##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the Quarterly Period Ended June 30, 2008
 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



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
    
    
    35Item 4. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Default Upon Senior Securities
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46Signature
    
    
    48EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### 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 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    415,805
    
    
    $
    476,697Short-term investments
    
    
    106,862
    
    
    
    79,932Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    71,177
    
    
    
    84,674Deferred costs, current portion
    
    
    8,598
    
    
    
    6,408Prepaid expenses and other current assets
    
    
    39,168
    
    
    
    33,845Total current assets
    
    
    641,610
    
    
    
    681,556Equipment, software, and leasehold improvements, at cost:Equipment and software
    
    
    124,406
    
    
    
    109,621Leasehold improvements
    
    
    30,875
    
    
    
    30,632Total equipment, software, and leasehold improvements, at cost
    
    
    155,281
    
    
    
    140,253Less accumulated depreciation and amortization
    
    
    94,763
    
    
    
    83,756Net equipment, software, and leasehold improvements
    
    
    60,518
    
    
    
    56,497Restricted cash equivalents and investments
    
    
    14,670
    
    
    
    15,509Equity investments
    
    
    8,126
    
    
    
    9,976Other assets
    
    
    16,419
    
    
    
    10,161Deferred tax assets, net
    
    
    40,169
    
    
    
    40,913Other intangible assets, net
    
    
    90,506
    
    
    
    107,677Goodwill
    
    
    341,551
    
    
    
    353,153Total assets
    
    $
    1,213,569
    
    
    $
    1,275,442LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,748
    
    
    $
    56,160Accrued and other liabilities
    
    
    106,654
    
    
    
    114,136Deferred revenue, current portion
    
    
    40,680
    
    
    
    39,564Related party payable
    
    
    9,992
    
    
    
    17,241Convertible debt
    
    
    100,000
    
    
    
    100,000Accrued loss on excess office facilities, current portion
    
    
    4,311
    
    
    
    3,389Total current liabilities
    
    
    291,385
    
    
    
    330,490Deferred revenue, non-current portion
    
    
    1,608
    
    
    
    2,663Accrued loss on excess office facilities, non-current portion
    
    
    4,797
    
    
    
    7,311Deferred rent
    
    
    4,675
    
    
    
    4,518Deferred tax liabilities, net, non-current portion
    
    
    18,311
    
    
    
    22,060Other long-term liabilities
    
    
    10,152
    
    
    
    13,683Total liabilities
    
    
    330,928
    
    
    
    380,725Minority
interest in Rhapsody America ($68.2 million redemption value at June 30, 2008)
    
    
    10,931
    
    
    
    19,613Shareholders equity:Preferred stock, $0.001 par value, no shares issued and outstanding
Series A: authorized 200 shares
    
    
    
    
    
    
    Undesignated series: authorized 59,800 shares
    
    
    
    
    
    
    Common stock, $0.001 par value authorized 1,000,000 shares; issued and outstanding
143,269 shares in 2008 and 142,298 shares in 2007
    
    
    143
    
    
    
    142Additional paid-in capital
    
    
    670,008
    
    
    
    653,904Accumulated other comprehensive (loss) income
    
    
    (2,888
    )
    
    
    17,732Retained earnings
    
    
    204,447
    
    
    
    203,326Total shareholders equity
    
    
    871,710
    
    
    
    875,104Total liabilities and shareholders equity
    
    $
    1,213,569
    
    
    $
    1,275,442
  3




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##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue (A)
    
    $
    152,648
    
    
    $
    136,171
    
    
    $
    300,211
    
    
    $
    265,643Cost of revenue (B)
    
    
    55,645
    
    
    
    49,199
    
    
    
    111,038
    
    
    
    95,142Gross profit
    
    
    97,003
    
    
    
    86,972
    
    
    
    189,173
    
    
    
    170,501Operating expenses:Research and development
    
    
    29,065
    
    
    
    25,005
    
    
    
    54,071
    
    
    
    48,484Sales and marketing
    
    
    53,054
    
    
    
    50,081
    
    
    
    106,650
    
    
    
    99,781Advertising with related party
    
    
    9,240
    
    
    
    
    
    
    
    16,580
    
    
    
    General and administrative
    
    
    18,337
    
    
    
    17,063
    
    
    
    35,421
    
    
    
    34,417Restructuring costs
    
    
    
    
    
    
    
    
    
    
    686
    
    
    
    Subtotal operating expenses
    
    
    109,696
    
    
    
    92,149
    
    
    
    213,408
    
    
    
    182,682Antitrust litigation benefit, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,747
    )Total operating expenses, net
    
    
    109,696
    
    
    
    92,149
    
    
    
    213,408
    
    
    
    121,935Operating (loss) income
    
    
    (12,693
    )
    
    
    (5,177
    )
    
    
    (24,235
    )
    
    
    48,566Other income (expenses):Interest income, net
    
    
    3,375
    
    
    
    8,065
    
    
    
    8,333
    
    
    
    17,167Equity in net loss of investments
    
    
    (107
    )
    
    
    
    
    
    
    (198
    )
    
    
    (132
    )Gain on sale of equity investments, net
    
    
    222
    
    
    
    132
    
    
    
    222
    
    
    
    132Minority interest in Rhapsody America
    
    
    8,177
    
    
    
