every meeting of the
directors, the Chairman of the Board of Directors, or, if a Chairman has not
been appointed or is absent, the President, or if the President is absent,
the most senior Vice President, or, in the absence of any such officer, a
chairman of the meeting chosen by a majority of the directors present, shall
preside over the meeting. The Secretary, or in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.

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ARTICLE V

OFFICERS

SECTION 27. OFFICERS DESIGNATED. The officers of the
corporation shall include, if and when designated by the Board of Directors,
the Chairman of the Board of Directors, the Chief Executive Officer, the
President, one or more Vice Presidents, the Secretary, the Chief Financial
Officer and the Treasurer, all of whom shall be elected at the annual
organizational meeting of the Board of Directors. The Board of Directors may
also appoint one or more Assistant Secretaries, Assistant Treasurers,
Controller and Assistant Controllers and such other officers and agents with
such powers and duties as it shall deem necessary. The Board of Directors
may assign such additional titles to one or more of the officers as it shall
deem appropriate. Any one person may hold any number of offices of the
corporation at any one time unless specifically prohibited therefrom by law.
The salaries and other compensation of the officers of the corporation shall
be fixed by or in the manner designated by the Board of Directors.

SECTION 28. TENURE AND DUTIES OF OFFICERS.

(a) GENERAL. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall have been
duly elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board
of Directors. If the office of any officer becomes vacant for any reason,
the vacancy may be filled by the Board of Directors.

(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors, when present, shall preside at all
meetings of the stockholders and the Board of Directors. The Chairman of the
Board of Directors shall perform other duties commonly incident to his office
and shall also perform such other duties and have such other powers as the
Board of Directors shall designate from time to time. If there is no
President, then the Chairman of the Board of Directors shall also serve as
the President of the corporation and shall have the powers and duties
prescribed in paragraph (c) of this Section 28.

(c) DUTIES OF PRESIDENT. The President shall preside at
all meetings of the stockholders and at all meetings of the Board of
Directors, unless the Chairman of the Board of Directors has been appointed
and is present. Unless some other officer has been elected Chief Executive
Officer of the corporation, the President shall be the Chief Executive
Officer of the corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business
and officers of the corporation. The President shall perform other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board of Directors shall designate from time to
time.

(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may
assume and perform the duties of the President in the absence or disability
of the President or whenever the office of President is vacant. The Vice
Presidents shall perform other duties commonly incident to their

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<PAGE>

office and shall also perform such other duties and have such other powers as
the Board of Directors or the President shall designate from time to time.

(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record
all acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings
of the stockholders and of all meetings of the Board of Directors and any
committee thereof requiring notice. The Secretary shall perform all other
duties given him in these Bylaws and other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time. The President may
direct any Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the Board
of Directors or the President shall designate from time to time.

(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief
Financial Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of
the financial affairs of the corporation in such form and as often as
required by the Board of Directors or the President. The Chief Financial
Officer, subject to the order of the Board of Directors, shall have the
custody of all funds and securities of the corporation. The Chief Financial
Officer shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time. The President
may direct the Treasurer or any Assistant Treasurer, or the Controller or any
Assistant Controller to assume and perform the duties of the Chief Financial
Officer in the absence or disability of the Chief Financial Officer, and each
Treasurer and Assistant Treasurer and each Controller and Assistant
Controller shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the Board
of Directors or the President shall designate from time to time.

SECTION 29. DELEGATION OF AUTHORITY. The Board of
Directors may from time to time delegate the powers or duties of any officer
to any other officer or agent, notwithstanding any provision hereof.

SECTION 30. RESIGNATIONS. Any officer may resign at any
time by giving written notice to the Board of Directors or to the President
or to the Secretary. Any such resignation shall be effective when received
by the person or persons to whom such notice is given, unless a later time is
specified therein, in which event the resignation shall become effective at
such later time. Unless otherwise specified in such notice, the acceptance
of any such resignation shall not be necessary to make it effective. Any
resignation shall be without prejudice to the rights, if any, of the
corporation under any contract with the resigning officer.

SECTION 31. REMOVAL. Any officer may be removed from
office at any time, either with or without cause, by the affirmative vote of
a majority of the directors in office at the time, or by the unanimous
written consent of the directors in office at the time, or by any committee
or

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superior officers upon whom such power of removal may have been conferred by
the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED
BY THE CORPORATION

SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board
of Directors may, in its discretion, determine the method and designate the
signatory officer or officers, or other person or persons, to execute on
behalf of the corporation any corporate instrument or document, or to sign on
behalf of the corporation the corporate name without limitation, or to enter
into contracts on behalf of the corporation, except where otherwise provided
by law or these Bylaws, and such execution or signature shall be binding upon
the corporation.

Unless otherwise specifically determined by the Board of
Directors or otherwise required by law, promissory notes, deeds of trust,
mortgages and other evidences of indebtedness of the corporation, and other
corporate instruments or documents requiring the corporate seal, and
certificates of shares of stock owned by the corporation, shall be executed,
signed or endorsed by the Chairman of the Board of Directors, or the
President or any Vice President, and by the Secretary or Treasurer or any
Assistant Secretary or Assistant Treasurer. All other instruments and
documents requiring the corporate signature, but not requiring the corporate
seal, may be executed as aforesaid or in such other manner as may be directed
by the Board of Directors.

All checks and drafts drawn on banks or other depositaries on
funds to the credit of the corporation or in special accounts of the
corporation shall be signed by such person or persons as the Board of
Directors shall authorize so to do.

Unless authorized or ratified by the Board of Directors or
within the agency power of an officer, no officer, agent or employee shall
have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
for any amount.

SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION.
All stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors, or, in the
absence of such authorization, by the Chairman of the Board of Directors, the
Chief Executive Officer, the President, or any Vice President.

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ARTICLE VII

SHARES OF STOCK

SECTION 34. FORM AND EXECUTION OF CERTIFICATES.
Certificates for the shares of stock of the corporation shall be in such form
as is consistent with the Certificate of Incorporation and applicable law.
Every holder of stock in the corporation shall be entitled to have a
certificate signed by or in the name of the corporation by the Chairman of
the Board of Directors, or the President or any Vice President and by the
Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary,
certifying the number of shares owned by him in the corporation. Any or all
of the signatures on the certificate may be facsimiles. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued with
the same effect as if he were such officer, transfer agent, or registrar at
the date of issue. Each certificate shall state upon the face or back
thereof, in full or in summary, all of the powers, designations, preferences,
and rights, and the limitations or restrictions of the shares authorized to
be issued or shall, except as otherwise required by law, set forth on the
face or back a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. Within a reasonable time after the
issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section
or otherwise required by law or with respect to this section a statement that
the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same
class and series shall be identical.

SECTION 35. LOST CERTIFICATES. A new certificate or
certificates shall be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen, or
destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. The
corporation may require, as a condition precedent to the issuance of a new
certificate or certificates, the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to advertise the
same in such manner as it shall require or to give the corporation a surety
bond in such form and amount as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate
alleged to have been lost, stolen, or destroyed.

SECTION 36. TRANSFERS.

(a) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders thereof, in
person or by attorney duly authorized, and upon the surrender of a properly
endorsed certificate or certificates for a like number of shares.

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(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more
classes of stock of the corporation to restrict the transfer of shares of
stock of the corporation of any one or more classes owned by such
stockholders in any manner not prohibited by the General Corporation Law of
Delaware.

SECTION 37. FIXING RECORD DATES.

(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the Board of Directors may fix, in advance, a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of
Directors may fix a new record date for the adjourned meeting.

(b) Prior to the Initial Public Offering, in order that
the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix a record date. The Board of
Directors shall promptly, but in all events within ten (10) days after the
date on which such a request is received, adopt a resolution fixing the
record date. If no record date has been fixed by the Board of Directors
within ten (10) days of the date on which such a request is received, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken
is delivered to the corporation by delivery to its registered office in the
State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to the corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and
prior action by the Board of Directors is required by law, the record date
for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action.

(c) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the

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<PAGE>

stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty
(60) days prior to such action. If no record date is fixed, the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.

SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall
be entitled to recognize the exclusive right of a person registered on its
books as the owner of shares to receive dividends, and to vote as such owner,
and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person whether or
not it shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds,
debentures and other corporate securities of the corporation, other than
stock certificates (covered in Section 34), may be signed by the Chairman of
the Board of Directors, the President or any Vice President, or such other
person as may be authorized by the Board of Directors, and, if required, the
corporate seal impressed thereon or a facsimile of such seal imprinted
thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Chief Financial Officer or Treasurer or an Assistant
Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other
corporate security shall be authenticated by the manual signature, or where
permissible facsimile signature, of a trustee under an indenture pursuant to
which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal, if
required, on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or
an Assistant Treasurer of the corporation or such other person as may be
authorized by the Board of Directors, or bear imprinted thereon the facsimile
signature of such person. In case any officer who shall have signed or
attested any bond, debenture or other corporate security, or whose facsimile
signature shall appear thereon or on any such interest coupon, shall have
ceased to be such officer before the bond, debenture or other corporate
security so signed or attested shall have been delivered, such bond,
debenture or other corporate security nevertheless may be adopted by the
corporation and issued and delivered as though the person who signed the same
or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.

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ARTICLE IX

DIVIDENDS

SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the
capital stock of the corporation, subject to the provisions of the
Certificate of Incorporation, if any, may be declared by the Board of
Directors pursuant to law at any regular or special meeting. Dividends may
be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the Certificate of Incorporation.

SECTION 41. DIVIDEND RESERVE. Before payment of any
dividend, there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the Board of Directors from time
to time, in their absolute discretion, think proper as a reserve or reserves
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
Board of Directors shall think conducive to the interests of the corporation,
and the Board of Directors may modify or abolish any such reserve in the
manner in which it was created.

ARTICLE X

FISCAL YEAR

SECTION 42. FISCAL YEAR. The fiscal year of the
corporation shall end on the 31st day of December or on such other date as
may be fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE
OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER
AGENTS.

(a) RIGHT TO INDEMNIFICATION. The corporation shall
indemnify and hold harmless, to the fullest extent permitted by Delaware
General Corporation Law as it presently exists or may hereafter be amended;
PROVIDED, HOWEVER, that the corporation may modify the extent of such
indemnification by individual contracts with its directors and executive
officers, any person (an "Indemnitee") who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit or Proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that he or she, or a person for whom he or she is the
legal representative, is or was a director or officer of the corporation or,
while a director or officer of the corporation, is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust, enterprise or
nonprofit entity, including service with respect to employee benefit plans,
against all liability and loss suffered and expenses (including attorneys'
fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding
sentence, except as otherwise provided in

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<PAGE>

paragraph (c) of this Section 43, the corporation shall be required to
indemnify an Indemnitee in connection with a Proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such Proceeding (or
part thereof) by the Indemnitee was authorized by the Board of Directors of
the corporation.

(b) PREPAYMENT OF EXPENSES. The corporation shall pay
the expenses (including attorneys' fees) incurred by an Indemnitee in
defending any Proceeding in advance of its final disposition, PROVIDED,
HOWEVER, that, to the extent required by law, such payment of expenses in
advance of the final disposition of the Proceeding shall be made only upon
receipt of an undertaking by the Indemnitee to repay all amounts advanced if
it should be ultimately determined that the Indemnitee is not entitled to be
indemnified under this Section 43 or otherwise.

(c) CLAIMS. If a claim for indemnification or payment of
expenses under this Section 43 is not paid in full within sixty days after a
written claim therefor by the Indemnitee has been received by the
corporation, the Indemnitee may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be
paid the expense of prosecuting such claim. In any such action the
corporation shall have the burden of proving that the Indemnitee is not
entitled to the requested indemnification or payment of expenses under
applicable law.

(d) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on
any indemnitee by this Section 43 shall not be exclusive of any other rights
which such Indemnitee may have or hereafter acquire under any statute,
provision of the certificate of incorporation, these Bylaws, agreement, vote
of stockholders or disinterested directors or otherwise. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.

(e) OTHER SOURCES. The corporation's obligation, if any,
to indemnify or to advance expenses to any Indemnitee who was or is serving
at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit
entity shall be reduced by any amount such Indemnitee may collect as
indemnification or advancement of expenses from such other corporation,
partnership, joint venture, trust, enterprise or non-profit enterprise.

(f) INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.

(g) AMENDMENT OR REPEAL. Any repeal or modification of
the foregoing provisions of this Section 43 shall not adversely affect any
right or protection hereunder of any Indemnitee in respect of any act or
omission occurring prior to the time of such repeal or modification.

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<PAGE>

(h) OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.
This Section 43 shall not limit the right of the corporation, to the extent
and in the manner permitted by law, to indemnify and to advance expenses to
persons other than Indemnitees when and as authorized by appropriate
corporate action.

ARTICLE XII

NOTICES

SECTION 44. NOTICES.

(a) NOTICE TO STOCKHOLDERS. Whenever, under any
provisions of these Bylaws, notice is required to be given to any
stockholder, it shall be given in writing, timely and duly deposited in the
United States mail, postage prepaid, and addressed to his last known post
office address as shown by the stock record of the corporation or its
transfer agent.

(b) NOTICE TO DIRECTORS. Any notice required to be
given to any director may be given by the method stated in subsection (a), or
by facsimile, telex or telegram, except that such notice other than one which
is delivered personally shall be sent to such address as such director shall
have filed in writing with the Secretary, or, in the absence of such filing,
to the last known post office address of such director.

(c) AFFIDAVIT OF MAILING. An affidavit of mailing,
executed by a duly authorized and competent employee of the corporation or
its transfer agent appointed with respect to the class of stock affected,
specifying the name and address or the names and addresses of the stockholder
or stockholders to whom any such notice or notices was or were given, and the
time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.

(d) TIME NOTICES DEEMED GIVEN. All notices given by
mail, as above provided, shall be deemed to have been given as at the time of
mailing, and all notices given by facsimile, telex or telegram shall be
deemed to have been given as of the sending time recorded at time of
transmission.

