##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Quarterly Period Ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from          to
 Commission file number 0-23137
 RealNetworks, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1628146(State of incorporation)
    
    (I.R.S. Employer Identification Number)2601 Elliott Avenue, Suite 1000Seattle, Washington
    
    98121(Address of principal executive offices)
    
    (Zip Code)
 (206) 674-2700  (Registrants telephone number, including area code)
 þ o
  þ o o
 o þ




---



##### 



TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 3. Default Upon Senior Securities
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    49Signature
    
    
    50EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    219,548
    
    
    $
    525,232Short-term investments
    
    
    394,215
    
    
    
    153,688Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    79,354
    
    
    
    65,751Deferred costs, current portion
    
    
    5,089
    
    
    
    1,643Deferred tax assets, net, current portion
    
    
    927
    
    
    
    891Prepaid expenses and other current assets
    
    
    21,720
    
    
    
    21,990Total current assets
    
    
    720,853
    
    
    
    769,195Equipment, software, and leasehold improvements:Equipment and software
    
    
    94,038
    
    
    
    83,587Leasehold improvements
    
    
    30,343
    
    
    
    29,665Total equipment, software, and leasehold improvements, at cost
    
    
    124,381
    
    
    
    113,252Less accumulated depreciation and amortization
    
    
    72,829
    
    
    
    65,509Net equipment, software, and leasehold improvements
    
    
    51,552
    
    
    
    47,743Restricted cash equivalents
    
    
    15,500
    
    
    
    17,300Equity investments
    
    
    12,511
    
    
    
    22,649Other assets
    
    
    5,412
    
    
    
    5,148Deferred tax assets, net, non-current portion
    
    
    30,687
    
    
    
    27,150Other intangible assets, net
    
    
    104,760
    
    
    
    105,109Goodwill
    
    
    325,009
    
    
    
    309,122Total assets
    
    $
    1,266,284
    
    
    $
    1,303,416LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    50,231
    
    
    $
    52,097Accrued and other liabilities
    
    
    108,013
    
    
    
    104,328Deferred revenue, current portion
    
    
    37,233
    
    
    
    24,137Accrued loss on excess office facilities, current portion
    
    
    4,132
    
    
    
    4,508Total current liabilities
    
    
    199,609
    
    
    
    185,070Deferred revenue, non-current portion
    
    
    2,757
    
    
    
    3,440Accrued loss on excess office facilities, non-current portion
    
    
    8,574
    
    
    
    9,993Deferred rent
    
    
    4,446
    
    
    
    4,331Deferred tax liabilities, net, non-current portion
    
    
    24,580
    
    
    
    27,076Convertible debt
    
    
    100,000
    
    
    
    100,000Other long-term liabilities
    
    
    6,912
    
    
    
    3,740Total liabilities
    
    
    346,878
    
    
    
    333,650Shareholders equity:Preferred stock, $0.001 par value, no shares issued and outstandingSeries A: authorized 200 shares
    
    
    
    
    
    
    Undesignated series: authorized 59,800 shares
    
    
    
    
    
    
    Common stock, $0.001 par value authorized 1,000,000 shares; issued and outstanding
152,028 shares in 2007 and 163,278 shares in 2006
    
    
    152
    
    
    
    162Additional paid-in capital
    
    
    706,848
    
    
    
    791,108Accumulated other comprehensive income
    
    
    16,107
    
    
    
    23,485Retained earnings
    
    
    196,299
    
    
    
    155,011Total shareholders equity
    
    
    919,406
    
    
    
    969,766Total liabilities and shareholders equity
    
    $
    1,266,284
    
    
    $
    1,303,416
  3




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share data)
 Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue (A)
    
    $
    136,171
    
    
    $
    89,409
    
    
    $
    265,643
    
    
    $
    176,011Cost of revenue (B)
    
    
    49,199
    
    
    
    26,646
    
    
    
    95,142
    
    
    
    53,399Gross profit
    
    
    86,972
    
    
    
    62,763
    
    
    
    170,501
    
    
    
    122,612Operating expenses:Research and development
    
    
    25,005
    
    
    
    18,684
    
    
    
    48,484
    
    
    
    36,783Sales and marketing
    
    
    50,081
    
    
    
    37,961
    
    
    
    99,781
    
    
    
    74,044General and administrative
    
    
    17,063
    
    
    
    14,317
    
    
    
    34,417
    
    
    
    27,543Loss on excess office facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    738Subtotal operating expenses
    
    
    92,149
    
    
    
    70,962
    
    
    
    182,682
    
    
    
    139,108Antitrust litigation benefit, net
    
    
    
    
    
    
    (57,858
    )
    
    
    (60,747
    )
    
    
    (97,693
    )Total operating expenses, net
    
    
    92,149
    
    
    
    13,104
    
    
    
    121,935
    
    
    
    41,415Operating (loss) income
    
    
    (5,177
    )
    
    
    49,659
    
    
    
    48,566
    
    
    
    81,197Other income (expenses):Interest and other, net
    
    
    8,065
    
    
    
    9,381
    
    
    
    17,167
    
    
    
    17,360Gain on sale of equity investment
    
    
    132
    
    
    
    2,286
    
    
    
    132
    
    
    
    2,286Equity in net loss of investments
    
    
    
    
    
    
    
    
    
    
    (132
    )
    
    
    Other income, net
    
    
    485
    
    
    
    73
    
    
    
    952
    
    
    
    190Other income, net
    
    
    8,682
    
    
    
    11,740
    
    
    
    18,119
    
    
    
    19,836Income before income taxes
    
    
    3,505
    
    
    
    61,399
    
    
    
    66,685
    
    
    
    101,033Income taxes
    
    
    (2,178
    )
    
    
    (22,521
    )
    
    
    (25,397
    )
    
    
    (37,272
    )Net income
    
    $
    1,327
    
    
    $
    38,878
    
    
    $
    41,288
    
    
    $
    63,761Basic net income per share
    
    $
    0.01
    
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    0.40Diluted net income per share
    
    $
    0.01
    
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.36Shares used to compute basic net income per share
    
    
    153,880
    
    
    
    159,938
    
    
    
    157,929
    
    
    
    160,410Shares used to compute diluted net income per share
    
    
    169,033
    
    
    
    177,337
    
    
    
    173,822
    
    
    
    177,127Comprehensive income:Net income
    
    $
    1,327
    
    
    $
    38,878
    
    
    $
    41,288
    
    
    $
    63,761Unrealized holding losses on short-term and
equity investments, net of income taxes
    