    
    
    
    
    16,792
    
    
    
    Gain on sale of interest in Rhapsody America
    
    
    3,371
    
    
    
    
    
    
    
    7,097
    
    
    
    Other income, net
    
    
    50
    
    
    
    485
    
    
    
    818
    
    
    
    952Other income, net
    
    
    15,088
    
    
    
    8,682
    
    
    
    33,064
    
    
    
    18,119Income before income taxes
    
    
    2,395
    
    
    
    3,505
    
    
    
    8,829
    
    
    
    66,685Income taxes
    
    
    (3,700
    )
    
    
    (2,178
    )
    
    
    (7,708
    )
    
    
    (25,397
    )Net (loss) income
    
    $
    (1,305
    )
    
    $
    1,327
    
    
    $
    1,121
    
    
    $
    41,288Basic net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.26Diluted net income per share
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.24Shares used to compute basic net income per share
    
    
    142,905
    
    
    
    153,880
    
    
    
    142,946
    
    
    
    157,929Shares used to compute diluted net income per share
    
    
    142,905
    
    
    
    169,033
    
    
    
    156,000
    
    
    
    173,822Comprehensive (loss) income:Net (loss) income
    
    $
    (1,305
    )
    
    $
    1,327
    
    
    $
    1,121
    
    
    $
    41,288Unrealized holding gains (losses) on short-term and
equity investments, net of income taxes
    
    
    145
    
    
    
    (2,663
    )
    
    
    (289
    )
    
    
    (5,719
    )Foreign currency translation losses
    
    
    (12,269
    )
    
    
    1,268
    
    
    
    (20,331
    )
    
    
    (1,659
    )Comprehensive (loss) income
    
    $
    (13,429
    )
    
    $
    (68
    )
    
    $
    (19,499
    )
    
    $
    33,910(A) Components of net revenue:License fees
    
    $
    28,613
    
    
    $
    22,212
    
    
    $
    54,368
    
    
    $
    44,049Service revenue
    
    
    124,035
    
    
    
    113,959
    
    
    
    245,843
    
    
    
    221,594$
    152,648
    
    
    $
    136,171
    
    
    $
    300,211
    
    
    $
    265,643(B) Components of cost of revenue:License fees
    
    $
    10,614
    
    
    $
    7,882
    
    
    $
    20,002
    
    
    $
    16,174Service revenue
    
    
    45,031
    
    
    
    41,317
    
    
    
    91,036
    
    
    
    78,968$
    55,645
    
    
    $
    49,199
    
    
    $
    111,038
    
    
    $
    95,142
  4




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##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    1,121
    
    
    $
    41,288Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    25,701
    
    
    
    20,905Stock-based compensation
    
    
    11,520
    
    
    
    11,307Loss on disposal of equipment, software, and leasehold improvements
    
    
    182
    
    
    
    163Equity in net loss of investments
    
    
    198
    
    
    
    132Gain on sale of equity investments, net
    
    
    (222
    )
    
    
    (132
    )Excess tax benefit from stock option exercises
    
    
    (88
    )
    
    
    (596
    )Accrued loss on excess office facilities
    
    
    (1,592
    )
    
    
    (1,795
    )Unrealized gain on trading securities
    
    
    
    
    
    
    (2,102
    )Purchase of trading securities
    
    
    
    
    
    
    (270,000
    )Deferred income taxes
    
    
    (2,138
    )
    
    
    (6,069
    )Minority interest
    
    
    (16,792
    )
    
    
    Gain on sale of interest in Rhapsody America
    
    
    (7,097
    )
    
    
    Other
    
    
    89
    
    
    
    51Net change in certain operating assets and liabilities
    
    
    (39,160
    )
    
    
    552Net cash used in operating activities
    
    
    (28,278
    )
    
    
    (206,296
    )Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (15,231
    )
    
    
    (11,525
    )Purchases of short-term investments
    
    
    (95,671
    )
    
    
    (38,768
    )Proceeds from sales and maturities of short-term investments
    
    
    68,741
    
    
    
    70,343Purchases of other intangibles assets
    
    
    
    
    
    
    (2,060
    )Decrease in restricted cash equivalents and investments, net
    
    
    839
    
    
    
    1,800Payment of acquisition costs, net of cash acquired
    
    
    (10,164
    )
    
    
    (25,351
    )Proceeds from sales of equity investments
    
    
    1,225
    
    
    
    1,615Net cash used in investing activities
    
    
    (50,261
    )
    
    
    (3,946
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and exercise of
stock options
    
    
    6,041
    
    
    
    12,277Excess tax benefit from stock option exercises
    
    
    88
    
    
    
    596Net proceeds from sales of interest in Rhapsody America
    
    
    14,607
    
    
    
    Repurchase of common stock
    
    
    (681
    )
    
    
    (107,905
    )Net cash (used in) provided by financing activities
    
    
    20,055
    
    
    
    (95,032
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (2,408
    )
    
    
    (410
    )Net decrease in cash and cash equivalents
    
    
    (60,892
    )
    
    
    (305,684
    )Cash and cash equivalents, beginning of period
    
    
    476,697
    
    
    
    525,232Cash and cash equivalents, end of period
    
    $
    415,805
    
    
    $
    219,548Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    8,341
    
    
    $
    13,160Supplemental disclosure of non-cash investing and financing activities:Accrued acquisition costs
    