(e) METHODS OF NOTICE. It shall not be necessary that
the same method of giving notice be employed in respect of all directors, but
one permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other
or others.

(f) FAILURE TO RECEIVE NOTICE. The period or limitation
of time within which any stockholder may exercise any option or right, or
enjoy any privilege or benefit, or be required to act, or within which any
director may exercise any power or right, or enjoy any privilege, pursuant to
any notice sent him in the manner above provided, shall not be affected or
extended in any manner by the failure of such stockholder or such director to
receive such notice.

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<PAGE>

(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS
UNLAWFUL. Whenever notice is required to be given, under any provision of
law or of the Certificate of Incorporation or Bylaws of the corporation, to
any person with whom communication is unlawful, the giving of such notice to
such person shall not be required and there shall be no duty to apply to any
governmental authority or agency for a license or permit to give such notice
to such person. Any action or meeting which shall be taken or held without
notice to any such person with whom communication is unlawful shall have the
same force and effect as if such notice had been duly given. In the event
that the action taken by the corporation is such as to require the filing of
a certificate under any provision of the Delaware General Corporation Law,
the certificate shall state, if such is the fact and if notice is required,
that notice was given to all persons entitled to receive notice except such
persons with whom communication is unlawful.

(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS.
Whenever notice is required to be given, under any provision of law or the
Certificate of Incorporation or Bylaws of the corporation, to any stockholder
to whom (i) notice of two consecutive annual meetings, and all notices of
meetings or of the taking of action by written consent without a meeting to
such person during the period between such two consecutive annual meetings,
or (ii) all, and at least two, payments (if sent by first class mail) of
dividends or interest on securities during a twelve-month period, have been
mailed addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice
to such person shall not be required. Any action or meeting which shall be
taken or held without notice to such person shall have the same force and
effect as if such notice had been duly given. If any such person shall
deliver to the corporation a written notice setting forth his then current
address, the requirement that notice be given to such person shall be
reinstated. In the event that the action taken by the corporation is such as
to require the filing of a certificate under any provision of the Delaware
General Corporation Law, the certificate need not state that notice was not
given to persons to whom notice was not required to be given pursuant to this
paragraph.

ARTICLE XIII

AMENDMENTS

SECTION 45. AMENDMENTS. Subject to paragraph (g) of
Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws
adopted by the affirmative vote of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock. The Board of Directors shall also have the power to adopt,
amend, or repeal Bylaws.

ARTICLE XIV

LOANS TO OFFICERS

SECTION 46. LOANS TO OFFICERS. The corporation may lend
money to, or guarantee any obligation of, or otherwise assist any officer or
other employee of the corporation or of its subsidiaries, including any
officer or employee who is a Director of the corporation or its

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<PAGE>

subsidiaries, whenever, in the judgment of the Board of Directors, such loan,
guarantee or assistance may reasonably be expected to benefit the
corporation. The loan, guarantee or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in these Bylaws shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.

<PAGE>

DIGITAL RIVER, INC.
1998 STOCK OPTION PLAN

APPROVED BY STOCKHOLDERS ON _______, 1998

1.) INTRODUCTION; PURPOSES. The Digital River, Inc. (the "Corporation") 1998
Stock Option Plan (the "Plan") amends and restates the Amended and Restated
1994 Stock Option Plan. The principal purposes of the Plan are: (a) to
improve individual performance by providing long-term incentives and rewards
to employees, directors and consultants of the Corporation; (b) to assist the
Corporation in attracting, retaining and motivating employees and consultants
with experience and ability; and (c) to associate the interests of such
persons with those of the Corporation's stockholders.

Options granted under this Plan may either be Incentive Stock Options
qualified under Section 422 of the Code or Non-Qualified Options.

2.) DEFINITIONS. For purposes of this Plan, the following terms shall have
the meanings indicated below:

(01) "Affiliate" - any parent corporation or subsidiary corporation of
the Corporation, whether now or hereafter existing, as those terms are
defined in Sections 424(e) and (f), respectively, of the Code.

(02) "Capital Stock" - any of the Corporation's authorized but unissued
shares of voting common stock, par value of One Cent ($.01) per share.

(03) "Code" - the Internal Revenue Code of 1986, as amended from time to
time.

(04) "Committee" - a committee consisting solely of not less than two
members of the Board of Directors of the Corporation who are "Non-Employee
Directors" within the meaning of and to the extent required by the general
rules and regulations promulgated pursuant to Section 16 of the Exchange Act.
The term "Committee" shall refer to the Board of Directors of the
Corporation during such times as no committee is appointed by the Board of
Directors.

(05) "Continuous Service" - the Optionee's service with the Corporation
or an Affiliate, whether as an employee, director or consultant, is not
interrupted or terminated. The Optionee's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionee renders service to the Corporation or an Affiliate as an
employee, consultant or director or a change in the entity for which the
Optionee renders such service, provided that there is no interruption or
termination of the Optionee's Continuous Service. For example, a change in
status from an employee of the Corporation to a consultant of an Affiliate or
a director of the Corporation will not constitute an interruption of
Continuous Service. The Board of Directors of the Corporation or the chief
executive officer of the Corporation, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the
case of any leave of absence approved by that party, including sick leave,
military leave or any other personal leave.

<PAGE>

(06) "Corporation" - effective December 29, 1997, Digital River, Inc., a
Delaware corporation and any of its Affiliates.

(07) "Covered Employee" - the Chief Executive Officer and the four (4)
other highest compensated officers of the Corporation for whom total
compensation is required to be reported to stockholders under the Exchange
Act, as determined for purposes of Section 162(m) of the Code.

(08) "Exchange Act" - the Securities Exchange Act of 1934, as amended.

(09) "Fair Market Value" - the price per share determined as follows:
(a) if the security is listed for trading on one or more national securities
exchanges (including the NASDAQ National Market System), the reported last
sales price on such principal exchange on the date in question, or if such
security shall not have been traded on such principal exchange on such date,
the reported last sales price on such principal exchange on the first day
prior thereto on which such security was so traded; or (b) if the security is
not listed for trading on a national securities exchange (including the
NASDAQ National Market System) but is traded in the over-the-counter market,
the mean of the highest and lowest bid prices for such security on the date
in question, or if there are no such bid prices for such security on such
date, the mean of the highest and lowest bid prices on the first day prior
thereto on which such prices existed; or (c) if neither (a) nor (b) is
applicable, by any means deemed fair and reasonable by the Committee (as
defined below) which determination shall be final and binding on all parties.

(10) "Incentive Stock Option" - an option defined in Section 422 of the
Code to purchase shares of the Capital Stock of the Corporation.

(11) "Non-Qualified Stock Option" - an option, not intended to qualify
as an Incentive Stock Option as defined in Section 422 of the Code, to
purchase Capital Stock of the Corporation.

(12) "Option" - the term shall refer to either an Incentive Stock Option
or a Non-Qualified Stock Option.

(13) "Option Agreement" - a written agreement pursuant to which the
Corporation grants an option to an Optionee and sets the terms and conditions
of the Option.

(14) "Option Date" - the date upon which an option Agreement for an
Option granted pursuant to this Plan is duly executed by or on behalf of the
Corporation.

(15) "Option Stock" - the voting common stock of the Corporation, par
value of One Cent ($.01) per share (subject to adjustment as described in
Section 8) reserved for Options pursuant to this Plan, or any other class of
stock of the Corporation which may be substituted therefor by exchange, stock
split or otherwise.

(16) "Optionee" - an officer, management level employee, other employee,
consultant or director of the Corporation or one of its Affiliates to whom an
Option has been granted under the Plan.

<PAGE>

(17) "Outside Director" - a director of the Corporation who either (i)
is not a current employee of the Corporation or an "affiliated corporation"
(within the meaning of Treasury Regulations promulgated under Section 162(m)
of the Code), is not a former employee of the Corporation or an "affiliated
corporation" receiving compensation for prior services (other than benefits
under a tax qualified pension plan), was not an officer of the Corporation or
an "affiliated corporation" at any time and is not currently receiving direct
or indirect remuneration from the Corporation or an "affiliated corporation"
for services in any capacity other than as a director or (ii) is otherwise
considered an "outside director" for purposes of Section 162(m) of the Code.

(18) "Plan" - this 1998 Stock Option Plan, as amended hereafter from
time to time.

(19) "Rule 16b-3" - Rule 16b-3 promulgated under the Exchange Act or any
successor to Rule 16b-3, as in effect from time to time.

3.) OPTIONS AVAILABLE UNDER PLAN. The Corporation's authorized Capital Stock
in an amount equal to 3,500,000 shares is hereby made available, and shall be
reserved for issuance under this Plan. The aggregate number of shares
available under this Plan shall be subject to adjustment on the occurrence of
any of the events and in the manner set forth in Section 8. Except as
provided in Section 8, in no event shall the number of shares reserved be
reduced below the number of shares issuable upon exercise of outstanding
Options. If an option shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares, shall (unless the Plan
shall have been terminated) become available for other Options under the Plan.

4.) ADMINISTRATION. The Plan shall be administered by the Committee. The
Corporation shall grant Options pursuant to the Plan upon determinations of
the Committee as to which of the eligible persons shall be granted Options,
the number of shares to be optioned and the term during which any such
Options may be exercised. The Committee may from time to time adopt rules and
regulations for carrying out the Plan and shall have authority and discretion
to interpret and construe any provision of the Plan. Each determination,
interpretation or other action made or taken by the Committee pursuant to the
provisions of the Plan shall be final and conclusive. No member of the
Committee will be liable for any action or determination made in good faith
with respect to the Plan or any Option granted under the Plan.

At such time as the Capital Stock is publicly traded, in the discretion of
the Board of Directors of the Corporation, the Committee may consist solely of
two or more Outside Directors, in accordance with Section 162(m) of the Code,
and/or solely of two or more Non-Employee Directors, in accordance with Rule
16b-3. Within the scope of such authority, the Board of Directors of the
Corporation or the Committee may (i) delegate to a committee of one or more
members of the Board who are not Outside Directors, the authority to grant
Options to eligible persons who are either (a) not then Covered Employees and
are not expected to be Covered Employees at the time of recognition of income
resulting from such Option or (b) not persons with respect to whom the
Corporation wishes to comply with Section 162(m) of the Code and/or (ii)
delegate to a committee of one or more members of the Board who are not Non-

<PAGE>

Employee Directors the authority to grant Options to eligible persons who are
not then subject to Section 16 of the Exchange Act.

5.) ELIGIBILITY FOR INCENTIVE STOCK OPTIONS. Incentive Stock Options may
only be granted to an officer employee, management level employee or other
employee of the Corporation or any of its Affiliates. A director of the
Corporation who is not also an employee shall not be eligible to receive an
Incentive Stock Option.

In selecting the employees to whom Incentive Stock Options shall be
granted, as well as determining the number of shares subject to each Option,
the Committee shall take into consideration such factors as it deems relevant
in connection with accomplishing the purposes of the Plan. For any calendar
year, the aggregate Fair Market Value (determined at the Option Date) of the
stock with respect to which any Incentive Stock Options are exercisable for
the first time by any individual employee (under all Incentive Stock Option
plans of the Corporation, and all Affiliate corporations) shall not exceed
$100,000. Subject to the provisions of Section 3, an employee who has been
granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or options if the Committee shall so determine.

No Incentive Stock Option may be granted under this Plan later than the
expiration of ten (10) years from the adoption of this Plan by the Board of
Directors or the approval of this Plan by the stockholders, whichever is
earlier. Subject to the provisions of Section 8, relating to adjustments upon
changes in stock, no employee shall be eligible to be granted Options
covering more than five hundred thousand (500,000) shares of the Capital
Stock during any calendar year.

6.) ELIGIBILITY FOR NON-QUALIFIED OPTIONS. Non-Qualified Options may be
granted only to an officer, director, management level employee, other
employee or consultant of the Corporation or a Affiliate. No further
restrictions are placed on the Committee in determining eligibility for
granting Non-Qualified Options. Subject to the provisions of Section 8,
relating to adjustments upon changes in stock, no employee shall be eligible
to be granted Options covering more than five hundred thousand (500,000)
shares of the Capital Stock during any calendar year.

7.) TERMS AND CONDITIONS OF OPTIONS. Whenever the Committee shall designate
an Optionee, it shall communicate to the Secretary of the Corporation the
name of the Optionee, the number of shares to be Optioned and such other
terms and conditions as it shall determine, not inconsistent with the
provisions of this Plan. The President or other officer of the Corporation
shall then enter into an Option Agreement with the Optionee, complying with
and subject to the following terms and conditions and setting forth such
other terms and conditions of the Option as determined by the Committee:

(01) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares to which it pertains. The price of Option Stock
for an Incentive Stock Option, shall be not less than one hundred percent
(100%) of the Fair Market Value of the Option Stock at the Option Date. The
price of the Option Stock for a Non-Qualified Stock Option shall be
determined by the Committee and may be less than the Fair Market Value at the
Option Date. In the event an Incentive Stock Option is granted to an employee
who, at the Option Date, owns more than ten percent (10%) of the total
combined voting power of all classes of the Corporation's stock then
outstanding, the price of the shares of common stock which will be

<PAGE>

covered by such Option shall be at least one hundred ten percent (110%) of
the Fair Market Value of the common stock at the Option Date. The Option
price shall be subject to adjustment as provided in Section 8 hereof.
Notwithstanding the foregoing, an Incentive Stock Option may be granted with
an exercise price lower than that set forth in this paragraph if such Option
is granted pursuant to an assumption or substitution for another option in a
manner satisfying the provisions of Section 424(a) of the Code.