    
    (2,663
    )
    
    
    (5,094
    )
    
    
    (5,719
    )
    
    
    (12,915
    )Foreign currency translation gains (losses)
    
    
    1,268
    
    
    
    1,005
    
    
    
    (1,659
    )
    
    
    1,372Comprehensive (loss) income
    
    $
    (68
    )
    
    $
    34,789
    
    
    $
    33,910
    
    
    $
    52,218(A) Components of net revenue:License fees
    
    $
    22,212
    
    
    $
    22,850
    
    
    $
    44,049
    
    
    $
    45,486Service revenue
    
    
    113,959
    
    
    
    66,559
    
    
    
    221,594
    
    
    
    130,525$
    136,171
    
    
    $
    89,409
    
    
    $
    265,643
    
    
    $
    176,011(B) Components of cost of revenue:License fees
    
    $
    7,882
    
    
    $
    9,329
    
    
    $
    16,174
    
    
    $
    19,190Service revenue
    
    
    41,317
    
    
    
    17,317
    
    
    
    78,968
    
    
    
    34,209$
    49,199
    
    
    $
    26,646
    
    
    $
    95,142
    
    
    $
    53,399
  4




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    41,288
    
    
    $
    63,761Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    20,905
    
    
    
    8,219Stock-based compensation
    
    
    11,307
    
    
    
    7,311Loss on disposal of equipment, software, and leasehold improvements
    
    
    163
    
    
    
    76Equity in net loss of investments
    
    
    132
    
    
    
    Gain on sale of equity investment
    
    
    (132
    )
    
    
    (2,286
    )Excess tax benefit from stock option exercises
    
    
    (596
    )
    
    
    Accrued loss on excess office facilities
    
    
    (1,795
    )
    
    
    (1,742
    )Unrealized gain on trading securities
    
    
    (2,102
    )
    
    
    Deferred income taxes
    
    
    (6,069
    )
    
    
    35,246Purchases of trading securities
    
    
    (270,000
    )
    
    
    Other
    
    
    51
    
    
    
    48Net change in certain operating assets and liabilities, net of acquisitions
    
    
    552
    
    
    
    (50,651
    )Net cash (used in) provided by operating activities
    
    
    (206,296
    )
    
    
    59,982Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (11,525
    )
    
    
    (5,381
    )Purchases of short-term investments
    
    
    (38,768
    )
    
    
    (102,853
    )Proceeds from sales and maturities of short-term investments
    
    
    70,343
    
    
    
    86,422Purchases of other intangibles assets
    
    
    (2,060
    )
    
    
    Proceeds from sale of equity investments
    
    
    1,615
    
    
    
    2,286Purchases of equity investments
    
    
    
    
    
    
    (450
    )Decrease in restricted cash equivalents
    
    
    1,800
    
    
    
    Cash used in acquisitions, net of cash acquired
    
    
    (25,351
    )
    
    
    (7,086
    )Net cash used in investing activities
    
    
    (3,946
    )
    
    
    (27,062
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and exercise of
stock options
    
    
    12,277
    
    
    
    34,522Excess tax benefit from stock options exercises
    
    
    596
    
    
    
    Repurchase of common stock
    
    
    (107,905
    )
    
    
    (96,972
    )Net cash used in financing activities
    
    
    (95,032
    )
    
    
    (62,450
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (410
    )
    
    
    739Net decrease in cash and cash equivalents
    
    
    (305,684
    )
    
    
    (28,791
    )Cash and cash equivalents, beginning of period
    
    
    525,232
    
    
    
    651,971Cash and cash equivalents, end of period
    
    $
    219,548
    
    
    $
    623,180Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    13,160
    
    
    $
    12,042Supplemental disclosure of non-cash investing and financing activities:Accrued acquisition costs
    
    $
    368
    
    
    $
    Accrued acquisition consideration
    
    $
    
    
    
    $
    2,054
  5




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three and Six Months Ended June 30, 2007 and 2006
 Note 1. Summary of Significant Accounting Policies
 Description of Business.
  Basis of Presentation.
   Revenue Recognition. Software Revenue Recognition; Software Revenue Recognition with Respect to Certain Arrangements Accounting for Performance of Construction-Type and Certain Production-Type Contracts Revenue Recognition in Financial Statements Reporting
Revenue Gross as a Principal versus Net as an Agent; Revenue Arrangements
with Multiple Deliverables
   6




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Accounting for Taxes Collected From Customers
 Reclassifications.
 Note 2. Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. Accounting for Income Taxes
   Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 7




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Note 3. Stock-Based Compensation
 Share-Based Payment Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans
   Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2007
    
    2006
    
    2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.73
    %
    
    
    4.99
    %
    
    
    4.72
    %
    
    
    4.79
    %Expected life (years)
    
    
    4.1
    
    
    
    4.3
    
    
    
    4.1
    
    
    
    4.3Volatility
    
    
    42
    %
    
    
    49.1
    %
    
    
    42
    %
    
    
    48.4
    %
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of service revenue
    
    $
    154
    
    
    $
    41
    
    
    $
    313
    
    
    $
    91Research and development
    
    
    1,641
    
    
    
    1,318
    
    
    
    3,413
    
    
    
    2,687Sales and marketing
    
    
    2,203
    
    
    
    1,434
    
    
    
    4,590
    
    
    
    2,793General and administrative
    
    
    1,624
    
    
    
    880
    
    
    
    2,991
    
    
    
    1,740Total stock-based compensation expense
    
    $
    5,622
    
    
    $
    3,673
    
    
    $
    11,307
    
    
    $
    7,311
  Note 4. Business Combinations
 Business Combinations During 2007
    8