    $
    
    
    
    $
    368
  5




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##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2008 and 2007
 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




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Accounting for Taxes Collected From Customers
 Accounting for Gains on Sale of Subsidiary Stock.
 Note 2. Recent Accounting Pronouncements
 Business Combinations
 Noncontrolling Interest in Consolidated
Financial Statements
 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
 7




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Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles
 Note 3. Stock-Based Compensation
 Share-Based Payment Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans
   Quarters
    
    Six MonthsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    2.96
    %
    
    
    4.73
    %
    
    
    2.61
    %
    
    
    4.72
    %Expected life (years)
    
    
    4.2
    
    
    
    4.1
    
    
    
    4.2
    
    
    
    4.1Volatility
    
    
    45
    %
    
    
    42
    %
    
    
    45
    %
    
    
    42
    %
  Quarters
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of service revenue
    
    $
    662
    
    
    $
    154
    
    
    $
    896
    
    
    $
    313Research and development
    
    
    2,146
    
    
    
    1,641
    
    
    
    4,059
    
    
    
    3,413Sales and marketing
    
    
    1,433
    
    
    
    2,203
    
    
    
    3,341
    
    
    
    4,590General and administrative
    
    
    1,790
    
    
    
    1,624
    
    
    
    3,224
    
    
    
    2,991Total stock-based compensation expense
    
    $
    6,031
    
    
    $
    5,622
    
    
    $
    11,520
    
    
    $
    11,307
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##### Table of Contents



Note 4. Rhapsody America
 Formation
  
    
    RealNetworks contributed its Rhapsody service subscribers, RadioPass subscribers,
cash of $16.4 million, contracts, revenue from existing Rhapsody subscribers, marketing
materials, player hardware, rhapsody.com and related URLs, certain liabilities, and
distribution arrangements in exchange for a 51% equity interest in Rhapsody America.
RealNetworks also licensed certain assets to Rhapsody America, including Rhapsody
content, Rhapsody technology, the Rhapsody brands and related materials.
    
    MTVN contributed its URGE service subscribers, cash, contracts, marketing materials,
and revenue from existing URGE subscribers, certain liabilities, plus the note payable
described below, in exchange for a 49% equity interest in Rhapsody America. MTVN has
also licensed certain assets to Rhapsody America, including URGE content, brands and
related materials.
    
    In addition to the assets described above, MTVN also contributed a $230 million
five-year note payable in consideration for acquiring MTVNs interest in the venture.
Rhapsody America must use the proceeds from the note solely to purchase advertising from
MTVN. As MTVN makes payments on the note, Rhapsody America records equity and
RealNetworks realizes an immediate appreciation in the carrying value of the Companys
interests in the venture and recognizes a gain if the gain is reasonably assured in
accordance with SAB 51. MTVN made payments of $7.2 million and $14.4 million during the
quarter and six months ended June 30, 2008, respectively. As a result, RealNetworks
realized and recorded gains of $3.7 million and $7.3 million during the quarter and six
months ended June 30, 2008, respectively, as all of the SAB 51 gain criteria were met.
As of June 30, 2008, $39.4 million in payments were made on the note since the formation
of Rhapsody America.
   Trade Name and Trademarks
    
    $
    4,000Existing Technology
    
    
    1,900Existing Subscribers
    
    
    1,680Total Identifiable Intangible Assets
    
    $
    7,580
   Call/Put Rights
  9




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Note 5. Fair Value Measurements
 Fair Value Measurement Effective
Date of FASB Statement No. 157
   
    
    Level 1: Observable inputs such as quoted prices in active markets for identical
assets or liabilities
    
    Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active
    
    Level 3: Unobservable inputs that reflect the reporting entitys own assumptions
  10




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Fair Value Measurements as of June 30,2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash equivalentsMoney market funds
    
    $
    308,937
    
    
    $
    308,937
    
    
    $
    
    
    
    $
    Corporate notes and bonds
    
    
    29,981
    
    
    
    29,981
    
    
    
    
    
    
    
    Short-term investmentsCorporate notes and bonds
    
    
    43,174
    
    
    
    43,174
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    63,688
    
    
    
    63,688
    
    
    
    
    
    
    
    Equity investmentsPublicly traded investments
    
    
    7,003
    
    
    
    7,003
    
    
    
    
    
    
    
    Total
    
    $
    452,783
    
    
    $
    452,783
    
    
    $
    
    
    
    $
    
  11




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##### Table of Contents



Note 6.
    