(02) TIME AND MANNER OF EXERCISE OF OPTION. Options granted hereunder
shall be exercisable as determined by the Committee at the time of the grant
of such Options. Notwithstanding the foregoing, no Option may be exercised
after ten (10) years from the date on which the option was granted; provided
that no incentive stock option granted to a holder of ten percent (10%) of
the Corporation's voting capital stock may be exercised after five (5) years
from the date on which it was granted.

(03) TERMINATION OF CONTINUOUS SERVICE, EXCEPT DEATH OR DISABILITY. In
the event that the continuous service of an Optionee shall cease for any
reason other than his or her death, disability or "for cause," any vested
outstanding Options shall terminate at the time specified in the Option
Agreement; provided, however, that such vested outstanding Options shall not
be exercisable for a period greater than three (3) months after the
termination of the employee. Any vested Options not exercised within the
period specified in the Option Agreement shall terminate at the expiration of
such period. If no such period is specified in the Option Agreement, then any
vested outstanding Options shall terminate at the time of the Optionee's
termination of continuous service. In the event that Optionee shall be
terminated "for cause" including but not limited to: (i) willful breach of
any agreement entered into with the Corporation; (ii) misappropriation of the
Corporation's property, fraud, embezzlement, breach of fiduciary duty, other
acts of dishonesty against the Corporation; or (iii) conviction of any felony
or crime involving moral turpitude, the Option shall terminate as of the date
of the Optionee's termination of continuous service.

(04) DEATH OR DISABILITY OF OPTIONEE. If the Optionee shall die or
become disabled within the definition of Section 22(e)(3) of the Code while
in the employ of the Corporation or any Affiliate or if the Optionee shall
die within the period after the termination of his or her continuous service
with the Corporation or any Affiliate as provided in paragraph (03) of this
section, and in either case shall not have fully exercised his or her vested
Options, any vested Options granted pursuant to the Plan which were
exercisable at the date of termination of continuous service shall terminate
at the time specified in the option Agreement; provided, however, that such
vested Options shall not be exercisable for a period greater than one (1)
year following his or her death or date of disability. If no such periods are
specified in the Option Agreement, then any vested outstanding Options shall
be exercisable only within: (i) six (6) months following the optionee's death
and (ii) thirty (30) days following the Optionee's disability. In the case of
death, such Option shall be exercised pursuant to subparagraph (06) of this
Section by the Person or persons to whom the optionee's rights under the
Option shall pass by the Optionee's will or by the laws of descent and
distribution, and only to the extent that such Options were exercisable at
the time of death.

(05) TRANSFER OF OPTION. Each Option granted hereunder shall, by its
terms, not be transferable by the Optionee other than by will or by the laws
of descent and distribution, and

<PAGE>

shall be, during the Optionee's lifetime, exercisable only by the Optionee or
Optionee's guardian or legal representative. Except as permitted by the
preceding sentence, each Option granted under the Plan and the rights and
privileges thereby conferred shall not be transferred, assigned or pledged in
any way (whether by operation of law or otherwise) and shall not be subject
to execution, attachment or similar process. Upon any attempt to so transfer,
assign, pledge, or otherwise dispose of the option, or of any right or
privilege conferred thereby, contrary to the provisions of the Option or the
Plan, or upon levy of any attachment or similar process upon such rights and
privileges, the Option, and such rights and privileges, shall immediately
become null and void.

(06) MANNER OF EXERCISE OF OPTIONS. An Option may be exercised, in whole
or in part, at such time or times and with such rights with respect to such
shares which have accrued and are in effect. Such Option shall be exercisable
only by: (i) written notice to the Corporation of intent to exercise the
Option with respect to a specified number of shares of stock; (ii) tendering
the original Option Agreement to the Corporation; and (iii) payment to the
Corporation of the amount of the Option purchase price for the number of
shares of stock with respect to which the Option is then exercised. Payment
of the Option purchase price shall be made in the manner set forth in the
Option Agreement, which may be in: (i) cash, check or equivalent form; (ii)
by delivery of shares of common stock of the Corporation which have been
owned for no less than six (6) months, With a Fair Market Value equal to the
Option purchase price; (iii) by a combination of cash and shares of common
stock of the Corporation, which value together shall equal the Option
purchase price; provided, however, that there shall be no such exercise at
any time as to fewer than one hundred (100) shares or all of the remaining
shares then purchasable by the Optionee or person exercising the Option. When
all shares of Optioned stock covered by the Option Agreement have been issued
to the Optionee, or the Option shall expire, the Option Agreement shall be
canceled.

(07) OPTION CERTIFICATE. The Board of Directors shall have discretion to
issue a certificate representing an Option granted pursuant to this Plan.
Such certificate shall be surrendered to the Corporation upon exercise of the
Option.

(08) DELIVERY OF CERTIFICATE. Except where shares are held for unpaid
withholding taxes, between fifteen (15) and thirty (30) days after receipt of
the written notice and payment specified above, the Corporation shall deliver
to the Optionee certificates for the number of shares with respect to which
the Option has been exercised, issued in the Optionee's name; provided,
however, that such delivery shall be deemed effected for all purposes when
the Corporation, or the stock transfer agent for the Corporation, shall have
deposited such certificates in the United States mail, postage prepaid,
addressed to the Optionee and the address specified in the written notice of
exercise.

(09) OTHER PROVISIONS. The Option Agreements under this Section shall
contain such other provisions as the Committee shall deem advisable.

8.) ADJUSTMENTS.

(01) CAPITALIZATION ADJUSTMENTS. If any change is made in the Capital
Stock subject to the Plan, or subject to any Option, without the receipt of
consideration by the Corporation

<PAGE>

(through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or other transaction not involving the receipt
of consideration by the Corporation), the Plan will be appropriately adjusted
in the class(es) and maximum number of shares subject to the Plan pursuant to
Section 3.) and the maximum number of shares subject to award to any person
pursuant to Sections 5 and 6.), and the outstanding Options will be
appropriately adjusted in the class(es) and number of shares and price per
share of stock subject to such outstanding Options. Such adjustments shall
be made by the Board of Directors of the Corporation, the determination of
which shall be final, binding and conclusive. (The conversion of any
convertible securities of the Corporation shall not be treated as a
transaction "without receipt of consideration" by the Corporation.)

(02) CHANGE IN CONTROL-ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (1) a sale of substantially all of the assets of the
Corporation, (2) a merger or consolidation in which the Corporation is not
the surviving corporation or (3) a reverse merger in which the Corporation is
the surviving corporation but the shares of Capital Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, then
any surviving corporation or acquiring corporation shall assume any Options
outstanding under the Plan or shall substitute similar Options (including an
award to acquire the same consideration paid to the stockholders in the
transaction described in this Section 8, paragraph (02) for those outstanding
under the Plan. In the event any surviving corporation or acquiring
corporation refuses to assume such Options or to substitute similar Options
for those outstanding under the Plan but subject to the restrictions in this
Section 8, paragraph (04), then with respect to Options held by Optionees
whose Continuous Service has not terminated, the vesting shall be accelerated
in full, and the Options shall terminate if not exercised at or prior to such
event. With respect to any other Options outstanding under the Plan, such
Options shall terminate if not exercised prior to such event.

(03) CHANGE IN CONTROL-SECURITIES ACQUISITION. In the event of an
acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Exchange Act, or any comparable successor provisions
(excluding any employee benefit plan, or related trust, sponsored or
maintained by the Corporation or an Affiliate) of the beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act, or
comparable successor rule) of securities of the Corporation representing at
least fifty percent (50%) of the combined voting power entitled to vote in
the election of directors (other than an acquisition pursuant to Section 8,
paragraph (02) above), then with respect to Options held by Optionees whose
Continuous Service has not terminated and subject to the restrictions in
Section 8, paragraph (04), the vesting of such Options shall be accelerated
in full.

(04) POOLING OF INTERESTS. If the Corporation and the other party to
the transaction constituting a "change in control" as described in this
Section 8 agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact
is so treated, then the accelerated vesting of options described in this
Section 8.) shall not occur to the extent that the Corporation's independent
public accountants and such other party's independent public accountants
separately determine in good faith that such acceleration would preclude the
use of "pooling of interests" accounting.

<PAGE>

9.) NO RIGHTS AS STOCKHOLDER. An Optionee shall not, by reason of any option
granted hereunder, have any right of a stockholder of the Corporation with
respect to the shares covered by his Option until such shares shall have been
issued to the Optionee.

10.) NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall impose
no obligation upon the Optionee to exercise such option. Neither shall the
Plan confer upon the Optionee any rights respecting continued continuous
service nor limit the Optionee's rights or the Corporation's rights to
terminate such continuous service.

11.) WITHHOLDING TAXES. Whenever under the Plan shares of Option Stock are to
be issued upon exercise of the motions granted hereunder and prior to the
delivery of any certificate or certificates for said shares by the
Corporation, the Corporation shall have the right to require the Optionee to
remit to the Corporation an amount sufficient to satisfy any federal and
state withholding or other employment taxes resulting from such exercise. In
the event that withholding taxes are not paid within five days after the date
of exercise, to the extent permitted by law the Corporation shall have the
right, but not the obligation, to cause such withholding taxes to be
satisfied by reducing the number of shares of stock deliverable or by
offsetting such withholding taxes against amounts otherwise due from the
Corporation to the Optionee. If withholding taxes are paid by reduction of
the number of shares deliverable to Optionee, such shares shall be valued at
the Fair Market Value as of the fifth business day following the date of
exercise.

12.) PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION.
Unless the shares to be issued upon exercise of an Option granted under the
Plan have been effectively registered under the Securities Act of 1933 as now
in force or hereafter amended (the "1933 Act"), the Corporation shall be
under no obligation to issue any shares covered by any Option unless the
person who exercises such Option, whether such exercise is in whole or in
part, shall give a written representation and undertaking to the Corporation
which is satisfactory in form and scope to counsel for the Corporation and
upon which, in the opinion of such counsel, the Corporation may reasonably
rely, that he or she is acquiring the shares issued to him or her pursuant to
such exercise of the option for his or her own account as an investment and
not with a view to, or for sale in connection with, the distribution of any
such shares, and that he or she will make no transfer of the same except in
compliance with any rules and regulations in force at the time of such
transfer under the 1933 Act, or any other applicable law, and that if shares
are issued without such registration a legend to this effect may be endorsed
on the securities so issued. In the event that the Company shall,
nevertheless, deem it necessary or desirable to register under the 1933 Act
or other applicable statutes any shares with respect to which an Option shall
have been exercised, or to qualify any such shares for exemption from the
1933 Act or other applicable statutes, then the Corporation shall take such
action at its own expense and may require from each participant such
information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for
such purpose and may require reasonable indemnity to the Company and its
officers and directors from such holder against all losses, claims, damages
and liabilities arising from such use of the information so furnished and
caused by any untrue statement of any material fact required to be stated
therein or necessary to make the statement therein not misleading in light of
the circumstances under which they were made.

<PAGE>

13.) MODIFICATION OF OUTSTANDING OPTIONS. The Committee may accelerate the
exercisability of an outstanding Option and may authorize modification of any
outstanding Option with the consent of the participant when and subject to
such conditions as are deemed to be in the best interests of the Corporation
and in accordance with the purposes of the Plan.

14.) FOREIGN EMPLOYEES. Without amending the Plan, the Committee may grant
Options to eligible employees who are foreign nationals on such terms and
conditions different from those specified in this Plan as may in the judgment
of the Committee be necessary or desirable to foster and promote achievement
of the purposes of the Plan, and, in furtherance of such purposes the
Committee may make such modification, amendments, procedures, subplans and
the like as may be necessary or advisable to comply with provisions of laws
in other countries in which the Corporation operates or has employees.

15.) APPROVAL OF STOCKHOLDERS. This Plan is expressly subject to approval of
holders of the majority of the outstanding shares of Common Stock of the
Corporation, and if it is not so approved on or before twelve (12) months
after the date of adoption of this Plan by the Board of Directors, the Plan
shall not come into effect and any Options granted Pursuant to this Plan
shall be deemed canceled.

16.) LIQUIDATION. Upon the complete liquidation of the Corporation, any
unexercised Options theretofore granted under this Plan shall be deemed
canceled, except as otherwise provided in Section 8 in connection with a
merger, consolidation or reorganization of the Corporation.

17.) RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions of
Section 7, the Corporation may delay the issuance of shares covered by the
exercise of any Option and the delivery of a certificate for such shares
until one of the following conditions shall be satisfied:

(01) The shares with respect to which the Option has been exercised are
at the time of the issue of such shares effectively registered under
applicable Federal and State securities acts as now in force or hereafter
amended; or

(02) A no-action letter in respect of the issuance of such shares shall
have been obtained by the Corporation from the Securities and Exchange
Commission and any applicable state securities commissioner; or

(03) Counsel for the Corporation shall have given an opinion, which
opinion shall not be unreasonably conditioned or withheld, that such shares
are exempt from registration under applicable Federal and State securities
acts as now in force or hereafter amended.

It is intended that all exercise of Options shall be effective, and the
Corporation shall use its best efforts to bring about compliance with the
above conditions within a reasonable time, except that the Corporation shall
be under no obligation to cause a registration statement or a post-effective
amendment to any registration statement to be prepared at its expense solely
for the purpose of covering the issue of shares in respect of which any
option may be exercised.

18.) TERMINATION AND AMENDMENT OF THE PLAN. This Plan shall terminate ten
(10) years after June 9, 1998, the date the Plan is adopted by the Board, or
at such earlier time as the Board of

<PAGE>

Directors shall determine. Any termination shall not affect any Options then
outstanding under the Plan.

The Board or the Committee at any time, and from time to time, may amend
the Plan. However, except as provided in Section 8 relating to adjustments
upon changes in stock, no amendment shall be effective unless approved by the
stockholders of the Corporation to the extent stockholder approval is
necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements. The Board or the
Committee may, in its sole discretion, submit any other amendment to the Plan
for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid
to certain executive officers.