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Cash paid at acquisition
    
    $
    11,924Estimated direct acquisition costs
    
    
    902Total
    
    $
    12,826
   Current assets
    
    $
    5,110Property and equipment
    
    
    2,351Intangible assets subject to amortization:Technology
    
    
    1,760Customer relationships
    
    
    1,610Goodwill
    
    
    9,341Total assets acquired
    
    
    20,172Current liabilities
    
    
    (7,346
    )Net assets acquired
    
    $
    12,826
    
   Cash paid at acquisition
    
    $
    10,745Estimated direct acquisition costs
    
    
    468Total
    
    $
    11,213
  9




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Current assets
    
    $
    5,409Property and equipment
    
    
    265Other long-term assets
    
    
    109Intangible assets subject to amortization:Customer relationships
    
    
    3,270Technology
    
    
    2,545Tradenames and trademarks
    
    
    287Non-compete agreements
    
    
    80Goodwill
    
    
    2,852Total assets acquired
    
    
    14,817Current liabilities
    
    
    (1,761
    )Net deferred tax liabilities
    
    
    (1,472
    )Other long-term liabilities
    
    
    (371
    )Total liabilities acquired
    
    
    (3,604
    )Net assets acquired
    
    $
    11,213
   Business Combinations During 2006
       10




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Cash paid at acquisition
    
    $
    7,922Additional payments related to initial purchase price
    
    
    2,000Additional payments for achievement of performance criteria
    
    
    4,364Direct acquisition costs
    
    
    293Total
    
    $
    14,579
   Current assets
    
    $
    1,830Property and equipment
    
    
    166Intangible assets subject to amortization:Distributor and customer relationships
    
    
    1,290Technology and games
    
    
    570Tradenames and trademarks
    
    
    560Non-compete agreements
    
    
    180Goodwill
    
    
    12,532Total assets acquired
    
    
    17,128Current liabilities
    
    
    (1,781
    )Net deferred tax liabilities
    
    
    (768
    )Total liabilities acquired
    
    
    (2,549
    )Net assets acquired
    
    $
    14,579
   11




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 5. Cash, Cash Equivalents, Trading Securities, Short-Term Investments, and Restricted Cash
Equivalents
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    137,275
    
    
    $
    
    
    
    $
    
    
    
    $
    137,275Money market mutual funds
    
    
    54,930
    
    
    
    
    
    
    
    
    
    
    
    54,930Corporate notes and bonds
    
    
    27,338
    
    
    
    5
    
    
    
    
    
    
    
    27,343Total cash and cash equivalents
    
    
    219,543
    
    
    
    5
    
    
    
    
    
    
    
    219,548Trading securities:Money market mutual fund
    
    
    270,000
    
    
    
    2,102
    
    
    
    
    
    
    
    272,102Available-for-sale investments:Corporate notes and bonds
    
    
    53,215
    
    
    
    15
    
    
    
    (140
    )
    
    
    53,090U.S. Government agency securities
    
    
    69,027
    
    
    
    23
    
    
    
    (27
    )
    
    
    69,023Total available-for-sale investments
    
    
    122,242
    
    
    
    38
    
    
    
    (167
    )
    
    
    122,113Total short-term investments
    
    
    392,242
    
    
    
    2,140
    
    
    
    (167
    )
    
    
    394,215Total cash, cash equivalents,
trading securities, and short-term
investments
    
    $
    611,785
    
    
    $
    2,145
    
    
    $
    (167
    )
    
    $
    613,763Restricted cash equivalents
    
    $
    15,500
    
    
    $
    
    
    
    $
    
    
    
    $
    15,500
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    108,415
    
    
    $
    
    
    
    $
    
    
    
    $
    108,415Money market mutual funds
    
    
    231,634
    
    
    
    
    
    
    
    
    
    
    
    231,634Corporate notes and bonds
    
    
    182,184
    
    
    
    
    
    
    
    
    
    
    
    182,184U.S. Government agency securities
    
    
    2,999
    
    
    
    
    
    
    
    
    
    
    
    2,999Total cash and cash equivalents
    
    
    525,232
    
    
    
    
    
    
    
    
    
    
    
    525,232Short-term investments:U.S. Government agency securities
    
    
    153,520
    
    
    
    188
    
    
    
    (20
    )
    
    
    153,688Total short-term investments
    
    
    153,520
    
    
    
    188
    
    
    
    (20
    )
    
    
    153,688Total cash, cash equivalents, and short-term investments
    
    $
    678,752
    
    
    $
    188
    
    
    $
    (20
    )
    
    $
    678,920Restricted cash equivalents
    
    $
    17,300
    
    
    $
    
    
    
    $
    
    
    
    $
    17,300
    12




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Amortized
    
    
    EstimatedCost
    
    
    Fair ValueWithin one year
    
    $
    83,207
    
    
    $
    83,204Between one year and five years
    
    
    39,035
    
    
    
    38,909Total available-for-sale investments
    
    $
    122,242
    
    
    $
    122,113
 Note 6. Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
    
    
    SalesReceivable
    
    
    ReturnsBalances, December 31, 2006
    
    $
    1,101
    
    
    $
    1,389Additions charged to expenses/revenue
    
    
    75
    
    
    
    2,688Amounts written off
    
    
    (117
    )
    
    
    (2,700
    )Balances, June 30, 2007
    
    $
    1,059
    
    
    $
    1,377
  Note 7. Equity Investments
   June 30, 2007
    
    
    December 31, 2006Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValuePublicly traded investments
    
    $
    913
    
    
    $
    11,586
    
    
    $
    913
    
    
    $
    20,235Privately held investments
    
    
    1,551
    
    
    
    925
    
    
    
    1,879
    
    
    
    2,414Total equity investments
    
    $
    2,464
    
    
    $
    12,511
    
    
    $
    2,792
    
    
    $
    22,649
 Note 8. Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    77,540
    
    
    $
    8,901
    
    
    $
    68,639Developed technology
    
    
    41,085
    
    
    
    13,974
    
    
    
    27,111Patents, trademarks and tradenames
    
    
    7,402
    
    
    
    3,252
    
    
    
    4,150Service contracts and other
    
    
    6,821
    
    
    
    1,961
    
    
    
    4,860Total other intangible assets
    
    $
    132,848
    
    
    $
    28,088
    
    
    $
    104,760
 13




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    73,061
    
    
    $
    3,386
    
    
    $
    69,675Developed technology
    
    
    36,891
    
    
    
    9,981
    
    
    
    26,910Patents, trademarks and tradenames
    
    
    7,114
    
    
    
    2,226
    
    
    
    4,888Service contracts and other
    
    
    4,680
    
    
    
    1,044
    
    
    
    3,636Total other intangible assets
    
    $
    121,746
    
    
    $
    16,637
    
    
    $
    105,109
   2007 (remaining six months)
    