    Cash, Cash Equivalents, Trading Securities, Short-Term Investments, and Restricted Cash
Equivalents and Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    76,887
    
    
    $
    
    
    
    $
    
    
    
    $
    76,887Money market mutual funds
    
    
    308,937
    
    
    
    
    
    
    
    
    
    
    
    308,937Corporate notes and bonds
    
    
    29,981
    
    
    
    
    
    
    
    
    
    
    
    29,981Total cash and cash equivalents:
    
    
    415,805
    
    
    
    
    
    
    
    
    
    
    
    415,805Short-term investments:Corporate notes and bonds
    
    
    43,554
    
    
    
    19
    
    
    
    (399
    )
    
    
    43,174U.S. Government agency securities
    
    
    63,622
    
    
    
    93
    
    
    
    (27
    )
    
    
    63,688Total short-term investments:
    
    
    107,176
    
    
    
    112
    
    
    
    (426
    )
    
    
    106,862Total cash, cash equivalents and short-term investments
    
    $
    522,981
    
    
    $
    112
    
    
    $
    (426
    )
    
    $
    522,667Restricted cash equivalents and investments
    
    $
    14,670
    
    
    $
    
    
    
    $
    
    
    
    $
    14,670
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    105,615
    
    
    $
    
    
    
    $
    
    
    
    $
    105,615Money market mutual funds
    
    
    198,148
    
    
    
    
    
    
    
    
    
    
    
    198,148Corporate notes and bonds
    
    
    172,934
    
    
    
    
    
    
    
    
    
    
    
    172,934Total cash and cash equivalents
    
    
    476,697
    
    
    
    
    
    
    
    
    
    
    
    476,697Short-term investments:Corporate notes and bonds
    
    
    43,552
    
    
    
    
    
    
    
    (981
    )
    
    
    42,571U.S. Government agency securities
    
    
    37,296
    
    
    
    65
    
    
    
    
    
    
    
    37,361Total short-term investments
    
    
    80,848
    
    
    
    65
    
    
    
    (981
    )
    
    
    79,932Total cash, cash equivalents, and short-term investments
    
    $
    557,545
    
    
    $
    65
    
    
    $
    (981
    )
    
    $
    556,629Restricted cash equivalents and investments
    
    $
    15,509
    
    
    $
    
    
    
    $
    
    
    
    $
    15,509
     Amortized
    
    
    EstimatedCost
    
    
    Fair ValueWithin one year
    
    $
    31,327
    
    
    $
    30,976Between one year and five years
    
    
    75,849
    
    
    
    75,886Total available-for-sale investments
    
    $
    107,176
    
    
    $
    106,862
 12




---



##### Table of Contents



Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
    
    
    SalesReceivable
    
    
    ReturnsBalances, December 31, 2007
    
    $
    1,117
    
    
    $
    1,338Additions charged to expenses/revenue
    
    
    372
    
    
    
    1,934Amounts written off
    
    
    (218
    )
    
    
    (2,119
    )Balances, June 30, 2008
    
    $
    1,271
    
    
    $
    1,153
  Note 8. Equity Investments
   June 30, 2008
    
    
    December 31, 2007Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValuePublicly traded investments
    
    $
    933
    
    
    $
    7,003
    
    
    $
    933
    
    
    $
    8,085Privately held investments
    
    
    2,458
    
    
    
    1,123
    
    
    
    2,740
    
    
    
    1,891Total equity investments
    
    $
    3,391
    
    
    $
    8,126
    
    
    $
    3,673
    
    
    $
    9,976
 Note 9. Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    75,804
    
    
    $
    20,724
    
    
    $
    55,080Developed technology
    
    
    47,907
    
    
    
    22,756
    
    
    
    25,151Patents, trademarks and tradenames
    
    
    13,741
    
    
    
    6,536
    
    
    
    7,205Service contracts and other
    
    
    6,469
    
    
    
    3,399
    
    
    
    3,070Total other intangible assets
    
    $
    143,921
    
    
    $
    53,415
    
    
    $
    90,506
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    80,435
    
    
    $
    15,273
    
    
    $
    65,162Developed technology
    
    
    48,173
    
    
    
    18,539
    
    
    
    29,634Patents, trademarks and tradenames
    
    
    13,833
    
    
    
    5,000
    
    
    
    8,833Service contracts and other
    
    
    6,815
    
    
    
    2,767
    
    
    
    4,048Total other intangible assets
    
    $
    149,256
    
    
    $
    41,579
    
    
    $
    107,677
 13




---



##### Table of Contents



2008 (remaining six months)
    
    $
    12,5552009
    
    
    23,2222010
    
    
    18,5792011
    
    
    13,1092012
    
    
    11,955Thereafter
    
    
    11,086Total
    
    $
    90,506
 Note 10. Goodwill
  Balance, December 31, 2007
    
    $
    353,153Increases due to current year acquisitions
    
    
    1,682Decreases for the reduction of liabilities assumed
related to the acquisition of Sony NetServices GmbH
    
    
    (538
    )Effects of foreign currency translation
    
    
    (12,746
    )Balance, June 30, 2008
    
    $
    341,551
 Note 11. Accrued and Other Liabilities
  June 30,
    
    
    December 31,2008
    
    
    2007Royalties and other fulfillment costs
    
    $
    41,588
    
    
    $
    37,554Employee compensation, commissions and benefits
    
    
    21,463
    
    
    
    21,639Sales, VAT and other taxes payable
    
    
    13,252
    
    
    
    18,156Legal fees and contingent legal fees
    
    
    2,883
    
    
    
    3,439Other
    
    
    27,468
    
    
    
    33,348Other
    
    $
    106,654
    
    
    $
    114,136
 Note 12. Loss on Excess Office Facilities
   Accrued loss on excess office facilities, December 31, 2007
    
    $
    10,700Less amounts amortized from the accrued loss on excess office facilities
    