19.) INDEMNIFICATION. In addition to such other rights of indemnification as
they may have and subject to limitations of applicable law, the members of
the Committee shall be indemnified by the Corporation against all costs and
expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with the Plan or any
rights granted thereunder and against all amounts paid to them in settlement
thereof or paid by them in satisfaction of a judgment of any such action,
suit or proceeding. The Committee member or members shall notify the
Corporation in writing, giving the Corporation an opportunity at its own cost
to defend the same before such Committee member or members undertake to
defend the same on their own behalf.

20.) GENERAL PROVISIONS. If any day on or before which action under the Plan
must be taken falls on a Saturday, Sunday, or legal holiday, such action may
be taken on the next succeeding day not a Saturday, Sunday or legal holiday.
To the extent that federal laws do not otherwise control, the Plan and all
determinations made and actions taken pursuant hereto shall be governed by
and construed under the laws of the State of Delaware.

<PAGE>

DIGITAL RIVER EMPLOYMENT AGREEMENT FOR JOEL A. RONNING

This AGREEMENT is made effective as of May 25, 1998 by and between Digital
River Inc. (the "Company"), a corporation organized under the laws of Delaware,
with its principal administrative office at 5198 West 76th Street, Edina,
Minnesota and Joel A. Ronning (the "Executive").

WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement; and

WHEREAS, the Executive is willing to serve in the employ of the Company on
a full-time basis for said period.

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:

1. POSITION AND RESPONSIBILITIES.

During the period of his employment hereunder, Executive agrees to serve as
Chairman and Chief Executive Officer of the Company. The Executive shall serve
as a full time employee of the Company to perform such duties as the Company may
from time to time reasonably direct. The Executive's responsibilities will
include, among other things, (i) developing and assisting in the development of
new products and business for the Company, (ii) supervising the preparation and
development of budgets for the Company for approval by the Board of Directors,
and (iii) developing and directing the Company's on-line services, finance,
marketing, sales and technology areas. Notwithstanding the above, the Executive
may maintain his interests existing as of the date hereof in Tech Squared Inc.
so long as the services rendered by the Executive in connection with the
position does not substantially interfere with the Executive's performance of
his duties under this Agreement.

2. TERM.

(a) The period of Executive's employment under this Agreement shall be deemed
to have commenced as of the date hereof, and shall continue for a period of
twenty-four (24) full calendar months thereafter (the "Expiration Date").
Unless written notice shall have been delivered by the party desiring to
terminate this Agreement, which written notice shall have been delivered not
later than 120 days prior to the Expiration Date (including the Expiration Date
with respect to any renewed term), this Agreement shall be renewed for
consecutive one (1) year periods.

(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, and reasonable vacation periods, Executive shall
devote substantially all his business time, attention, skill, and efforts to the
faithful performance of his duties hereunder including activities and services
related to the organization, operation and management of the Company, provided,
however, that, with the approval of the Board of Directors of the Company (the
"Board"), as evidenced by a resolution of such Board, from time to time,
Executive may serve,

<PAGE>

or continue to serve, on the boards of directors of, and hold any other
offices or positions in, companies or organizations, which, in such Board's
judgment, will not present any conflict of interest with the Company, or
materially affect the performance of Executive's duties pursuant to this
Agreement.

(c) Notwithstanding anything herein contained to the contrary: (i) Executive's
employment with the Company may be terminated by the Company or Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement; and (ii) nothing in this Agreement shall mandate or prohibit a
continuation of Executive's employment following the expiration of the term of
this Agreement upon such terms and conditions as the Board and Executive may
mutually agree.

3. COMPENSATION AND REIMBURSEMENT.

(a) The compensation specified under this Agreement shall constitute the salary
and benefits paid for the duties described in Section 1. The Company shall pay
Executive as compensation a salary of not less than $140,000 per year to be
increased to not less than $225,000 per year upon the successful completion of
an initial public offering ("Base Salary"). Such Base Salary shall be payable
in accordance with the Company's payroll practice in effect from time to time.
During the period of this Agreement, Executive's Base Salary shall be reviewed
at least annually; the first such review will be made no later than one year
from the date of this Agreement. Such review shall be conducted by a Committee
designated by the Board, and the Board may increase Executive's Base Salary. An
increase shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Company shall
also provide Executive at no cost to Executive with all such other benefits as
are provided uniformly to permanent full-time employees of the Company.

(b) The Executive shall also receive an annual bonus amount to be determined by
the Board. The bonus availability for 1998 will be 100% of the base salary at
the time of successful completion of the bonus objectives. The 1998 bonus
objectives are as follows: 50% of the bonus for the successful completion of an
IPO (based on the post IPO Base Salary), 50% of the bonus based on the
achievement of 1998 revenue goals as set forth by the compensation committee.

Executive shall continue to be entitled to receive an annual bonus in an amount
to be determined by the Board, this bonus will be similar in scope to the 1998
bonus. The Executive shall only be eligible for an annual bonus as long as the
Executive remains an employee of the Company.

(c) The Executive will be entitled to four (4) weeks paid vacation annually.
The Executive will be entitled to participate in or receive benefits under any
employee benefit plans including, but not limited to, retirement plans (i.e.,
401(k) plans), supplemental retirement plans, pension plans, profit-sharing
plans, health-and-accident plan, medical coverage or any other employee benefit
plan or arrangement made available by the Company currently or in the future to
its senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan of the company in which

<PAGE>

Executive is eligible to participate. Nothing paid to the Executive under
any such plan or arrangement will be deemed to be in lieu of other
compensation to which the Executive is entitled under this Agreement. In
addition the Company shall maintain term life insurance, naming the
Executive's designee as beneficiary, in the face amount of $1,000,000.

(d) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraphs (b) and (c) of this
Section 3, the Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement.

(e) It is agreed that the company has already granted to the Executive,
pursuant to a stock option agreement satisfactory to the Executive, stock
options to purchase 650,000 shares of common stock at an exercise price of $2.00
per share (being the then fair market value of such stock). 25% (162,500) of
the options shall vest immediately with the remainder vesting equally over a
four (4) year period commencing on the grant date, subject to Sections 4(e) and
5(e) hereof. These options may be exercised with the use of a "broker notice."

4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.

The provisions of this Section shall in all respects be subject to the terms and
conditions stated in Sections 7 and 14.

(a) Upon the occurrence of an Event of Termination (as herein defined) during
the Executive's term of employment under this Agreement, the provisions of this
Section 4 shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Company of Executive's full-time employment hereunder for any reason,
including, without limitation, the company's failure to renew this Agreement,
other than a Change in Control (as defined in Section 5(a) hereof, upon
Retirement (as defined in Section 6 hereof), death or disability (as defined in
Section 6 hereof), or for Cause (as defined in Section 7 hereof); (ii)
Executive's resignation from the company's employ, upon any (A) failure to elect
or reelect or to appoint or reappoint Executive as Chief Executive Officer, (B)
unless consented to by the Executive, a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position and
attributes thereof described in Section 1, above, (and any such material change
shall be deemed a continuing breach of this Agreement), (C) a relocation of
Executive's principal place of employment by more than 30 miles from its
location at the effective date of this Agreement, or a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement or (D) material breach of this Agreement by the
Company. Upon the occurrence of any event described in clauses (A), (B), (C) or
(D), above, Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon not less than thirty (30) days prior
written notice given within a reasonable period of time not to exceed, except in
case of a continuing breach, three (3) calendar months after the event giving
rise to said right to elect.

(b) Subject to Section 10 hereof, upon the occurrence of an Event of
Termination, the Company shall be obligated to pay Executive, or, as severance
pay or liquidated damages, or both, an

<PAGE>

amount equal to the sum of (i) twelve (12) months of the Executive's Base
Salary at the time of the occurrence of the Event of Termination plus (ii)
the average of the Annual Bonus amount for the three (3) prior years (or such
lesser time number of years, in the event that the Executive has been
employed by the Company for less than three (3) years). At the election of
the Executive such payment shall be made in a lump sum or in twelve (12)
equal monthly installments during the twelve (12) months following
Executive's termination.

(c) Upon the occurrence of an Event of Termination, the Company will cause to
be continued life, medical, dental and disability coverage (to the extent
available) substantially identical to the coverage maintained by the Company for
Executive prior to his termination for twelve (12) months.

(d) Upon the occurrence of an Event of Termination, the Executive will be
entitled to receive vested benefits due him under or contributed by the Company
on his behalf pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability (if coverage is available under the company's current
policy) or other employee benefit plans maintained by the Company on the
Executive's behalf to the extent that such benefits are not otherwise paid to
Executive under a separate provision of this Agreement.

(e) Upon the occurrence of an Event of Termination, any unexercised stock
options granted to the Executive pursuant to Section 3(e) of this Agreement
shall immediately vest and be immediately exercisable upon the Executive's
receipt of the Notice of Termination relating to such Event of Termination for a
period of one hundred twenty (120) days thereafter. These options will be
exercisable through the standard means as outlined in the companies option plan
or through a broker exercise notice at the Executive's discretion.

5. CHANGE IN CONTROL.

(a) No benefit shall be payable under this Section 5 unless there shall have
been a Change in Control of the Company as set forth below. For purposes of
this Agreement, a "Change in Control" of the Company shall mean an event of a
nature that: (i) would be required to be reported in response to Item 1 (a) of
the current report on Form 8-K pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") if the Company were (or is) required
to file reports pursuant to the Exchange Act; or (ii) without limitation such a
Change in Control shall be deemed to have occurred at such time as (A)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least a majority of the directors comprising the
Incumbent Board, shall be, for purposes of this clause (A), considered as though
he were a member of the Incumbent Board; or (B) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the
Company or similar transaction occurs in which the company is not the resulting
entity; or (C) a proxy statement shall be distributed soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the company with one or more corporations as a result of which
the outstanding shares of the class of securities then subject to such a plan or
transaction are exchanged for or converted into

<PAGE>

cash or property or securities not issued by the company shall be
distributed; or (D) a tender offer is completed for 20% or more of the voting
securities of the Company then outstanding.

(b) If any of the events described in Section 5(a) hereof constituting a Change
in Control have occurred or the Board has determined that a change in Control
has occurred, Executive shall be entitled to the benefits provided in paragraphs
(c) and (d) of this Section 5 upon his subsequent termination of employment at
any time during the term of this Agreement (regardless of whether such
termination results from his dismissal or his resignation at any time during the
term of this Agreement following any demotion, loss of title, office or
significant authority or responsibility, reduction in the annual compensation or
benefits or relocation of his principal place of employment by more than 30
miles from its location immediately prior to the change in control), unless such
termination is because of Termination for Cause.

(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Company shall pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, an amount equal to
the sum of (i) twelve (12) months of the Executive's Base Salary at the time of
the occurrence of the Change in Control plus (ii) the average of the Annual
Bonus amount for the prior three (3) years (or such lesser number of years, in
the event that the Executive has been employed by the Company for less than (3)
three years). At the election of the Executive, which election is to be made
within thirty (30) days of the Date of Termination following a change in
Control, such payment shall be made in a lump sum or paid in equal monthly
installments during the twelve (12) months following Executive's termination.
In the event that no election is made, payment to the Executive will be made on
a monthly basis during the remaining term of the Agreement.

(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Company will cause to be continued life, medical,
dental and disability coverage (if coverage is available under the Company's
current policy) substantially identical to the coverage maintained by the
Company for Executive prior to his severance for twelve (12) months following
termination.

(e) Upon the occurrence of a Change of Control, any unexercised stock options
granted to the Executive pursuant to Section 3(d) of this Agreement shall
immediately vest and be immediately exercisable and may be exercised as outlined
in 3(e).

6. TERMINATION UPON RETIREMENT, DEATH, AND DISABILITY.

(a) Termination by the Company of the Executive based on "Retirement" shall
mean termination in accordance with the Company's retirement policy or in
accordance with any retirement arrangement established with executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Company and
other plans to which Executive is a party.

<PAGE>

(b) This Agreement shall automatically terminate upon the death of the
Executive. If terminated because of death as a minimum the rights granted in
section 4(e) will be immediately available for executives beneficiary.

(c) If the Executive is Disabled (as defined below) for a continuous period of
six (6) months, the Company may terminate this Agreement upon written notice to
the Executive. If the Company terminates the Executive due to the Disability of
the Executive, the Company shall, for a period of one (1) year from the date of
termination, provide the Executive with the term life insurance and medial
insurance as are in effect at the time of termination. The Executive, for
purposes thereof, shall be deemed to be "Disabled" when, as a result of bodily
injury or disease or mental disorder he is so disabled that he is prevented from
performing the principal duties of his employment and is under the regular care
of a currently licensed physician or surgeon for such bodily injury, disease or
mental disorder.

7. TERMINATION FOR CAUSE.

The term "Termination for Cause" shall mean termination because of (i) any
knowing act, or knowing failure to act, by the Executive involving fraud or
willful malfeasance in the performance of his duties under this Agreement,
including, but not limited to, Executive's willful failure to serve as a full
time employee of the company pursuant to the terms and provisions of Section 1
of this Agreement, or (ii) the Executive's unlawful appropriation of a corporate
opportunity or other breach of fiduciary duty or other obligation to the
Company, or (iii) the conviction of the Executive of a felony under federal or
state law. For purposes of this Section, no act, or the failure to act, on
Executive's part shall be "willful" unless done, or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in the
best interest of the Company or its affiliates. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been deliver to him a Notice of Termination which shall include
a copy of a resolution duly adopted by the affirmative vote of a majority of
the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable, 30 days, notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in the
good faith opinion of the Board, Executive was guilty of conduct justifying
termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.

8. NOTICE

(a) Any purported termination by the Company or by the Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.

<PAGE>

(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination.

9. CONFIDENTIALITY

Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Company thereof to any person, firm corporation, or other entity for any reason
or purpose whatsoever which is not otherwise publicly available. In the event
of a breach or threatened breach by the Executive of the provisions of this
Section 9, the Company will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Company, or from rendering any
services to any person, firm corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Company from pursuing any
other remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.