    $
    11,6632008
    
    
    22,6562009
    
    
    20,8532010
    
    
    16,9392011
    
    
    11,128Thereafter
    
    
    21,521Total
    
    $
    104,760
 Note 9. Goodwill
  Balance, December 31, 2006
    
    $
    309,122Increases for payments due to Zylom
    
    
    4,364Adjustments to purchase price for WiderThan
    
    
    (1,296
    )Purchase of additional shares of WiderThan
    
    
    1,160Increase due to acquisitions
    
    
    12,193Effects of foreign currency translation
    
    
    (534
    )Balance, June 30, 2007
    
    $
    325,009
 Note 10. Accrued and Other Liabilities
  June 30,
    
    
    December 31,2007
    
    
    2006Royalties and other fulfillment costs
    
    $
    32,127
    
    
    $
    29,968Employee compensation, commissions and benefits
    
    
    21,379
    
    
    
    25,244Income taxes payable
    
    
    12,811
    
    
    
    8,455Sales, VAT and other taxes payable
    
    
    10,787
    
    
    
    13,364Legal fees and contingent legal fees
    
    
    4,187
    
    
    
    4,075Accrued charitable donations
    
    
    79
    
    
    
    2,048Other
    
    
    26,643
    
    
    
    21,174Total
    
    $
    108,013
    
    
    $
    104,328
 Note 11. Loss on Excess Office Facilities
  14




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Accrued loss on excess office facilities, December 31, 2006
    
    $
    14,501Less amounts paid on accrued loss on excess office facilities, net of sublease income
    
    
    (1,795
    )Accrued loss on excess office facilities, June 30, 2007
    
    
    12,706Less current portion
    
    
    4,132Accrued loss on excess office facilities, non-current portion
    
    $
    8,574
 Note 12. Repurchase of Common Stock
   Note 13. Earnings Per Share
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2007
    
    2006
    
    2007
    
    2006Weighted average common shares outstanding used to
compute basic net income per share
    
    
    153,880
    
    
    
    159,938
    
    
    
    157,929
    
    
    
    160,410Dilutive potential common shares:Stock options and restricted stock
    
    
    4,403
    
    
    
    6,649
    
    
    
    5,143
    
    
    
    5,967Convertible debt
    
    
    10,750
    
    
    
    10,750
    
    
    
    10,750
    
    
    
    10,750Shares used to compute diluted net income per share
    
    
    169,033
    
    
    
    177,337
    
    
    
    173,822
    
    
    
    177,127
  Note 14. Commitments and Contingencies
 Borrowing Arrangements
 15




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     Litigation
    16




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Note 15. Segment Information
 Disclosure About Segments of an
Enterprise and Related Information
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    88,035
    
    
    $
    66,542
    
    
    $
    172,589
    
    
    $
    132,242Europe
    
    
    20,522
    
    
    
    15,925
    
    
    
    38,232
    
    
    
    29,830Republic of Korea
    
    
    18,885
    
    
    
    
    
    
    
    37,284
    
    
    
    Rest of the World
    
    
    8,729
    
    
    
    6,942
    
    
    
    17,538
    
    
    
    13,939Total net revenue
    
    $
    136,171
    
    
    $
    89,409
    
    
    $
    265,643
    
    
    $
    176,011
   17




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Consumer products and services
    
    $
    87,115
    
    
    $
    77,442
    
    
    $
    172,155
    
    
    $
    152,253Technology products and solutions
    
    
    49,056
    
    
    
    11,967
    
    
    
    93,488
    
    
    
    23,758Total net revenue
    
    $
    136,171
    
    
    $
    89,409
    
    
    $
    265,643
    
    
    $
    176,011
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Music
    
    $
    36,801
    
    
    $
    30,118
    
    
    $
    70,928
    
    
    $
    59,036Media Software and services
    
    
    25,419
    
    
    
    26,127
    
    
    
    52,430
    
    
    
    53,404Games
    
    
    24,895
    
    
    
    21,197
    
    
    
    48,797
    
    
    
    39,813Total consumer products and service revenue
    
    $
    87,115
    
    
    $
    77,442
    
    
    $
    172,155
    
    
    $
    152,253
  June 30,
    
    
    December 31,2007
    
    
    2006United States
    
    $
    175,030
    
    
    $
    172,846Republic of Korea
    
    
    247,996
    
    
    
    256,032Europe
    
    
    50,840
    
    
    
    26,807Rest of the World
    
    
    7,455
    
    
    
    6,289Total long-lived assets
    
    $
    481,321
    
    
    $
    461,974
  June 30,
    
    
    December 31,2007
    
    
    2006United States
    
    $
    516,961
    
    
    $
    621,532Republic of Korea
    
    
    340,577
    
    
    
    314,106Europe
    
    
    53,697
    
    
    
    26,298Rest of the World
    
    
    8,171
    
    
    
    7,830Total net assets
    
    $
    919,406
    
    
    $
    969,766
 18




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  June 30,
    
    
    December 31,2007
    
    
    2006Consumer products and services
    
    $
    137,568
    
    
    $
    131,997Technology products and solutions
    
    
    187,441
    
    
    
    177,125Total goodwill
    
    $
    325,009
    
    
    $
    309,122
   Consumer Products
    
    
    Technology Products
    
    
    Reconcilingand Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    87,115
    
    
    $
    49,056
    
    
    $
    
    
    
    $
    136,171Cost of revenue
    
    
    28,898
    
    
    
    20,301
    
    
    
    
    
    
    
    49,199Gross profit
    
    
    58,217
    
    
    
    28,755
    
    
    
    
    
    
    
    86,972Other operating expenses
    
    
    54,425
    
    
    
    37,724
    
    
    
    
    
    
    
    92,149Operating income (loss)
    
    
    3,792
    
    
    
    (8,969
    )
    
    
    
    
    
    
    (5,177
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    8,682
    
    
    
    8,682Income (loss) before income taxes
    
    $
    3,792
    
    
    $
    (8,969
    )
    
    $
    8,682
    
    
    $
    3,505
  Consumer Products
    
    
    Technology Products
    
    
    Reconcilingand Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    77,442
    
    
    $
    11,967
    
    
    $
    
    
    
    $
    89,409Cost of revenue
    
    
    24,415
    
    
    
    2,231
    
    
    
    
    
    
    
    26,646Gross profit
    
    
    53,027
    
    
    
    9,736
    
    
    
    
    
    
    
    62,763Antitrust litigation benefit, net
    
    
    
    
    
    
    
    
    
    
    (57,858
    )
    
    
    (57,858
    )Other operating expenses
    
    
    56,463
    
    
    
    14,499
    
    
    
    
    
    
    