    
    (1,592
    )Accrued loss on excess office facilities, June 30, 2008
    
    
    9,108Less current portion
    
    
    4,311Accrued loss on excess office facilities, non-current portion
    
    $
    4,797
 14




---



##### Table of Contents



Note 13. Repurchase of Common Stock
  Note 14. Earnings Per Share
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average common shares outstanding used to
compute basic net income per share
    
    
    142,905
    
    
    
    153,880
    
    
    
    142,946
    
    
    
    157,929Dilutive potential common shares:Stock options and restricted stock
    
    
    
    
    
    
    4,403
    
    
    
    2,304
    
    
    
    5,143Convertible debt
    
    
    
    
    
    
    10,750
    
    
    
    10,750
    
    
    
    10,750Shares used to compute diluted net income per share
    
    
    142,905
    
    
    
    169,033
    
    
    
    156,000
    
    
    
    173,822
  Note 15. Commitments and Contingencies
 Borrowing Arrangements
    15




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##### Table of Contents



Purchase
Obligations.
 Litigation
    16




---



##### Table of Contents



Note 16. Segment Information
       Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    37,170
    
    
    $
    64,183
    
    
    $
    51,295
    
    
    $
    
    
    
    $
    152,648Cost of revenue
    
    
    20,693
    
    
    
    14,362
    
    
    
    20,590
    
    
    
    
    
    
    
    55,645Gross profit
    
    
    16,477
    
    
    
    49,821
    
    
    
    30,705
    
    
    
    
    
    
    
    97,003Operating expenses
    
    
    32,652
    
    
    
    44,029
    
    
    
    32,778
    
    
    
    237
    
    
    
    109,696Operating income (loss)
    
    
    (16,175
    )
    
    
    5,792
    
    
    
    (2,073
    )
    
    
    (237
    )
    
    
    (12,693
    )Total non-operating income, net
    
    
    11,548
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    15,088Income (loss) before income taxes
    
    $
    (4,627
    )
    
    $
    5,792
    
    
    $
    (2,073
    )
    
    $
    3,303
    
    
    $
    2,395
 17




---



##### Table of Contents



Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    75,249
    
    
    $
    122,390
    
    
    $
    102,572
    
    
    $
    
    
    
    $
    300,211Cost of revenue
    
    
    42,212
    
    
    
    26,975
    
    
    
    41,851
    
    
    
    
    
    
    
    111,038Gross profit
    
    
    33,037
    
    
    
    95,415
    
    
    
    60,721
    
    
    
    
    
    
    
    189,173Operating expenses
    
    
    65,623
    
    
    
    81,661
    
    
    
    64,964
    
    
    
    1,160
    
    
    
    213,408Operating income (loss)
    
    
    (32,586
    )
    
    
    13,754
    
    
    
    (4,243
    )
    
    
    (1,160
    )
    
    
    (24,235
    )Total non-operating income, net
    
    
    23,889
    
    
    
    
    
    
    
    
    
    
    
    9,175
    
    
    
    33,064Income (loss) before income taxes
    
    $
    (8,697
    )
    
    $
    13,754
    
    
    $
    (4,243
    )
    
    $
    8,015
    
    
    $
    8,829
  Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    36,801
    
    
    $
    50,314
    
    
    $
    49,056
    
    
    $
    
    
    
    $
    136,171Cost of revenue
    
    
    19,804
    
    
    
    9,436
    
    
    
    19,959
    
    
    
    
    
    
    
    49,199Gross profit
    
    
    16,997
    
    
    
    40,878
    
    
    
    29,097
    
    
    
    
    
    
    
    86,972Operating expenses
    
    
    24,037
    
    
    
    34,814
    
    
    
    33,096
    
    
    
    202
    
    
    
    92,149Operating income (loss)
    
    
    (7,040
    )
    
    
    6,064
    
    
    
    (3,999
    )
    
    
    (202
    )
    
    
    (5,177
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,682
    
    
    
    8,682Income (loss) before income taxes
    
    $
    (7,040
    )
    
    $
    6,064
    
    
    $
    (3,999
    )
    
    $
    8,480
    
    
    $
    3,505
  Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    70,928
    
    
    $
    101,227
    
    
    $
    93,488
    
    
    $
    
    
    
    $
    265,643Cost of revenue
    
    
    38,679
    
    
    
    18,564
    
    
    
    37,899
    
    
    
    
    
    
    
    95,142Gross profit
    
    
    32,249
    
    
    
    82,663
    
    
    
    55,589
    
    
    
    
    
    
    
    170,501Operating expenses
    
    
    48,986
    
    
    
    67,721
    
    
    
    63,634
    
    
    
    (58,406
    )
    
    
    121,935Operating income (loss)
    
    
    (16,737
    )
    
    
    14,942
    
    
    
    (8,045
    )
    
    
    58,406
    
    
    
    48,566Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,119
    
    
    
    18,119Income (loss) before income taxes
    
    $
    (16,737
    )
    
    $
    14,942
    
    
    $
    (8,045
    )
    
    $
    76,525
    
    
    $
    66,685
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    100,898
    
    
    $
    88,035
    
    
    $
    200,067
    
    
    $
    172,589Europe
    
    
    27,196
    
    
    
    20,522
    
    
    
    51,363
    
    
    
    38,232Republic of Korea
    
    
    12,770
    
    
    
    18,885
    
    
    
    26,090
    
    
    