10. NON-COMPETITION.

Upon any termination of Executive's employment hereunder pursuant to Section 4
hereof, Executive agrees not to compete with the Company for a period of twelve
(12) months following such termination in those states within the United States
and those countries outside the United States in which the Company conducts
business (the "Restricted Area"); provided, that the Executive may continue his
involvement with Tech Squared and other permitted interests and the ownership by
the Executive of less than five percent (5%) or less of a publicly-traded class
of securities shall not be deemed a violation of this Section 10. Executive
agrees that during such period and within the Restricted Area, Executive shall
not work for or advise, consult or otherwise serve with, directly or indirectly,
any entity whose business materially competes with the business of distributing
third party vendors software via the Internet. The parties hereto, recognizing
that irreparable injury will result to the Company, its business and property in
the event of Executive's breach of this Section 10 agree that in the event of
any such breach by Executive, the Company will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive. Executive represents and admits that in the event of the
termination of his employment pursuant to Section 7 hereof, Executive's
experience and capabilities are such that Executive can obtain employment in a
business engaged in other lines and/or of a different nature than the Company,
and that the enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood. Nothing herein will be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from Executive.

<PAGE>

11. SOURCE OF PAYMENTS.

All payments provided in this Agreement shall be timely paid in cash or check
from the general funds of the Company. The Company may use insurance proceeds
especially obtained therefore as partial payment in the event of disability.

12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.

This Agreement contains the entire understanding between the parties hereto and
supersedes any prior employment agreement between the Company or any predecessor
of the Company and Executive, except that this Agreement shall not affect or
operate to reduce any benefit or compensation inuring to the Executive of a kind
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.

13. NO ATTACHMENT.

(a) Except as required by law, no right to receive payments under this Agreement
shall be subject to anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge, or hypothecation, or to execution, attachment,
levy, or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to affect any such action shall be null, void, and of
no effect.

(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Company and their respective successors and assigns.

14. MODIFICATION AND WAIVER.

(a) This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.

(b) No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision of this
Agreement, except by written instrument of the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future as to any act other than that specifically waived.

15. SEVERABILITY.

If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.

<PAGE>

16. HEADINGS FOR REFERENCE ONLY.

The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.

17. GOVERNING LAW

This agreement shall be governed by the laws of the State of Minnesota.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Executive
Employment Agreement to be duly executed and delivered as of the day and year
first above written.

EXECUTIVE: COMPANY:

JOEL A. RONNING DIGITAL RIVER, INC.

/s/ Joel A. Ronning BY /s/ Thomas F. Madison
- ------------------------- -------------------------------
TITLE: Chairman of Compensation Committee
------------------------------------

<PAGE>

STOCK SUBSCRIPTION WARRANT
FOR
SHARES OF COMMON STOCK
OF
DIGITAL RIVER, INC.

For value received, Christopher Sharples, an individual resident of London,
England, or his successors or assigns ("Holder"), is entitled to subscribe for
and purchase from Digital River, Inc., a Delaware corporation (the "Company"),
up to 150,000 fully paid and nonassessable shares of the Company's common stock,
or such greater or lesser number of such shares as may be determined by
application of the anti-dilution provisions of this Warrant, at the price of Two
Dollars ($2.00) per share, subject to adjustments as noted below (the "Warrant
Exercise Price").

This Warrant may be exercised by Holder at any time or from time to time on
or prior to February 26, 2003.

This Warrant is subject to the following provisions, terms and conditions:

1. The rights represented by this Warrant may be exercised by the holder
hereof, in whole or in part, by written notice of exercise delivered to the
Company at least twenty (20) days prior to the intended date of exercise and by
the surrender of this Warrant (properly endorsed if required) at the principal
office of the Company and upon payment to it by cash, certified check or bank
draft of the purchase price for such shares. The shares so purchased shall be
deemed to be issued as of the close of business on the date on which this
Warrant has been exercised by payment to the Company of the Warrant Exercise
Price. Certificates for the shares of stock so purchased, bearing the
restrictive legend set forth at the end of this Warrant, shall be delivered to
the holder within fifteen (15) days after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a new
warrant representing the number of shares, if any, with respect to which this
Warrant has not been exercised shall also be delivered to the holder hereof
within such time. No fractional shares shall be issued upon the exercise of
this Warrant.

2. The Company covenants and agrees that all shares that may be issued
upon the exercise of the rights represented by this Warrant shall, upon
issuance, be duly authorized and issued, fully paid and nonassessable shares.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant, a sufficient
number exercise of the subscription rights evidenced by this Warrant, a
sufficient number of shares of its common stock to provide for the exercise of
the rights represented by this Warrant.

3. The Warrant Exercise Price shall be subject to adjustment from time to
time as hereinafter provided in this section 3.

(a) If the Company at any time divides the outstanding shares of its
common stock into a greater number of shares (whether pursuant to a stock split,
stock dividend or otherwise), and conversely, if the outstanding shares of its
common stock are combined into a

<PAGE>

smaller number of shares, the Warrant Exercise Price in effect immediately
prior to such division or combination shall be proportionately adjusted to
reflect the reduction or increase in the value of each such common share.

(b) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of the Company's common
stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for such common shares, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, the holder of
this Warrant shall have the right to purchase and receive upon the basis and
upon the terms and conditions specified in this Warrant and in lieu of the
shares of the common stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby, such shares
of stock, other securities or assets as would have been issued or delivered to
the holder of this Warrant if it had exercised this Warrant and had received
such shares of common stock prior to such reorganization, reclassification,
consolidation, merger or sale. The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed to the registered holder of this
Warrant at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.

(c) Until such time as the Company has completed an initial public
offering of its common stock pursuant to a registration statement filed with the
Securities and Exchange Commission under Section 5 of the Securities Act of
1933, as amended, if and whenever the Company shall (1) issue or sell any shares
of its common stock for a consideration per share less than $1.80 (as adjusted
to give effect to any subdivision or combination of its common stock after the
date hereof), (2) issue or sell any warrants, options or other rights to acquire
shares of its common stock at a purchase price less than $1.80 (as adjusted to
give effect to any subdivision or combination of its common stock after the date
hereof), or (3) issue or sell any other securities that are convertible into
shares of its common stock for a purchase or exchange price less than $1.80 per
share (as adjusted to give effect to any subdivision or combination of its
common stock after the date hereof), and such purchase or exchange price is less
than the Warrant Exercise Price then in effect, then, upon such issuance or
sale, the Warrant Exercise Price shall be reduced to the price at which such
shares of common stock are being issued or sold by the Company or the price at
which such other securities are exercisable or convertible into shares of the
Company's Common Stock. Any adjustment in the Warrant Exercise Price shall
apply only to any exercise of this Warrant made subsequent to such adjustment.

(d) If the Company takes any other action, or if any other event
occurs, which does not come within the scope of the provisions of section 3(a),
3(b) or 3(c), but which should result in an adjustment in the Warrant Exercise
Price and/or the number of shares subject to this Warrant in order to fairly
protect the purchase rights of the holder of this Warrant, an appropriate
adjustment in such purchase rights shall be made by the Company.

<PAGE>

(e) Upon any adjustment of the Warrant Exercise Price to a price
equal to $1.50 or less (as adjusted to give effect to any subdivision or
combination of its common stock after the date hereof), the holder of this
Warrant shall thereafter be entitled to purchase, at the Warrant Exercise Price
resulting from such adjustment, an additional 50,000 fully paid and
nonassessable shares of the Company's common stock, so that the aggregate number
of shares into which this Warrant is exercisable equals 200,000 shares.

(f) Upon any adjustment of the Warrant Exercise Price, the Company
shall give written notice thereof, by first class mail, postage prepaid,
addressed to the registered holder of this Warrant at the address of such holder
as shown on the books of the Company, which notice shall state the Warrant
Exercise Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.

4. This Warrant shall not entitle the holder hereof to party voting
rights or other rights as a shareholder of the Company.

5. The holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before transferring this Warrant or transferring
any shares of the Company's common stock issuable or issued upon the exercise of
this Warrant of the holder's intention to do so, describing briefly the manner
of any proposed transfer of this Warrant or such holder's intention as to the
shares of common stock issuable upon the exercise hereof or the intended
disposition to be made of shares of common stock upon such exercise. Promptly
upon receiving such written notice, the Company shall present copies thereof to
counsel for the Company. If in the opinion of such counsel, the proposed
transfer of this Warrant or disposition of shares may be effected without
registration or qualification (under any federal or state law) of this Warrant
or the shares of common stock issuable or issued upon the exercise hereof, the
Company, as promptly as practicable, shall notify such holder of such opinion,
whereupon such holder shall be entitled to transfer this Warrant, or to exercise
this Warrant in accordance with its terms and dispose of the shares received
upon such exercise or to dispose of shares of common stock received upon the
previous exercise of this Warrant, all in accordance with the terms of the
notice delivered by such holder to the Company, provided that an appropriate
legend in substantially the form set forth at the end of this Warrant respecting
the foregoing restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for such shares.

6. Subject to the provisions of section 5, this Warrant and all rights
hereunder are transferable, in whole or in part, only to (i) any family member
of the Holder, and (ii) any trust, limited liability company or other entity
formed for the benefit of Holder or any family member of the Holder. Any such
transfer shall be made in person or by duly authorized attorney, upon surrender
of this Warrant properly endorsed to any person or entity who represents in
writing that he/it is acquiring the warrant for investment and without any view
to the sale or other distribution thereof. Each holder of this Warrant, by
taking or holding the same, consents and agrees that the bearer of this Warrant,
when endorsed, may be treated by the Company and all other persons dealing with
this Warrant as the absolute owner hereof for any purpose and as the person
entitled to exercise the rights represented by this Warrant, or to the transfer
hereof on the

<PAGE>

books of the Company, any notice to the contrary notwithstanding; but until
such transfer on such books, the Company may treat the registered owner
hereof as the owner for all purposes.

7. In the event that the Company determines to proceed with the
preparation and filing of a registration statement under the Securities Act of
1935 in connection with the proposed offer and sale for money of any shares of
its common stock, Holder shall be entitled to "piggyback" on such registration
statement as set forth in Annex I of the Securities Purchase Agreement, dated
February 28, 1998, among the Company, Holder and certain other investors
identified therein, the terms of which are incorporated herein by reference.

8. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
delivered by a duly authorized officer as of the 26th day of February 1998.

DIGITAL RIVER, INC.

By: /s/ Joel Ronning
------------------------------
Joel Ronning
President

<PAGE>

RESTRICTION ON TRANSFER

The security evidenced hereby has not been registered under the Securities
Act of 1933 or any state securities laws and may not be sold, transferred,
assigned, offered, pledged or otherwise distributed for value unless there is an
effective registration statement under such act or laws covering such security
or the Company receives an opinion of counsel for the holder of this security
(concurred in by counsel for the Company) stating that such sale, transfer,
assignment, pledge or distribution is exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 and all
applicable state securities laws.

<PAGE>

STOCK OPTION AGREEMENT

AGREEMENT, entered into and effective this 28th day of December, 1995
(the "Date of Grant"), by and between Joel A. Ronning (the "Optionor") and
MacUSA, Inc., a Minnesota corporation (the "Optionee").

RECITALS

A. The Optionor desires to give the Optionee the right and option to purchase
from the Optionor certain shares of the Common Stock, $.01 par value (the
"Common Stock") of Digital River, Inc., a Minnesota corporation (the
"Company") owned by the Optionor.

B. The Optionor is a party, together with the Company and Fujitsu Limited, a
corporation organized under the laws of Japan ("Fujitsu"), to a Stock
Purchase Agreement dated August 30, 1994 (the "Purchase Agreement"),
whereby Fujitsu purchased approximately 40% of the outstanding Common
Stock, and to the related Investors' Rights Agreement, Voting Agreement,
Memorandum of Understanding, Personal Guaranty and Stock Pledge Agreement,
and certain other agreements ancillary or relating to the Purchase
Agreement (collectively, the "Related Agreements").

C. The terms and conditions of this Agreement, including the grant and/or
exercise of the option granted hereby, are intended by the Optionor to be
subject to any and all restrictions on the rights of the Optionor with
respect to the Common Stock owned by the Optionor contained in any of the
Related Agreements.

AGREEMENT

In consideration of the mutual covenants and conditions hereinafter set
forth, the parties hereto hereby agree as follows:

1. GRANT OF OPTION. The Optionor hereby grants to the Optionee the right,
privilege, and option (the "Option") to purchase Six Hundred Thousand
(600,000) shares of the Common Stock (the "Option Shares"), from the Optionor
according to the terms and subject to the conditions hereinafter set forth.

2. OPTION EXERCISE PRICE. The aggregate price to be paid by Optionee for
all of the Option Shares in the event of an exercise of the Option shall be
$1.00.

3. DURATION OF OPTION AND TIME OF EXERCISE. The Option shall become
exercisable with respect to the Option Shares on or after the date hereof and
shall expire on and no longer be exercisable after 5:00 p.m., Minneapolis,
Minnesota time, on December 31, 2000 (the "Option Term"). This Option shall
not be exercisable, unless and until the Optionor and Optionee have
negotiated and executed a stock purchase agreement relating to the purchase
of the Option Shares of the Optionee pursuant to the exercise of this Option
containing such representations and warranties of the parties as are
characteristic of similar stock purchase transactions.

<PAGE>

4. VOTING OF OPTION SHARES. During the Option Term, the Optionor shall
seek the advice and consultation of the Board of Directors of the Optionee
before voting the Option Shares in any and all Company actions to be taken by
the holders of Common Stock. Subject to the restrictions imposed on
shareholders of the Company pursuant to the Related Agreements, Optionor will
vote the Option Shares as directed by the Board of Directors of Optionee.