    70,962Operating income (loss)
    
    
    (3,436
    )
    
    
    (4,763
    )
    
    
    57,858
    
    
    
    49,659Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    11,740
    
    
    
    11,740Income (loss) before income taxes
    
    $
    (3,436
    )
    
    $
    (4,763
    )
    
    $
    69,598
    
    
    $
    61,399
  Consumer Products
    
    
    Technology Products
    
    
    Reconcilingand Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    172,155
    
    
    $
    93,488
    
    
    $
    
    
    
    $
    265,643Cost of revenue
    
    
    56,712
    
    
    
    38,430
    
    
    
    
    
    
    
    95,142Gross profit
    
    
    115,443
    
    
    
    55,058
    
    
    
    
    
    
    
    170,501Antitrust litigation benefit, net
    
    
    
    
    
    
    
    
    
    
    (60,747
    )
    
    
    (60,747
    )Other operating expenses
    
    
    109,584
    
    
    
    73,098
    
    
    
    
    
    
    
    182,682Operating income (loss)
    
    
    5,859
    
    
    
    (18,040
    )
    
    
    60,747
    
    
    
    48,566Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    18,119
    
    
    
    18,119Income (loss) before income taxes
    
    $
    5,859
    
    
    $
    (18,040
    )
    
    $
    78,866
    
    
    $
    66,685
 19




---



##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Consumer Products
    
    
    Technology Products
    
    
    Reconcilingand Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    152,253
    
    
    $
    23,758
    
    
    $
    
    
    
    $
    176,011Cost of revenue
    
    
    49,166
    
    
    
    4,233
    
    
    
    
    
    
    
    53,399Gross profit
    
    
    103,087
    
    
    
    19,525
    
    
    
    
    
    
    
    122,612Loss on excess office facilities
    
    
    
    
    
    
    
    
    
    
    738
    
    
    
    738Antitrust litigation benefit, net
    
    
    
    
    
    
    
    
    
    
    (97,693
    )
    
    
    (97,693
    )Other operating expenses
    
    
    110,342
    
    
    
    28,028
    
    
    
    
    
    
    
    138,370Operating income (loss)
    
    
    (7,255
    )
    
    
    (8,503
    )
    
    
    96,955
    
    
    
    81,197Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    19,836
    
    
    
    19,836Income (loss) before income taxes
    
    $
    (7,255
    )
    
    $
    (8,503
    )
    
    $
    116,791
    
    
    $
    101,033
 20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain
forward-looking statements that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on current expectations,
estimates, and projections about RealNetworks industry, products, managements beliefs, and
certain assumptions made by management. Words such as anticipates, expects, intends,
plans, believes, seeks, estimates, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include statements with respect to:
 
    
    future revenues, income taxes, net income per diluted share, acquisition costs and related amortization, and other
measures of results of operations;
    
    the effects of acquiring WiderThan, Sony NetServices GmbH (SNS), and Exomi Oy (Exomi), including our position as a
technology services provider for leading wireless carriers;
    
    plans, strategies and expected opportunities for growth, increased profitability and innovation in 2007 and future years;
    
    the expected growth and profitability of our Technology Products and Solutions business;
    
    the financial performance and growth of our Games business, including future international growth;
    
    the migration of our Media Software and Services businesses from general purpose subscription businesses toward premium
services and free-to-consumer services, the popularity of the RealPlayer and our expected introduction of new products
and innovations in our Media Software and Services business;
    
    our ability to grow our Music business, including opportunities for us to become the platform of choice for the Consumer
Electronics industry, the integration of our Rhapsody DNA into the digital devices of an expanding list of partners and
our plans to introduce additional innovations;
    
    the effect of future interoperability on our Music business, the significance of growth opportunities in the digital
music market and our expectations for short-term progress and long-term success in our Music business;
    
    our financial position, planned capital expenditures, and the availability of capital resources;
    
    our expectations regarding acquisition activity in 2007 and our focus on the integration of completed acquisitions;
    
    future competition; and
    
    the degree of seasonality in our revenue.
 These statements are not guarantees of future performance and actual actions or results may
differ materially. These statements are subject to certain risks, uncertainties and assumptions
that are difficult to predict, including those noted in the documents incorporated herein by
reference. Particular attention should also be paid to the cautionary language in section Item 1
of Part II entitled Legal Proceedings and Item 1A of Part II entitled Risk Factors.
RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result
of new information, future events or otherwise, unless required by law. Readers should, however,
carefully review the risk factors included in other reports or documents filed by RealNetworks from
time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on
Form 10-Q and any Current Reports on Form 8-K .
 Overview
    21




---



##### Table of Contents




    Critical Accounting Policies and Estimates
  
    
    Revenue recognition;
    
    Estimating music publishing rights and music royalty accruals;
    
    Recoverability of deferred costs;
    
    Estimating allowances for doubtful accounts and sales returns;
    
    Estimating losses on excess office facilities;
    
    Determining whether declines in the fair value of investments are
other-than-temporary and estimating fair market value of
investments in privately held companies;
    
    Valuation of other intangible assets;
    
    Valuation of goodwill;
    
    Stock-based compensation; and
    
    Accounting for income taxes.
 Revenue Recognition. Software Revenue Recognition; Software Revenue Recognition with Respect to Certain Arrangements Accounting for
Performance of Construction-Type and Certain Production-Type Contracts Revenue Recognition in Financial
Statements
 22




---



##### Table of Contents



Revenue
Arrangements with Multiple Deliverables; Reporting Revenue Gross as a
Principal versus Net as an Agent
      Music Publishing Rights and Music Royalty Accruals.
 Recoverability of Deferred Costs.
  23




---



##### Table of Contents



Allowances for Doubtful Accounts and Sales Returns.
 Accrued Loss on Excess Office Facilities.
 Impairment of Investments.
 Valuation of Other Intangible Assets
 Valuation of Goodwill.
 
    
    poor economic performance relative to historical or projected future operating results;
    
    significant negative industry, economic or company specific trends;
    
    changes in the manner of our use of the assets or the plans for our business; and
    
    loss of key personnel.
  Stock-Based Compensation. Share-Based Payment
 24




---



##### Table of Contents



Accounting for Income Taxes.
   Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. Accounting for Income Taxes
   Revenue by Segment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006Consumer products and services
    
    $
    87,115
    
    
    
    12
    %
    
    $
    77,442
    
    
    $
    172,155
    
    
    