    37,284Rest of the World
    
    
    11,784
    
    
    
    8,729
    
    
    
    22,691
    
    
    
    17,538Total net revenue
    
    $
    152,648
    
    
    $
    136,171
    
    
    $
    300,211
    
    
    $
    265,643
 18




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007United States
    
    $
    191,213
    
    
    $
    186,665Republic of Korea
    
    
    202,415
    
    
    
    235,728Europe
    
    
    90,527
    
    
    
    87,181Rest of the World
    
    
    8,420
    
    
    
    7,753Total long-lived assets
    
    $
    492,575
    
    
    $
    517,327
  June 30,
    
    
    December 31,2008
    
    
    2007United States
    
    $
    586,838
    
    
    $
    576,994Republic of Korea
    
    
    201,685
    
    
    
    228,153Europe
    
    
    85,291
    
    
    
    79,410Rest of the World
    
    
    8,827
    
    
    
    10,160Total net assets
    
    $
    882,641
    
    
    $
    894,717
  June 30,
    
    
    December 31,2008
    
    
    2007Music
    
    $
    37,029
    
    
    $
    37,029Consumer
    
    
    134,745
    
    
    
    129,621Technology products and solutions
    
    
    169,777
    
    
    
    186,503Total goodwill
    
    $
    341,551
    
    
    $
    353,153
 Note 17. Related Party Transactions
 Transactions with MTVN.
   19




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##### Table of Contents



Note 18. Subsequent Events
  20




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##### 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, tax benefits, net income per diluted share,
acquisition costs and related amortization, and other measures of results of operations;
    
    the effects of our acquisitions, including WiderThan, Sony NetServices GmbH and Exomi
Oy, and our position as a technology services provider for leading wireless carriers;
    
    plans, strategies and expected opportunities for growth, increased profitability and
innovation in 2008 and future years;
    
    the creation of new strategic partnerships and broadening of existing strategic
partnerships and the advantages and growth we will achieve as a result of such
partnerships (including in connection with our Games, Music and Technology Products and
Solutions businesses);
    
    the expected growth and profitability of our Technology Products and Solutions
business;
    
    the governance, management, accounting and integration of our Rhapsody America
venture;
    
    the dilutive impact on our shareholders if the call or put rights contained in the
limited liability agreement for Rhapsody America are exercised and result in the
issuance of additional shares of our common stock;
    
    the financial performance and growth of our Games business, including future
international growth;
    
    RealNetworks intention to separate its games business, distribute shares of the
newly created games company to its shareholders, the potential sale of up to 20% of the
shares of the new games company in an initial public offering and the anticipated
tax-free nature of the proposed transactions;
    
    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 and the availability of resources;
    
    our expectations regarding acquisition activity in 2008 and our focus on the
integration of completed acquisitions;
    
    our relationships with our employees;
    
    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 .
 21




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##### Table of Contents



Overview
        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;
 22




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##### Table of Contents




    
    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;
    
    Minority interest;
    
    Accounting for gains on sale of subsidiary stock; and
    
    Accounting for income taxes.
    
    Accounting for taxes collected from customers.
 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 Revenue Arrangements with Multiple Deliverables; Reporting
Revenue Gross as a Principal versus Net as an Agent
      Music Publishing Rights and Music Royalty Accruals.
 23




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##### Table of Contents



Recoverability of Deferred Costs.
  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.
  24




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##### Table of Contents



Stock-Based Compensation. Share-Based Payment Accounting for Stock Issued to Employees
 Minority Interests. Consolidated
Financial Statements
 Accounting for Gains on Sale of Subsidiary Stock. Accounting for the Sales of
Stock of a Subsidiary
 Accounting for Income Taxes.
   25




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##### Table of Contents



Accounting for Taxes Collected From Customers
 Revenue by Segment
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Music
    
    $
    37,170
    
    
    
    1
    %
    
    $
    36,801
    
    
    $
    75,249
    
    
    
    6
    %
    
    $
    70,928Consumer
    
    
    64,183
    
    
    
    28
    
    
    
    50,314
    
    
    
    122,390
    
    
    
    21
    
    
    
    101,227Technology Products and Solutions
    
    
    51,295
    
    
    
    5
    
    
    
    49,056
    
    
    
    102,572
    
    
    
    10
    
    
    
    93,488Total net revenue
    
    $
    152,648
    
    
    
    12
    %
    
    $
    136,171
    
    
    $
    300,211
    
    
    
    13
    %
    
    $
    265,643
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Music
    
    
    24
    %
    
    
    27
    %
    
    
    25
    %
    
    
    27
    %Consumer
    
    
    42
    
    
    
    37
    
    
    
    41
    
    
    
    38Technology Products and Solutions
    
    
    34
    
    
    
    36
    
    
    
    34
    
    
    
    35Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Music.
  Consumer.
  26




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##### Table of Contents



Technology Products and Solutions.
  Consumer Revenue
  Quarters Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Games
    
    $
    34,945
    
    
    
    40
    %
    
    $
    24,895
    
    
    $
    66,743
    
    
    
    37
    %
    
    $
    48,797Media Software and Services
    
    
    29,238
    
    
    
    15
    
    
    
    25,419
    
    
    
    55,647
    
    
    
    6
    
    
    
    52,430Total consumer products and services revenue
    
    $
    64,183
    
    
    