5. COMPLIANCE WITH RELATED AGREEMENTS. It is expressly agreed by the
parties hereto that the terms of this Agreement, including without limitation
the transfer of the Option Shares pursuant to exercise of the Option granted
hereunder, are in all respects subject to the terms and conditions contained
in the Related Agreements, and that any provision of this Agreement or action
taken hereunder that violates any term or condition of the Related Agreements
will be void.

6. INDEMNIFICATION FOR TAX LIABILITY. As additional consideration for the
Option Shares, Optionee hereby agrees to reimburse Optionor with respect to
any tax liability of Optionor associated with the transfer to Optionee of the
Option Shares. For purposes of this provision, Optionor's tax liability
includes all federal, state and local taxes due as a result of the transfer,
together with any penalties and interest associated therewith. In addition,
Optionee will reimburse Optionor for the tax liability associated with the
reimbursement payment pursuant to this Section so that, on an after-tax
basis, Optionor has been fully reimbursed for any tax liability associated
with the transfer of the Option Shares to the Optionee.

7. MANNER OF OPTION EXERCISE.

(a) NOTICE. The Option may be exercised by the Optionee in whole only,
subject to the conditions contained herein, by delivery, in person or by
registered mail, of written notice of exercise to the Optionor at the
Optionee's principal executive office, such notice to identify this Option
and paying in full the total purchase price for the shares purchased, and the
Optionor shall deliver to the Optionee a certificate representing the shares
purchased. As soon as practicable after such notice and payment are
received, the Optionee shall be recorded on the books of the Company as the
owner of the Option Shares purchased, and the Optionor shall deliver to the
Optionee one or more duly issued stock certificates evidencing such ownership.

(b) PAYMENT. At the time of exercise of this Option, the Optionee
shall pay the exercise price of the Option Shares in cash.

8. NONTRANSFERABILITY. This Option shall not be (i) transferable by the
Optionee, either voluntarily or involuntarily, or (ii) subject to any lien,
directly or indirectly, by operation of law or otherwise. Any attempt to
transfer this Option shall void this Option.

9. BINDING EFFECT. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.

10. GOVERNING LAW. This Agreement and all rights and obligations hereunder
shall be construed in accordance with and governed by the laws of the State
of Minnesota.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.

OPTIONOR:

/s/ Joel A. Ronning
---------------------------------------
Joel A. Ronning

OPTIONEE:

MacUSA, Inc.

By: /s/ Joel A. Ronning
------------------------------------
Its: President
------------------------------------

<PAGE>

FORM OF REGISTRATION RIGHTS AGREEMENT

BETWEEN

DIGITAL RIVER, INC.
AND
WASSERSTEIN, ADELSON VENTURES, L.P.

1. INCIDENTAL REGISTRATION. At any time, and from time to time, after
the Company has completed an initial public offering of its common stock
pursuant to a registration statement filed with the Securities and Exchange
Commission (the "Commission"), each time the Company shall determine to proceed
with the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for money of any
of its securities by it or any of its security holders, the Company will give
written notice of its determination to all record holders of Shares. Upon the
written request of a record holder of any Shares given within 15 days after
receipt of any such notice from the Company, the Company will, except as herein
provided, cause all such common stock issued or issuable upon conversion of the
Shares or exercise of warrants (the "Common Stock"), the record holders of which
have so requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other disposition
by the prospective seller or sellers of the Common Stock to be so registered;
provided, however, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any such registration initiated by it. If any
registration pursuant to this section shall be underwritten in whole or in part,
the Company may require that the Common Stock requested for inclusion pursuant
to this section be included in the underwriting on the same terms and conditions
as the securities otherwise being sold through the underwriters. In the event
that the aggregate number of shares of Common Stock requested for inclusion
pursuant to this section would constitute more than ten percent (10%) of the
total number of shares to be included in a proposed underwritten public
offering, and if in the good faith judgment of the managing underwriter of such
public offering the inclusion of all of the Common Stock originally covered by a
request for registration would reduce the number of shares to be offered by the
Company or interfere with the successful marketing of the shares of stock
offered by the Company, the number of shares of Common Stock otherwise to be
included in the underwritten public offering may be reduced pro rata among the
holders thereof requesting such registration pari passu with other holders with
similar rights under their purchase agreement; provided, however, that after any
such required reduction the Common Stock to be included in such offering shall
constitute at least ten percent (10%) of the total number of shares to be
included in such offering. Those shares of Common Stock which are thus excluded
from the underwritten public offering shall be withheld from the market by the
holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering.

2. REQUIRED REGISTRATION. At any time six months after the Company has
completed an initial public offering of its common stock pursuant to a
registration statement filed with the Commission, the record holder of Shares
may by written request demand one registration with respect to common stock
issued or issuable upon conversion of the Preferred Stock or exercise of
warrants in a total amount not to exceed 1,500,000 shares of common stock (the
"Common Stock") subject to these registration rights. Upon receipt of the
written request

<PAGE>

the Company shall prepare and file a registration statement under the
Securities Act covering the Common Stock which is the subject of such request
and shall use its best efforts to cause such registration statement to become
effective. In addition, upon receipt of such request, the Company shall
promptly give written notice to all other holders of common stock who have
registration rights that such registration is to be effected. Upon the
written request of record holders of any shares of common stock subject to
registration rights given within 15 days after receipt of any such notice
from the Company, the Company will, except as herein provided, cause all such
shares, the record holders of which have so requested registration thereof,
to be included in such registration statement, all to the extent requisite to
permit the sale or other disposition by the prospective seller or sellers of
the shares to be so registered. In the event that the aggregate number of
shares requested for inclusion pursuant to this section is in the good faith
judgment of the Underwriter excessive in view of the ability of the market to
absorb them without adverse price reaction, then the number of shares to be
registered shall be reduced pari passu among the holders which shall include
the record holder hereunder as well as all existing holders who currently
have incidental registration rights by virtue of separate agreements with the
Company.

Not more than once a year holders of Preferred Stock shall also be entitled
to unlimited demand registrations on Form S-3 with respect to Common Stock,
subject to rights granted to existing stockholders of the Company. Upon
request, the Company shall file, and pay the expenses associated with, any
number of registration statements on Form S-3, if such form is then available
for use by the Company and such record holder or holders.

If, at the time any written request for registration is received by the
Company pursuant to this Section 2, the Company has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to Section 1 hereof rather than this
Section 2, and the rights of the holders of Common Stock covered by such written
request shall be governed by Section 1, hereof.

3. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of Section 1 and 2 to effect the registration of any Common Stock
under the Securities Act, the Company will:

(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed three (3) months;

(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such
securities, not to exceed three (3) months;

(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the

<PAGE>

registration statement, preliminary prospectus, final prospectus and such
other documents as such security holders and underwriters may reasonably
request in order to facilitate the public offering of such securities;

(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as such participating holders may reasonably
request within 20 days following the original filing of such registration
statement, except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified;

(e) notify the security holders participating in such registrations
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;

(f) notify such holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information; prepare and file with the Commission,
promptly upon the request of any such holders, any amendments or
supplements to such registration statement or prospectus which, in the
opinion of counsel for such holders (and concurred in by counsel for the
Company), is required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Purchased Shares by
such holder;

(g) prepare and promptly file with the Commission and promptly notify
such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading;

(h) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;

(i) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements
of the Securities Act or the rules and regulations thereunder, after having
been furnished with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for the Company the filing
of such amendment or supplement is reasonably necessary to protect the
Company from any

<PAGE>

liabilities under any applicable federal or state law and such filing will
not violate applicable law; and

(j) at the request of any such holder, furnish on the effective date
of the registration statement and, if such registration includes an
underwritten public offering, at the closing provided for in the
underwriting agreement opinions, dated such respective dates, of the
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the holder or holders making
such request, covering such matters as such underwriters and holder or
holders may reasonably request, in which opinion such counsel shall state
(without limiting the generality of the foregoing) that (a) such
registration statement has become effective under the Securities Act; (b)
to the best of such counsel's knowledge no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Securities
Act; (c) the registration statement and each amendment or supplement
thereto comply as to form in all material respects with the requirements of
the Securities Act and the applicable rules and regulations of the
Commission thereunder (except that such counsel need express no opinion as
to financial statements contained therein); (d) to the best of the
knowledge of such counsel neither the registration statement nor any
amendment nor supplement thereto contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except
that such counsel need express no opinion as to financial statements
contained therein); (e) the description in the registration statement or
any amendment or supplement thereto of legal and governmental proceedings
and contracts are accurate and fairly present the information required to
be shown; (f) such counsel does not know of any legal or governmental
proceedings pending or threatened, required to be described in the
registration statement or any amendment or supplement thereto which are not
described as required nor of any contracts or documents or instruments of
the character required to be described in the registration statement or
amendment or supplement thereto or to be filed as exhibits to the
registration statement, which are not described or filed as required; and
(g) letters, dated such respective dates, from the independent certified
public accountants of the Company addressed to the underwriters, if any,
and to the holder or holders making such request, covering such matters as
such underwriters and holder or holders may reasonably request, in which
letters such accountants shall state (without limiting the generality of
the foregoing) that they are independent certified public accountant within
the meaning of the Securities Act and that in the opinion of such
accountants the financial statements and other financial data of the
Company included in the registration statement or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.

4. EXPENSE. With respect to any registration, including registrations
pursuant to Form S-3, the Company shall bear the following fees, costs and
expenses: all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are required to bear such fees and
disbursements), all internal Company expenses, the premiums and other costs of
policies of insurance against liability arising out of the policies offering,
and all legal fees and

<PAGE>

disbursements and other expenses of complying with state securities or blue
sky laws of any jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of counsel and accountants
for the selling security holders, underwriting discounts and commissions and
transfer taxes for selling security holders and any other expenses incurred
by the selling security holders not expressly included above shall be borne
by the selling security holders.

5. INDEMNIFICATION. In the event that any Common Stock are included in a
registration statement:

(a) The Company will indemnify and hold harmless each holder of
Common Stock which are included in a registration statement and any
underwriter (as defined in the Securities Act) for such holder and each
person, if any, who controls such holder or such underwriter within the
meaning of the Securities Act, from and against any and all loss, damage,
liability, cost and expense to which such holder or any such underwriter or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses
are caused by any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading; provided however, that the Company will not be liable in
any such case to the extent that any such loss, damage, liability, cost or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by such holder, such underwriter or such controlling
person.

(b) Each holder of Common Stock which is included in a registration
will indemnity and hold harmless the Company, any controlling person and
any underwriter from and against any and all loss, damage, liability, cost
or expense to which the Company or any controlling person and/or any
underwriter may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused
by any untrue or alleged untrue statement of any material fact contained in
such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was so made in
reliance upon and in strict conformity with information furnished by such
holder.

<PAGE>

relieve it from any liability which it may have to any indemnified party
otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified
party, the indemnified party or parties shall have the right to select
separate counsel to participate in the defense of such action on behalf of
such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party pursuant to the provisions of said paragraph (a) or (b) for any legal
or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel
in accordance with the proviso of the preceding sentence, (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to 'represent the indemnified party within a reasonable
time after the notice of the commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.

6. REGISTRATION RIGHTS OF TRANSFER. The registration rights granted to
the holders of Purchased Shares pursuant to the provisions hereof shall also be
for the benefit of, and enforceable by, any subsequent holder of Purchased
Shares who is (i) a family member of any individual Investor, or (ii) a trust,
limited liability company or other entity formed for the benefit of any of
Investor's family members or descendants.

DIGITAL RIVER, INC.

By:
------------------------------
Its: Secretary
------------------------------

<PAGE>

No._______ April 22, 1998

DIGITAL RIVER, INC.

FORM OF CONDITIONAL WARRANT TO PURCHASE COMMON STOCK

This certifies that, for value received, the Holder is entitled to
subscribe for and purchase from the Company that number of shares of Common
Stock as shall be determined in accordance with the provisions of Section 2.1
hereof, at the Warrant Exercise Price at any time on or after the date of the
Initial Public Offering and on or before the Expiration Date.

This Warrant is subject to the following provisions, terms and
conditions which each Holder accepts by holding this Warrant:

ARTICLE I

DEFINITIONS

Certain capitalized terms used in this Warrant shall have the meanings
given to them in this Article:

1.1 CAPITAL EVENT- shall mean any reorganization or reclassification
of the Company's capital stock, any consolidation or merger of the Company with
another corporation or any sale of all or substantially all of the Company's
assets which results in Holders of the Common Stock becoming entitled to receive
any securities or property other than shares of Common Stock.

1.2 COMMON STOCK- shall mean the Company's sole class of Common Stock
outstanding as of the date hereof.

1.3 COMPANY - shall mean Digital River, Inc., a Delaware corporation.

1.4 EXERCISE PERIOD - shall mean the period from the date of the
Initial Public Offering to the Expiration Date.

1.5 EXPIRATION DATE - shall mean the fifth (5th) anniversary of the
Initial Public Offering.

1.6 HOLDER - shall mean Wasserstein, Adelson Ventures, L.P., a
Delaware limited partnership, or any person or entity to whom this Warrant is
assigned strictly in accordance with the terms of this Warrant.

1.7 INITIAL PUBLIC OFFERING - shall mean the first public offering of
at least 3 million shares of Common Stock.

<PAGE>

1.8 WARRANT EXERCISE PRICE - shall mean the sum of Two Dollars
($2.00) per share of Common Stock, or, if an adjustment is required to be made
in accordance with the provisions of Article 3, the price resulting from the
adjustment.

1.9 WARRANT - shall mean this Warrant and any Warrants into which
this Warrant is divided or combined and any Warrants issued upon the partial
exercise or the transfer of this Warrant.

Other capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Securities Purchase Agreement (the "Securities Purchase
Agreement") of even date herewith, between the Company and the Holder pursuant
to which this Conditional Warrant is being issued.