    13
    %
    
    $
    152,253Technology products and solutions
    
    
    49,056
    
    
    
    310
    
    
    
    11,967
    
    
    
    93,488
    
    
    
    294
    
    
    
    23,758Total net revenue
    
    $
    136,171
    
    
    
    52
    %
    
    $
    89,409
    
    
    $
    265,643
    
    
    
    51
    %
    
    $
    176,011
 25




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Consumer products and services
    
    
    64
    %
    
    
    87
    %
    
    
    65
    %
    
    
    87
    %Technology products and solutions
    
    
    36
    
    
    
    13
    
    
    
    35
    
    
    
    13Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Consumer Products and Services.
  Technology Products and Solutions.
  Consumer Products and Services Revenue
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006Music
    
    $
    36,801
    
    
    
    22
    %
    
    $
    30,118
    
    
    $
    70,928
    
    
    
    20
    %
    
    $
    59,036Media software and services
    
    
    25,419
    
    
    
    (3
    )
    
    
    26,127
    
    
    
    52,430
    
    
    
    (2
    )
    
    
    53,404Games
    
    
    24,895
    
    
    
    17
    
    
    
    21,197
    
    
    
    48,797
    
    
    
    23
    
    
    
    39,813Total consumer products and services revenue
    
    $
    87,115
    
    
    
    12
    %
    
    $
    77,442
    
    
    $
    172,155
    
    
    
    13
    %
    
    $
    152,253
 Music.
 26




---



##### Table of Contents



Media Software and Services.
 Games.
 Geographic Revenue
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006United States
    
    $
    88,035
    
    
    
    32
    %
    
    $
    66,542
    
    
    $
    172,589
    
    
    
    31
    %
    
    $
    132,242Europe
    
    
    20,522
    
    
    
    29
    
    
    
    15,925
    
    
    
    38,232
    
    
    
    28
    
    
    
    29,830Republic of Korea
    
    
    18,885
    
    
    
    n/a
    
    
    
    
    
    
    
    37,284
    
    
    
    n/a
    
    
    
    Rest of the world
    
    
    8,729
    
    
    
    26
    
    
    
    6,942
    
    
    
    17,538
    
    
    
    26
    
    
    
    13,939Total net revenue
    
    $
    136,171
    
    
    
    52
    %
    
    $
    89,409
    
    
    $
    265,643
    
    
    
    51
    %
    
    $
    176,011
 Music Games
 Revenue
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006License fees
    
    $
    22,212
    
    
    
    (3
    )%
    
    $
    22,850
    
    
    $
    44,049
    
    
    
    (3
    )%
    
    $
    45,486Service revenue
    
    
    113,959
    
    
    
    71
    
    
    
    66,559
    
    
    
    221,594
    
    
    
    70
    
    
    
    130,525Total net revenue
    
    $
    136,171
    
    
    
    52
    %
    
    $
    89,409
    
    
    $
    265,643
    
    
    
    51
    %
    
    $
    176,011
 27




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006License fees
    
    
    16
    %
    
    
    26
    %
    
    
    17
    %
    
    
    26
    %Service revenue
    
    
    84
    
    
    
    74
    
    
    
    83
    
    
    
    74Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 License Fees.
 Service Revenue.
 Deferred Revenue
  Cost of Revenue by Segment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006Consumer products and services
    
    $
    28,898
    
    
    
    18
    %
    
    $
    24,415
    
    
    $
    56,712
    
    
    
    15
    %
    
    $
    49,166Technology products and solutions
    
    
    20,301
    
    
    
    810
    
    
    
    2,231
    
    
    
    38,430
    
    
    
    808
    
    
    
    4,233Total cost of revenue
    
    $
    49,199
    
    
    
    85
    %
    
    $
    26,646
    
    
    $
    95,142
    
    
    
    78
    %
    
    $
    53,399
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Consumer products and services
    
    
    33
    %
    
    
    32
    %
    
    
    33
    %
    
    
    32
    %Technology products and solutions
    
    
    41
    
    
    
    19
    
    
    
    41
    
    
    
    18Total cost of revenue
    
    
    36
    
    
    
    30
    
    
    
    36
    
    
    
    30
 Cost of Consumer Products and Services.
 28




---



##### Table of Contents



Cost of Technology Products and Solutions.
 Cost of Revenue
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006License fees
    
    $
    7,882
    
    
    
    (16
    )%
    
    $
    9,329
    
    
    $
    16,174
    
    
    
    (16
    )%
    
    $
    19,190Service revenue
    
    
    41,317
    
    
    
    139
    
    
    
    17,317
    
    
    
    78,968
    
    
    
    131
    
    
    
    34,209Total cost of revenue
    
    $
    49,199
    
    
    
    85
    %
    
    $
    26,646
    
    
    $
    95,142
    
    
    
    78
    %
    
    $
    53,399
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006License fees
    
    
    35
    %
    
    
    41
    %
    
    
    37
    %
    
    
    42
    %Service revenue
    
    
    36
    
    
    
    26
    
    
    
    36
    
    
    
    26Total cost of revenue
    
    
    36
    
    
    
    30
    
    
    
    36
    
    
    
    30
 Cost of License Fees.
 Cost of Service Revenue.
 29




---



##### Table of Contents



Operating Expenses
 Research and Development
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    Change
    
    2006
    
    2007
    
    Change
    
    2006Research and development
    
    $
    25,005
    
    
    
    34
    %
    
    $
    18,684
    
    
    $
    48,484
    
    
    
    32
    %
    
    $
    36,783As a percentage of total net revenue
    
    
    18
    %
    
    
    
    
    
    
    21
    %
    
    
    18
    %
    
    
    
    
    
    
    21
    %
   Sales and Marketing
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    Change
    
    2006
    
    2007
    
    Change
    
    2006Sales and marketing
    
    $
    50,081
    
    
    
    32
    %
    
    $
    37,961
    
    
    $
    99,781
    
    
    
    35
    %
    
    $
    74,044As a percentage of total net revenue
    
    
    37
    %
    
    
    
    
    
    
    42
    %
    
    
    38
    %
    
    
    
    
    
    
    42
    %
   30




---



##### Table of Contents



General and Administrative
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    Change
    
    2006
    
    2007
    
    Change
    
    2006General and administrative
    
    $
    17,063
    
    
    
    19
    %
    
    $
    14,317
    
    
    $
    34,417
    
    
    