    28
    %
    
    $
    50,314
    
    
    $
    122,390
    
    
    
    21
    %
    
    $
    101,227
 Games.
  Media Software and Services.
  Geographic Revenue
  27




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##### Table of Contents



Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007United States
    
    $
    100,898
    
    
    
    15
    %
    
    $
    88,035
    
    
    $
    200,067
    
    
    
    16
    %
    
    $
    172,589Europe
    
    
    27,196
    
    
    
    33
    
    
    
    20,522
    
    
    
    51,363
    
    
    
    34
    
    
    
    38,232Republic of Korea
    
    
    12,770
    
    
    
    (32
    )
    
    
    18,885
    
    
    
    26,090
    
    
    
    (30
    )
    
    
    37,284Rest of the world
    
    
    11,784
    
    
    
    35
    
    
    
    8,729
    
    
    
    22,691
    
    
    
    29
    
    
    
    17,538Total net revenue
    
    $
    152,648
    
    
    
    12
    %
    
    $
    136,171
    
    
    $
    300,211
    
    
    
    13
    %
    
    $
    265,643
 Revenue by Segment
 Revenue by Segment
 Revenue by Segment
 License and Service Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007License fees
    
    $
    28,613
    
    
    
    29
    %
    
    $
    22,212
    
    
    $
    54,368
    
    
    
    23
    %
    
    $
    44,049Service revenue
    
    
    124,035
    
    
    
    9
    
    
    
    113,959
    
    
    
    245,843
    
    
    
    11
    
    
    
    221,594Total net revenue
    
    $
    152,648
    
    
    
    12
    %
    
    $
    136,171
    
    
    $
    300,211
    
    
    
    13
    %
    
    $
    265,643
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007License fees
    
    
    19
    %
    
    
    16
    %
    
    
    18
    %
    
    
    17
    %Service revenue
    
    
    81
    
    
    
    84
    
    
    
    82
    
    
    
    83Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 License Fees.
  Service Revenue.
  28




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##### Table of Contents



Deferred Revenue
  Cost of Revenue by Segment
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Music
    
    $
    20,693
    
    
    
    4
    %
    
    $
    19,804
    
    
    $
    42,213
    
    
    
    9
    %
    
    $
    38,679Consumer
    
    
    14,362
    
    
    
    52
    
    
    
    9,436
    
    
    
    26,974
    
    
    
    45
    
    
    
    18,564Technology products and solutions
    
    
    20,590
    
    
    
    3
    
    
    
    19,959
    
    
    
    41,851
    
    
    
    10
    
    
    
    37,899Total cost of revenue
    
    $
    55,645
    
    
    
    13
    %
    
    $
    49,199
    
    
    $
    111,038
    
    
    
    17
    %
    
    $
    95,142
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Music
    
    
    56
    %
    
    
    54
    %
    
    
    56
    %
    
    
    55
    %Consumer
    
    
    22
    
    
    
    19
    
    
    
    22
    
    
    
    18Technology products and solutions
    
    
    40
    
    
    
    41
    
    
    
    41
    
    
    
    41Total cost of revenue
    
    
    36
    %
    
    
    36
    %
    
    
    37
    %
    
    
    36
    %
 Cost of Music.
 Cost of Consumer.
 Cost of Technology Products and Solutions.
 29




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##### Table of Contents



Cost of License and Service Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007License fees
    
    $
    10,614
    
    
    
    35
    %
    
    $
    7,882
    
    
    $
    20,002
    
    
    
    24
    %
    
    $
    16,174Service revenue
    
    
    45,031
    
    
    
    9
    
    
    
    41,317
    
    
    
    91,036
    
    
    
    15
    
    
    
    78,968Total cost of revenue
    
    $
    55,645
    
    
    
    13
    %
    
    $
    49,199
    
    
    $
    111,038
    
    
    
    17
    %
    
    $
    95,142
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007License fees
    
    
    37
    %
    
    
    35
    %
    
    
    37
    %
    
    
    37
    %Service revenue
    
    
    36
    
    
    
    36
    
    
    
    37
    
    
    
    36Total cost of revenue
    
    
    36
    %
    
    
    36
    %
    
    
    37
    %
    
    
    36
    %
 Cost of License Fees.
 Cost of Service Revenue.
 Operating Expenses
 Research and Development
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007Research and development
    
    $
    29,065
    
    
    
    16
    %
    
    $
    25,005
    
    
    $
    54,071
    
    
    
    12
    %
    
    $
    48,484As a percentage of total net revenue
    
    
    19
    %
    
    
    
    
    
    
    18
    %
    
    
    18
    %
    
    
    
    
    
    
    18
    %
  30




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##### Table of Contents



Sales and Marketing
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007Sales and marketing
    
    $
    53,054
    
    
    
    6
    %
    
    $
    50,081
    
    
    $
    106,650
    
    
    
    7
    %
    
    $
    99,781As a percentage of total net revenue
    
    
    35
    %
    
    
    
    
    
    
    37
    %
    
    
    36
    %
    
    
    
    
    
    
    38
    %
  General and Administrative
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007General and administrative
    
    $
    18,337
    
    
    
    7
    %
    
    $
    17,063
    
    
    $
    35,421
    
    
    