ARTICLE II

DESCRIPTION OF WARRANT; EXERCISE; EXCHANGE;
RESERVATION OF SHARES

2.1 WARRANT EXERCISE - The rights represented by this Warrant may be
exercised by the Holder, in whole or in part, at any time on or after the date
of the Initial Public Offering and on or before the Expiration Date by:

(a) surrendering this Warrant at the Company's principal office,

(b) delivering a completed and duly executed Subscription and
Investment Representation Letter in the form satisfactory to the Company, and

The shares so purchased (the "Warrant Shares") shall be established
as follows:

(i) If the Company closes its Initial Public Offering prior to or on
December 31, 1998, the Warrant Shares shall consist of 150,000 shares of
Common Stock.

(ii) If the Company closes its Initial Public Offering after December
31, 1998 but prior to or on March 31, 1999, at a price per share greater
than $15.00, the Warrant Shares shall consist of 50,000 shares of Common
Stock.

The Warrant Shares shall be deemed to be issued to the Holder as the record
owner as of he close of business on the date on which this Warrant is exercised
as provided in this Section. No fractional shares shall be issued upon the full
or partial exercise of this Warrant.

2
<PAGE>

2.2 CERTIFICATES - Certificates for the shares purchased pursuant to
Section 2.1 shall be delivered to the Holder by the Company at its expense
within ten (10) days after the Warrant is exercised. At the same time, the
Company also shall deliver to the Holder a new Warrant representing the rights,
if any, which have not been exercised. The new Warrant shall be identical to
this Warrant except in those respects necessary to reflect exercise of the
Warrant.

2.3 COVENANTS AND AGREEMENTS - The Company covenants and agrees as
follows:

(a) All Common Stock issued upon the exercise of this Warrant will be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to their issuance.

(b) At all times prior to the Expiration Date, the Company will have
authorized and reserved a sufficient number of shares of Common Stock to provide
for the exercise of this Warrant.

(c) The Company will not, by amendment of its Articles of
Incorporation or through reorganization, consolidation, merger, dissolution,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant. The Company will
assist in carrying out all of the terms of this Warrant and will take all
actions necessary or appropriate to protect the rights of the Holder against
impairment. The Company will take all action necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassesable stock
upon exercise of the Warrant. No provision of this Warrant, however, shall be
construed to prohibit or limit the Company's ability to issue or sell its
securities for whatever purposes it deems appropriate.

2.4 CLOSING OF BOOKS - Except as expressly provided in this Warrant,
the Company will not close its transfer books against the transfer of this
Warrant or any shares of Common Stock issued or issuable upon exercise of this
Warrant in a manner which unreasonably interferes with the timely exercise of
the Warrant.

ARTICLE III

ADJUSTMENT AND LIMITS

3.1 ADJUSTMENT UPON CAPITAL EVENTS - Upon the occurrence of a Capital
Event, the Company shall make lawful and adequate provisions so that the Holder
thereafter shall have the right to purchase and receive, in lieu of the shares
of the Common Stock then purchasable and receivable upon the exercise of this
Warrant, the amount of shares of stock, securities or assets as would have been
issued or paid with respect to or in exchange for that number of shares of
Common Stock then purchasable and receivable upon the exercise of this Warrant.

3.2 PRESERVATION OF VALUE UPON CAPITAL EVENTS - In the case of any
Capital Event, appropriate provision shall be made with respect to the rights
and interests

3
<PAGE>

of the Holder so that all of the provisions of this Warrant (including, without
limitation, provisions for adjusting the Warrant Exercise Price and the number
of shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of this
Warrant.

3.3 OBLIGATION TO BE EXPRESSLY ASSUMED UPON CAPITAL EVENTS - The
Company shall not effect any consolidation, merger or sale of all or
substantially all of its assets, unless, prior to the consummation of the
transaction, the successor corporation (if other than the Company) or the
corporation issuing the securities being exchanged for the outstanding stock of
the Company, or the corporation purchasing the assets, assumes by written
instrument executed and delivered to the registered Holder, the obligation to
deliver to the Holder, upon exercise of this Warrant, the shares of stock,
securities or assets the Holder is entitled to purchase in accordance with this
Article.

3.4 SUBDIVISION OR COMBINATION OF STOCK - If the Common Stock is
subdivided into a greater number of shares or is combined into a lesser number
of shares, the number of shares subject to issuance upon exercise of this
Warrant shall be adjusted proportionately; that is, the number of shares subject
to issuance upon exercise of the Warrant shall be multiplied by a fraction of
which the denominator is the number of shares outstanding immediately prior to
the subdivision or combination, and the numerator of which is the number of
shares outstanding immediately after the subdivision or combination. Upon a
subdivision or combination of the Common Stock, the Warrant Exercise Price shall
be adjusted by making the following calculation:

(a) First, the number of shares of Common Stock subject to issuance
upon exercise of this Warrant just prior to the subdivision or combination shall
be multiplied by the Warrant Exercise Price in effect just prior to the
subdivision or combination;

(b) Then, the number of shares of Common Stock subject to issuance
upon exercise of this Warrant just after the subdivision or combination shall be
divided into the result of the computation in (a).

3.5 STOCK DIVIDENDS - If the Company declares and pays a dividend
upon its Common Stock payable in Common Stock, the number of shares of Common
Stock subject to issuance upon exercise of this Warrant shall be increased by
the number (and the kind) of shares which would have been issued to the Holder
of this Warrant had this Warrant been exercised immediately prior to the
dividend.

3.6 NO ADJUSTMENT - No adjustment to the Warrant Exercise Price or
the number of shares subject to issuance upon exercise of this Warrant shall be
made under any of the following circumstances:

(a) sale of any of the Company's securities, at any price, in arm's
length transactions, or

4
<PAGE>

(b) issuance of stock options, or the issuance of Common Stock
pursuant to stock options, to officers, directors and employees of the Company.

3.7 NOTICE OF ADJUSTMENT - The Company shall give notice of any
adjustment to the Holder. The notice shall state the increase or decrease, if
any, in the Warrant Exercise Price or the number of shares purchasable upon the
exercise of this Warrant and shall set forth in reasonable detail the method of
calculation.

ARTICLE IV

TRANSFER RESTRICITONS

4.1 GENERAL RESTRICTION - This Warrant, and the rights provided
hereby, may not be transferred, either voluntarily or by operation of law,
except in accordance with the provisions of this Article 4.

4.2 SECURITIES LAW TRANSFER RESTRICTIONS - By taking and holding this
Warrant, the Holder

(a) acknowledges that neither this Warrant nor any shares of
Common Stock issuable upon the exercise of this Warrant have been registered
under the Securities Act of 1933, as amended, or any applicable state securities
or Blue Sky law (collectively, the "Acts"); and

(b) agrees not to sell, transfer or otherwise dispose of this
Warrant or shares of Common Stock (except as provided in this Article 4) without
registration unless the Holder delivers to the Company an opinion, addressed to
the Company, of counsel selected by the Holder and acceptable to the Company and
its counsel, in form and substance satisfactory to the Company and its counsel,
to the effect that the sale, transfer or disposition can be effected without
registration and in compliance with the Acts, or that exemptions from the Act or
state securities laws are available for the sale, transfer or disposition. Any
certificate for shares of Common Stock issued upon exercise of this Warrant
shall bear an appropriate legend describing the foregoing restrictions.

4.3 PROVISION OF INFORMATION BY HOLDER - The Holder shall make
available to the Company the written information, presented in form and content
satisfactory to the Company, as the Company may reasonably request, from time to
time, in order to make the determination provided for in Section 4.2.

4.4 INVESTMENT REPRESENTATIONS - The Holder represents and warrants
that the Warrants are being purchased for the Holder's own account or investment
without the intention of reselling or redistributing the same, that the Holder
has made no agreement with others regarding any of such Warrants and that the
Holder's financial condition is such that it is not likely it will be necessary
to dispose of any such securities in the foreseeable future.

5
<PAGE>

ARTICLE V

MISCELLANEOUS

5.1 HOLDER TREATED AS OWNER - The Holder shall be treated by the
Company and all other persons dealing with this Warrant as the absolute owner of
the Warrant for any purpose and as the person entitled to exercise the rights
represented by this Warrant, until the Warrant is transferred on the Company's
books.

5.2 NOTICES - Any notice or communication to be given pursuant to
this Warrant shall be in writing and shall be delivered in person or by
certified mail, return receipt requested, in the United States mail, postage
pre-paid. Notices to the Company shall be addressed to the Company's principal
office. Notices to the Holder shall be addressed to the Holder's address as
reflected in the records of the Company. Notices shall be effective upon
delivery in person or, if mailed, at midnight on the third (3rd) business day
after mailing.

5.3 NO STOCKHOLDER RIGHTS - This Warrant shall not entitle the Holder
to any voting rights or other rights as a stockholder of the Company.

5.4 GOVERNING LAW; VENUE - This Warrant shall be governed by and
construed in accordance with the laws of the State of Minnesota. Venue for any
suit brought with respect to this Agreement shall be solely in Minneapolis,
Hennepin County, Minnesota.

5.5 HEADINGS; INTERPRETATION - The section headings used herein are
for convenience of reference only and are not intended to define, limit or
describe the scope or intent of any provision of this Warrant.

5.6 SUCCESSORS - The covenants, agreements and provisions of this
Warrant shall bind the parties hereto and their respective successors and
permitted assigns.

5.7 SEVERABILITY - In the event that any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforcable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforcable provision had
never been contained herein.

6
<PAGE>

IN WITNESS WHEREOF, the Company has caused this Warrant to be issued as of
the date first above written.

DIGITAL RIVER, INC.

By:
-----------------------------
Joel Ronning
Its: Chief Executive Officer

<PAGE>

No.________ ____________, 19___

DIGITAL RIVER, INC.

WARRANT TO PURCHASE COMMON STOCK

This certifies that, for value received, the Holder is entitled to
subscribe for and purchase from the Company ______________ (___) shares of
Common Stock at the Warrant Exercise Price at any time after ________ and on
or before the Expiration Date.

This Warrant is subject to the following provisions, terms and
conditions which each Holder accepts by holding this Warrant:

ARTICLE 1

DEFINITIONS

Capitalized terms used in this Warrant shall have the meanings given to
them in this Article:

1.1 CAPITAL EVENT - shall mean any reorganization or reclassification
of the Company's capital stock, any consolidation or merger of the Company
with another corporation or any sale of all or substantially all of the
Company's assets which results in Holders of the Common Stock becoming
entitled to receive any securities or property other than shares of Common
Stock.

1.2 COMMON STOCK - shall mean the Company's sole class of Common Stock
outstanding as of the date hereof.

1.3 COMPANY - shall mean Digital River, Inc., a Delaware corporation.

1.4 EXPIRATION DATE- shall mean the fifth (5th) anniversary of the
issuance of this Warrant.

1.5 HOLDER - shall mean ______________ or any person or entity to whom
this Warrant is assigned strictly in accordance with the terms of this
Warrant.

1.6 WARRANT EXERCISE PRICE - shall mean the sum of __________ (___) per
share of Common Stock, or, if an adjustment is required to be made in
accordance with the provisions of Article 3, the price resulting from the
adjustment.

1.7 WARRANT - shall mean this Warrant and any Warrants into which this
Warrant is divided or combined and any Warrants issued upon the partial
exercise or the transfer of this Warrant.

<PAGE>

ARTICLE 2

DESCRIPTION OF WARRANT; EXERCISE;
RESERVATION OF SHARES

2.1 WARRANT EXERCISE. The rights represented by this Warrant may be
exercised by the Holder, in whole or in part, on or before the Expiration
Date by:

(a) surrendering this Warrant at the Company's principal office,

(b) delivering a completed and duly executed Subscription and
Investment Representation Letter in the form satisfactory to the Company, and

The shares so purchased shall be deemed to be issued to the Holder as the
record owner as of the close of business on the date on which this Warrant is
exercised as provided in this Section. No fractional shares shall be issued
upon the full or partial exercise of this Warrant.

2.2 CERTIFICATES. Certificates for the shares purchased pursuant to
Section 2.1 shall be delivered to the Holder by the Company at its expense
within ten (10) days after the Warrant is exercised. At the same time, the
Company also shall deliver to the Holder a new Warrant representing the
rights, if any, which have not been exercised. The new Warrant shall be
identical to this Warrant except in those respects necessary to reflect
exercise of the Warrant.

2.3 COVENANTS AND AGREEMENTS. The Company covenants and agrees as
follows:

(a) All Common Stock issued upon the exercise of this Warrant will
be duly authorized, validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to their issuance.

(b) At all times prior to the Expiration Date, the Company will
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.

(c) The Company will not, by amendment of its Articles of
Incorporation or through reorganization, consolidation, merger, dissolution,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant. The Company
will assist in carrying out all of the terms of this Warrant and will take
all actions necessary or appropriate to protect the rights of the Holder
against impairment. The Company will take all action necessary or
appropriate in order that the Company may validly and legally issue fully
paid and nonassessable stock upon exercise of the Warrant. No provision of
this Warrant, however, shall be construed to prohibit or limit the Company's
ability to issue or sell its securities for whatever purposes it deems
appropriate.

2.4 CLOSING OF BOOKS. Except as expressly provided in this Warrant,
the Company will not close its transfer books against the transfer of this
Warrant or any shares of Common

<PAGE>

Stock issued or issuable upon exercise of this Warrant in a manner which
unreasonably interferes with the timely exercise of the Warrant.

ARTICLE 3

ADJUSTMENTS AND LIMITS

3.1 ADJUSTMENT UPON CAPITAL EVENTS. Upon the occurrence of a Capital
Event, the Company shall make lawful and adequate provisions so that the
Holder thereafter shall have the right to purchase and receive, in lieu of
the shares of the Common Stock then purchasable and receivable upon the
exercise of this Warrant, the amount of shares of stock, securities or assets
as would have been issued or paid with respect to or in exchange for that
number of shares of Common Stock then purchasable and receivable upon the
exercise of this Warrant.