    25
    %
    
    $
    27,543As a percentage of total net revenue
    
    
    13
    %
    
    
    
    
    
    
    16
    %
    
    
    13
    %
    
    
    
    
    
    
    16
    %
   Loss on Excess Office Facilities
    Antitrust Litigation Benefit, Net
  31




---



##### Table of Contents



Other Income, Net
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    Change
    
    
    2006
    
    
    2007
    
    
    Change
    
    
    2006Interest and other, net
    
    $
    8,065
    
    
    
    (14
    )%
    
    $
    9,381
    
    
    $
    17,167
    
    
    
    (1
    )%
    
    $
    17,360Gain on sale of equity investments
    
    
    132
    
    
    
    (94
    )
    
    
    2,286
    
    
    
    132
    
    
    
    (94
    )
    
    
    2,286Equity in net loss of investments
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    (132
    )
    
    
    n/a
    
    
    
    Other income, net
    
    
    485
    
    
    
    564
    
    
    
    73
    
    
    
    952
    
    
    
    401
    
    
    
    190Other income, net
    
    $
    8,682
    
    
    
    (26
    )%
    
    $
    11,740
    
    
    $
    18,119
    
    
    
    (9
    )%
    
    $
    19,836
   Income Taxes
  Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. Accounting for Income Taxes
   32




---



##### Table of Contents



New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Liquidity and Capital Resources
  June 30,
    
    December 31,2007
    
    2006Working capital
    
    $
    521,244
    
    
    $
    584,125Cash, cash equivalents, trading
securities, and short-term investments
    
    
    613,763
    
    
    
    678,920Restricted cash
    
    
    15,500
    
    
    
    17,300
   June 30,
    
    June 30,2007
    
    2006Cash (used in) provided by operating activities
    
    $
    (206,296
    )
    
    $
    59,982Cash used in investing activities
    
    
    (3,946
    )
    
    
    (27,062
    )Cash used in financing activities
    
    
    (95,032
    )
    
    
    (62,450
    )
   33




---



##### Table of Contents



Off-Balance Sheet Agreements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 34




---



##### Table of Contents



Investment Risk.
 Foreign Currency Risk.
     
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 35




---



##### Table of Contents



Changes in Internal Controls.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
  Risks Related to Our Consumer Products and Services Business
 Future growth of our online consumer businesses may not keep pace with recently realized growth
rates; any slowdown in growth would negatively impact our overall operating results.
  We are experiencing greater fluctuations in revenue due to seasonality than at any time in our
past, and we expect this trend to continue.
  36




---



##### Table of Contents



The success of our subscription services businesses depends upon our ability to increase
subscription revenue.
  Our digital content subscription business, and our online music services in particular, depend on
our continuing ability to license compelling content on commercially reasonable terms.
  RealPlayer 11 may not achieve consumer or market acceptance and may be subject to legal challenge.
   Music publishing royalty rates for music subscription services are not yet fully established; a
determination of high royalty rates could negatively impact our operating results.
  37




---



##### Table of Contents



The April 2007 Copyright Royalty Board decision regarding Internet radio royalties and minimum
payments could result in material expenses that would harm our operating results and our ability to
provide popular radio services.
  Our consumer businesses face substantial competitive challenges that may prevent us from being
successful in those businesses.
 Music.
 Media Software and Services.
 Games.
 We may not be successful in maintaining and growing our distribution of digital media products.
  38




---



##### Table of Contents



The success of our music services depend, in part, on interoperability with our customers music
playback hardware.
  Risks Related to Our Technology Products and Solutions Business
 Our recent acquisitions could expose us to new risks, disrupt our business and adversely impact our
results of operations.
  Our businesses may be adversely affected by developments affecting the South Korean economy amid
increased tensions with North Korea.
   Our traditional system software business has been negatively impacted by the effects of our
competitors and our settlement agreement with Microsoft may not improve sales of our system
software products.
  39




---



##### Table of Contents



A majority of the revenue that we generate in South Korea is dependent upon our relationship with
SK Telecom, the largest wireless carrier in Korea; any deterioration of this relationship could
materially harm our business.
  Contracts with our carrier customers subject us to significant risks that could negatively impact
our revenue from application services.
    Our carrier customers could begin developing some or all of our carrier applications services on
their own, which could result in the loss of future revenues.
  The mobile entertainment market is highly competitive.
  Our Helix open source initiative is subject to risks associated with open source technology.
  40




---



##### Table of Contents



Our patents may not improve our business prospects.
  Risks Related to Our Business in General
 Our operating results are difficult to predict and may fluctuate, which may contribute to
fluctuations in our stock price.
  Our settlement agreement with Microsoft may not improve our business prospects.
  Our products and services must compete with the products and services of strong or dominant
competitors.
  
    
    reduced prices, revenue and margins;
    
    increased expenses in responding to competitors;
    
    loss of current and potential customers, market share and market power;
    
    lengthened sales cycles;
    
    degradation of our stature and reputation in the market;
    
    changes in our business and distribution and marketing strategies;
    
    changes to our products, services, technology, licenses and business practices, and other disruption of our operations;
    
    strained relationships with partners; and
    
    pressure to prematurely release products or product enhancements.
  Failure to develop and introduce new products and services that achieve market acceptance could
result in a loss of market opportunities and negatively affect our operating results.
  41




---



##### Table of Contents



Microsoft is one of our strongest competitors, and employs highly aggressive tactics against us.
  If our products are not able to support the most popular digital media formats, our business will
be substantially impaired.
  We depend upon our executive officers and key personnel, but may be unable to attract and retain
them, which could significantly harm our business and results of operations.
   Our industry is experiencing consolidation that may cause us to lose key relationships and
intensify competition.
   Acquisitions involve costs and risks that could harm our business and impair our ability to realize
potential benefits from acquisitions.
   42




---



##### Table of Contents




    
    difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of
the acquired company;
    
    retaining key management or employees of the acquired company;
    
    entrance into unfamiliar markets, industry segments, or types of businesses;
    
    operating and integrating acquired businesses in remote locations;
    
    integrating and managing businesses based in countries in which we have little or no prior experience;
    
    diversion of management time and other resources from existing operations to integration activities for acquired businesses;
    
    impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired
business; and
    
    assumption of known and unknown liabilities of the acquired company, including intellectual property claims.
 Our strategic investments may not be successful and we may have to recognize expenses in our income
statement in connection with these investments.
  We need to develop relationships and technical standards with manufacturers of non-PC media and
communication devices to grow our business.
  Our business and operating results will suffer if our systems or networks fail, become unavailable,
unsecured or perform poorly so that current or potential users do not have adequate access to our
products, services and websites.
  Our network is subject to security risks that could harm our business and reputation and expose us
to litigation or liability.
  43