3.2 PRESERVATION OF VALUE UPON CAPITAL EVENTS. In the case of any
Capital Event, appropriate provision shall be made with respect to the rights
and interests of the Holder so that all of the provisions of this Warrant
(including, without limitation, provisions for adjusting the Warrant Exercise
Price and the number of shares purchasable and receivable upon the exercise
of this Warrant) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of this Warrant.

3.3 OBLIGATION TO BE EXPRESSLY ASSUMED UPON CAPITAL EVENTS. The
Company shall not effect any consolidation, merger or sale of all or
substantially all of its assets, unless, prior to the consummation of the
transaction, the successor corporation (if other than the Company) or the
corporation issuing the securities being exchanged for the outstanding stock
of the Company, or the corporation purchasing the assets, assumes by written
instrument executed and delivered to the registered Holder, the obligation to
deliver to the Holder, upon exercise of this Warrant, the shares of stock,
securities or assets the Holder is entitled to purchase in accordance with
this Article.

3.4 SUBDIVISION OR COMBINATION OF STOCK. If the Common Stock is
subdivided into a greater number of shares or is combined into a lesser
number of shares, the number of shares subject to issuance upon exercise of
this Warrant shall be adjusted proportionately; that is, the number of shares
subject to issuance upon exercise of the Warrant shall be multiplied by a
fraction of which the denominator is the number of shares outstanding
immediately prior to the subdivision or combination, and the numerator of
which is the number of shares outstanding immediately after the subdivision
or combination. Upon a subdivision or combination of the Common Stock, the
Warrant Exercise Price shall be adjusted by making the following calculation:

(a) First, the number of shares of Common Stock subject to
issuance upon exercise of this Warrant just prior to the subdivision or
combination shall be multiplied by the Warrant Exercise Price in effect just
prior to the subdivision or combination;

(b) Then, the number of shares of Common Stock subject to issuance
upon exercise of this Warrant just after the subdivision or combination shall
be divided into the result of the computation in (a).

<PAGE>

3.5 STOCK DIVIDENDS. If the Company declares and pays a dividend upon
its Common Stock payable in Common Stock, the number of shares of Common
Stock subject to issuance upon exercise of this Warrant shall be increased by
the number (and the kind) of shares which would have been issued to the
Holder of this Warrant had this Warrant been exercised immediately prior to
the dividend.

3.6 NO ADJUSTMENT. No adjustment to the Warrant Exercise Price or the
number of shares subject to issuance upon exercise of this Warrant shall be
made under any of the following circumstances:

(a) sale of any of the Company's securities, at any price, in
arms' length transactions, or

(b) issuance of stock options, or the issuance of Common Stock
pursuant to stock options, to officers, directors and employees of the
Company.

3.7 NOTICE OF ADJUSTMENT. The Company shall give notice of any
adjustment to the Holder. The notice shall state the increase or decrease,
if any, in the Warrant Exercise Price or the number of shares purchasable
upon the exercise of this Warrant and shall set forth in reasonable detail
the method of calculation.

ARTICLE 4

TRANSFER RESTRICTIONS

4.1 GENERAL RESTRICTION. This Warrant, and the rights provided hereby,
may not be transferred, either voluntarily or by operation of law, without
the consent of the Company.

4.2 SECURITIES LAW TRANSFER RESTRICTIONS. By taking and holding this
Warrant, the Holder

(a) acknowledges that neither this Warrant nor any shares of
Common Stock issuable upon the exercise of this Warrant have been registered
under the Securities Act of 1933, as amended, or any applicable state
securities or Blue Sky law (collectively, the "Acts"); and

(b) agrees not to sell, transfer or otherwise dispose of this
Warrant or shares of Common Stock (except as provided in this Article 4)
without registration unless the Holder delivers to the Company an opinion,
addressed to the Company, of counsel selected by the Holder and acceptable to
the Company and its counsel, in form and substance satisfactory to the
Company and its counsel, to the effect that the sale, transfer or disposition
can be effected without registration and in compliance with the Acts, or that
exemptions from the Act or state securities laws are available for the sale,
transfer or disposition. Any certificate for shares of Common Stock issued
upon exercise of this Warrant shall bear an appropriate legend describing the
foregoing restrictions.

4.3 PROVISION OF INFORMATION BY HOLDER. The Holder shall make
available to the Company the written information, presented in form and
content satisfactory to the Company, as

<PAGE>

the Company may reasonably request, from time to time, in order to make the
determination provided for in Section 4.2.

4.4 INVESTMENT REPRESENTATIONS. The Holder represents and warrants
that the Warrants are being purchased for the Holder's own account or
investment without the intention of reselling or redistributing the same,
that the Holder has made no agreement with others regarding any of such
Warrants and that the Holder's financial condition is such that it is not
likely it will be necessary to dispose of any such securities in the
foreseeable future.

ARTICLE 5

MISCELLANEOUS

5.1 HOLDER TREATED AS OWNER. The Holder shall be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
of the Warrant for any purpose and as the person entitled to exercise the
rights represented by this Warrant, until the Warrant is transferred on the
Company's books.

5.2 NOTICES. Any notice or communication to be given pursuant to this
Warrant shall be in writing and shall be delivered in person or by certified
mail, return receipt requested, in the United States mail, postage pre-paid.
Notices to the Company shall be addressed to the Company's principal office.
Notices to the Holder shall be addressed to the Holder's address as reflected
in the records of the Company. Notices shall be effective upon delivery in
person or, if mailed, at midnight on the third (3rd) business day after
mailing.

5.3 NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the Holder
to any voting rights or other rights as a stockholder of the Company.

5.4 GOVERNING LAW; VENUE. This Warrant shall be governed by and
construed in accordance with the laws of the State of Minnesota. Venue for
any suit brought with respect to this Agreement shall be solely in
Minneapolis, Hennepin County, Minnesota.

5.5 HEADINGS; INTERPRETATION. The section headings used herein are for
convenience of reference only and are not intended to define, limit or
describe the scope or intent of any provision of this Warrant.

5.6 SUCCESSORS. The covenants, agreements and provisions of this
Warrant shall bind the parties hereto and their respective successors and
permitted assigns.

5.7 SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.

<PAGE>

IN WITNESS WHEREOF, the Company has caused this Warrant to be issued as
of the date first above written.

DIGITAL RIVER, INC.:

By:
--------------------------------------
Joel Ronning
Its: Chief Executive Officer

<PAGE>

FORM OF REGISTRATION RIGHTS AGREEMENT

1. INCIDENTAL REGISTRATION. At any time, and from time to time, after
the Company has completed an initial public offering of its common stock
pursuant to a registration statement filed with the Securities and Exchange
Commission (the "Commission"), each time the Company shall determine to
proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for
money of any of its securities by it or any of its security holders, the
Company will give written notice of its determination to all record holders
of Purchased Shares. Upon the written request of a record holder of any
shares of Purchased Shares given within 15 days after receipt of any such
notice from the Company, the Company will, except as herein provided, cause
all such shares of Purchased Shares, the record holders of which have so
requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Purchased Shares to
be so registered; provided, however, that nothing herein shall prevent the
Company from, at any time, abandoning or delaying any such registration
initiated by it. If any registration pursuant to this section shall be
underwritten in whole or in part, the Company may require that the Purchased
Shares requested for inclusion pursuant to this section be included in the
underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters. In the event that the aggregate number
of Purchased Shares requested for inclusion pursuant to this section would
constitute more than ten percent (10%) of the total number of shares to be
included in a proposed underwritten public offering, and if in the good faith
judgement of the managing underwriter of such public offering the inclusions
of all of the Purchased Shares originally covered by a request for
registration would reduce the number of shares to be offered by the Company
or interfere with the successful marketing of the shares of stock offered by
the Company, the number of shares of Purchased Shares otherwise to be
included in the underwritten public offering may be reduced pro rata among
the holders thereof requesting such registration; provided, however, that
after any such required reduction the Purchased Shares to be included in such
offering shall constitute at least ten percent (10%) of the total number of
shares to be included in such offering. Those shares of Purchased Shares
which are thus excluded from the underwritten public offering shall be
withheld from the market by the holders thereof for a period, not to exceed
90 days, which the managing underwriter reasonably determines is necessary in
order to effect the underwritten public offering.

2. REGISTRATION PROCEDURES. If and whenever the Company is required
by the provisions of Section 1 to effect the registration of any Purchased
Shares under the Securities Act, the Company will:

(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be

<PAGE>

necessary to keep such registration statement effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed three (3) months;

(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such security
holders and underwriters may reasonably request in order to facilitate the
public offering of such securities;

(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as such participating holders may reasonably
request within 20 days following the original filing of such registration
statement, except that the Company shall not for any purpose be required
to execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified;

(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;

(f) notify such holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information;

(g) prepare and file with the Commission, promptly upon the request
of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders
(and concurred in by counsel for the Company), is required under the
Securities Act or the rules and regulations thereunder in connection with
the distribution of the Purchased Shares by such holder;

(h) prepare and promptly file with the Commission and promptly notify
such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading;

(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;

(j) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected

<PAGE>

on the grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or the rules
and regulations thereunder, after having been furnished with a copy thereof
at least five business days prior to the filing thereof, unless in the
opinion of counsel for the Company the filing of such amendment or
supplement is reasonably necessary to protect the Company from any
liabilities under any applicable federal or state law and such filing will
not violate applicable law; and

(k) at the request of any such holder, furnish on the effective date
of the registration statement and, if such registration includes an
underwritten public offering, at the closing provided for in the
underwriting agreement: (i) opinions, dated such respective dates, of the
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the holder or holders making
such request, covering such matters as such underwriters and holder or
holders may reasonably request, in which opinion such counsel shall state
(without limiting the generality of the foregoing) that (a) such
registration statement has become effective under the Securities Act;
(b) to the best of such counsel's knowledge no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Securities
Act; (c) the registration statement and each amendment or supplement
thereto comply as to form in all material respects with the requirements of
the Securities Act and the applicable rules and regulations of the
Commission thereunder (except that such counsel need express no opinion
as to financial statements contained therein); (d) to the best of the
knowledge of such counsel neither the registration statement nor any
amendment nor supplement thereto contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except
that such counsel need express no opinion as to financial statements
contained therein); (e) the description in the registration statement or
any amendment or supplement thereto of legal and governmental proceedings
and contracts are accurate and fairly present the information required to
be shown; and (f) such counsel does not know of any legal or governmental
proceedings, pending or threatened, required to be described in the
registration statement or any amendment or supplement thereto which are
not described as required nor of any contracts or documents or instruments
of the character required to be described in the registration statement
or amendment or supplement thereto or to be filed as exhibits to the
registration statement, which are not described or filed as required;
and (ii) letters, dated such respective dates, from the independent
certified public accountants of the Company, addressed to the underwriters,
if any, and to the holder or holders making such request, covering such
matters as such underwriters and holder or holders may reasonably request,
in which letters such accountants shall state (without limiting the
generality of the foregoing) that they are independent certified public
accountants within the meaning of the Securities Act and that in the
opinion of such accountants the financial statements and other financial
data of the Company included in the registration statement or any amendment
or supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.

3. EXPENSES. With respect to any registration, including
registrations pursuant to Form S-3, the Company shall bear the following
fees, costs and expenses: all registration, filing

<PAGE>

and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, fees and disbursements or counsel for the
underwriter or underwriters of such securities (if the Company and/or
selling security holders are required to bear such fees and disbursements),
all internal Company expenses, the premiums and other costs of policies of
insurance against liability arising out of the public offering, and all
legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to
be offered are to be registered or qualified. Fees and disbursements of
counsel and accountants for the selling security holders, underwriting
discounts and commissions and transfer taxes for selling security holders
and any other expenses incurred by the selling security holders not expressly
included above shall be borne by the selling security holders.

4. INDEMNIFICATION. In the event that any Purchased Shares are
included in a registration statement under Section 1:

(a) The Company will indemnify and hold harmless each holder of
Purchased Shares which are included in a registration statement pursuant
to the provisions of Section 1 and any underwriter (as defined in the
Securities Act) for such holder and each person, if any, who controls
such holder or such underwriter within the meaning of the Securities
Act, from and against any and all loss, damage, liability, cost and
expense to which such holder or any such underwriter or controlling
person may become subject under the Securities Act or otherwise, insofar
as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained
therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, damage, liability, cost
or expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity
with information furnished by such holder, such underwriter or such
controlling person.

(b) Each holder of Purchased Shares which are included in a
registration pursuant to the provisions of Section 1 will indemnify and
hold harmless the Company, any controlling person and any underwriter
from and against any and all loss, damage, liability, cost or expense to
which the Company or any controlling person and/or any underwriter may
become subject under the Securities Act or otherwise, insofar as such
losses, damages, liabilities, costs or expenses are caused by any untrue
or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity with
information furnished by such holder.

<PAGE>

(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this section of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is
to be made against the indemnifying party pursuant to the provisions of
said paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than hereunder. In case such action is
brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party shall have the
right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party;
provided, however, if the defendants in any action include both the
indemnified party and the indemnifying party and there is a conflict of
interest which would prevent counsel for the indemnifying party from
also representing the indemnified party, the indemnified party or
parties shall have the right to select separate counsel to participate
in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party pursuant to the
provisions of said paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless (i)
the indemnified party shall have employed counsel in accordance with the
proviso of the preceding sentence, (ii) the indemnified party shall not
have employed counsel satisfactory to the indemnified party to represent
the indemnfied party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.

5. REGISTRATION RIGHTS OF TRANSFEREES. The registration rights granted
to the holders of Purchased Shares pursuant to the provisions hereof shall
also be for the benefit of, and enforceable by, any subsequent holder of
Purchased Shares who is (i) a family member of any individual Investor, or
(ii) a trust, limited liability company or other entity formed for the
benefit of any of Investor's family members or descendents.

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.

/s/ ARTHUR ANDERSEN LLP
-----------------------------
ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
July 15, 1998

<PAGE>
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