---



##### Table of Contents



The growth of our business is dependent in part on successfully implementing our international
expansion strategy.
   We may be unable to adequately protect our proprietary rights and may face risks associated with
third-party claims relating to our intellectual property.
   
    
    our applications for patents and trademarks relating to our business may not be granted and, if granted, may be challenged or
invalidated;
    
    our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
    
    our efforts may not prevent the development and design by others of products or technologies similar to, competitive with, or
superior to those we develop; or
    
    another party may obtain a blocking patent, thus requiring us to either obtain a license or design around the patent in order
to continue to offer the contested feature or service in our products.
  We may be subject to market risk and legal liability in connection with the data collection
capabilities of our products and services.
  44




---



##### Table of Contents



We account for employee stock options using the fair value method, which may have a material
adverse affect on our results of operations.
 Share Based Payment
 We may be subject to assessment of sales and other taxes for the sale of our products, license of
technology or provision of services.
    We may be subject to additional income tax assessments.
  We donate a portion of our net income to charity.
  45




---



##### Table of Contents



Risks Related to the Securities Markets and Ownership of Our Common Stock
 Our directors and executive officers beneficially own approximately one third of our stock, which
gives them significant control over certain major decisions on which our shareholders may vote, may
discourage an acquisition of us, and any significant sales of stock by our officers and directors
could have a negative effect on our stock price.
  
    
    elect or defeat the election of our directors;
    
    amend or prevent amendment of our articles of incorporation or bylaws;
    
    effect or prevent a merger, sale of assets or other corporate transaction; and
    
    control the outcome of any other matter submitted to the shareholders for vote.
  Provisions of our charter documents, Shareholder Rights Plan, and Washington law could discourage
our acquisition by a third-party.
  
    
    adopt a plan of merger;
    
    authorize the sale, lease, exchange or mortgage of assets
representing more than 50% of the book value of our assets prior
to the transaction or on which our long-term business strategy is
substantially dependent;
    
    authorize our voluntary dissolution; or
    
    take any action that has the effect of any of the above.
    We are exposed to potential risks from legislation requiring companies to evaluate controls under
Section 404 of the Sarbanes-Oxley Act of 2002.
  46




---



##### Table of Contents



Certain material weaknesses in internal controls of WiderThan were identified as of December 31,
2005; if we fail to remediate and maintain an effective system of internal controls at WiderThan we
may be unable to accurately report our financial results or reduce our ability to prevent or detect
fraud, and investor confidence may be affected.
  
    
    WiderThan did not retain accounting staff with sufficient depth
and skill in the application of U.S. GAAP commensurate with the
reporting requirements of a U.S. registrant;
    
    WiderThan did not have effective controls over establishing and
maintaining accounting policies related to revenue recognition;
and
    
    WiderThan did not maintain effective controls, including
monitoring, over the financial close and reporting process.
Specifically, WiderThan relied heavily on the use of spreadsheet
programs during the financial close process and did not have
adequately designed controls to ensure the completeness, accuracy,
and restricted access to such spreadsheets.
  Our stock price has been volatile in the past and may continue to be volatile.
  Financial forecasting of our operating results will be difficult because of the changing nature of
our products and business, and our actual results may differ from forecasts.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    During the quarter ended June 30, 2007, the Company issued and sold unregistered securities as
follows:
 (1)
    
    On June 29, 2007, the Company issued an aggregate of 2,997 shares of Common Stock
to three non-employee directors as compensation for board service during the first
quarter of 2007 pursuant to the RealNetworks, Inc. Amended and
Restated 2005 Stock Incentive Plan.
The aggregate value of the shares was $25,000. The shares were issued in reliance on
Section 4(2) under the Securities Act of 1933, as amended, on the basis that the
transactions did not involve a public offering.
 (b)
    
    Not applicable(c)
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  47




---



##### Table of Contents



Total Number ofShares Repurchased
    
    Average Price PaidPeriod
    
    (in thousands)
    
    Per Share5/1/2007  5/31/2007
    
    
    1,448
    
    
    $
    8.436/1/2007  6/30/2007
    
    
    2,092
    
    
    
    8.23Total
    
    
    3,540
    
    
    $
    8.31
 
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Directors Elected
    
    For
    
    WithheldEric A. Benhamou
    
    
    140,891,103
    
    
    
    1,378,770Edward Bleier
    
    
    141,071,644
    
    
    
    1,198,229Kalpana Raina
    
    
    141,080,707
    
    
    
    1,189,166
  
  VotesFor
    
    
    71,766,499Against
    
    
    46,682,724Broker non-votes
    
    
    23,508,109Abstain
    
    
    312,541
  VotesFor
    
    
    112,761,377Against
    
    
    5,704,017Broker non-votes
    
    
    23,508,109Abstain
    
    
    296,370
 48




---



##### Table of Contents



VotesFor
    
    
    139,587,956Against
    
    
    2,311,344Broker non-votes
    
    
    Abstain
    
    
    370,573
 
 Item 5. Other Information
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description3.1
    
    
    
    Amended and Restated Bylaws of RealNetworks, Inc. adopted
April 24, 2007 (incorporated by reference from Exhibit 3.1 to
RealNetworks Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 27, 2007)10.1
    
    
    
    RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and
restated on June 25, 2007 (incorporated by reference from
Exhibit 10.1 to RealNetworks Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 29, 2007)10.2
    
    
    
    RealNetworks, Inc. 2007 Employee Stock Purchase Plan31.1
    
    
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 49




---



##### Table of Contents



SIGNATURE
  REALNETWORKS, INC.By:
    
    /s/ Michael EggersMichael EggersTitle: Senior Vice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 50




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    
    
    Amended and Restated Bylaws of RealNetworks, Inc. adopted
April 24, 2007 (incorporated by reference from Exhibit 3.1 to
RealNetworks Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 27, 2007)10.1
    
    
    
    RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and
restated on June 25, 2007 (incorporated by reference from
Exhibit 10.1 to RealNetworks Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 29, 2007)10.2
    
    
    
    RealNetworks, Inc. 2007 Employee Stock Purchase Plan31.1
    
    
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 51