    3
    %
    
    $
    34,417As a percentage of total net revenue
    
    
    12
    %
    
    
    
    
    
    
    13
    %
    
    
    12
    %
    
    
    
    
    
    
    13
    %
  Advertising with Related Party
  Antitrust Litigation Benefit, Net
  31




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##### Table of Contents



Other Income, Net
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Interest income, net
    
    $
    3,375
    
    
    
    (58
    )%
    
    $
    8,065
    
    
    $
    8,333
    
    
    
    (51
    )%
    
    $
    17,167Equity in net loss of investments
    
    
    (107
    )
    
    
    n/a
    
    
    
    
    
    
    
    (198
    )
    
    
    50
    
    
    
    (132
    )Gain on sale of equity investment
    
    
    222
    
    
    
    68
    
    
    
    132
    
    
    
    222
    
    
    
    68
    
    
    
    132Minority interest in Rhapsody America
    
    
    8,177
    
    
    
    n/a
    
    
    
    
    
    
    
    16,792
    
    
    
    n/a
    
    
    
    Gain on sale of interest in Rhapsody America
    
    
    3,371
    
    
    
    n/a
    
    
    
    
    
    
    
    7,097
    
    
    
    n/a
    
    
    
    Other income, net
    
    
    50
    
    
    
    (90
    )
    
    
    485
    
    
    
    818
    
    
    
    (14
    )
    
    
    952Other income, net
    
    $
    15,088
    
    
    
    74
    %
    
    $
    8,682
    
    
    $
    33,064
    
    
    
    82
    %
    
    $
    18,119
  Income Taxes
    New Accounting Pronouncements
   32




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##### Table of Contents



Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
 Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles
 Liquidity and Capital Resources
  June 30,
    
    December 31,2008
    
    2007Working capital
    
    $
    350,225
    
    
    $
    351,066Cash, cash equivalents, and short-term investments
    
    
    522,667
    
    
    
    556,629Restricted cash
    
    
    14,670
    
    
    
    15,509
   June 30,
    
    June 30,2008
    
    2007Cash used in operating activities
    
    $
    (28,278
    )
    
    $
    (206,296
    )Cash used in investing activities
    
    
    (50,261
    )
    
    
    (3,946
    )Cash provided by (used in) financing activities
    
    
    20,055
    
    
    
    (95,032
    )
   33




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##### Table of Contents



Off-Balance Sheet Agreements
  34




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 Investment Risk.
 Foreign Currency Risk.
     35




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Risks Related to Our Recently Announced Separation of Our Games Business
 We recently announced our intention to separate our global games business into an independent
company and to distribute shares of the newly created games company to our shareholders. We also
indicated that we may precede the spin-off with an initial public offering and sale of up to 20% of
the shares of the games company. If such transactions are not completed, our stock price and
business may be adversely affected.
 36




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Our games business represents a significant portion of our business and a spin-off or initial
public offering of the games business may cause our operating results to suffer and may cause our
revenues, income and stock price to decline.
   The separation and possible initial public offering of the games business is a substantial
undertaking that may disrupt our ongoing business and may increase expenses, which may affect our
results of operations or financial condition.
  Risks Related to Our Music and Consumer Businesses
 Our music and consumer businesses face substantial competitive challenges that may prevent us from
being successful in, and negatively impact future growth in, those businesses.
  
    
    reduced prices or margins,
 37




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##### Table of Contents




    
    loss of current and potential customers, market share and market power,
    
    changes to our products, services, technologies, licenses or business practices or
strategies,
    
    lengthened sales cycles,
    
    pressure to prematurely release products or product enhancements, or
    
    degradation in our stature and reputation in the market.
  Music.
 Media Software and Services.
 Games.
 The success of our subscription services businesses depends upon our ability to increase
subscription revenue and to license compelling content on commercially reasonable terms.
  38




---



##### Table of Contents



Music publishing royalty rates for music subscription services offered through RealNetworks and
Rhapsody America are not yet fully established; a determination of high royalty rates could
negatively impact our operating results.
  An appeal of, or other industry settlement relating to, 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.
  We may not be successful in maintaining and growing our distribution of digital media products.
  We face risks with respect to certain matters in the governance and management of our Rhapsody
America joint venture and the integration and operation of assets that have been combined to form
Rhapsody America.
  39




---



##### Table of Contents



We and MTVN have certain contractual rights relating to the purchase and sale of MTVNs membership
interest in Rhapsody America that may be settled in part through the issuance of additional shares
of our capital stock, which would dilute our other shareholders voting and economic interests in
us, and may require us to pay MTVN a price that exceeds the appraised value of its proportionate
interest in Rhapsody America.
  Risks Related to Our Technology Products and Solutions Business
 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 or otherwise harm our operating results.
   40




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##### Table of Contents



The mobile entertainment market is highly competitive.
  Our traditional system software licensing business has been negatively impacted by competitive
factors, and we may not experience improved sales of our system software products.
  Risks Related to Our Business in General
 Our operating results are difficult to predict and may fluctuate, which may contribute to
volatility in our stock price.
  
    
    our inability to realize SAB No. 51 gains within the statement of operations upon
adoption of SFAS 160 in 2009,
    
    impairments of goodwill and other long-lived assets,
    
    integrating and operating newly acquired businesses and assets,
    
    the seasonality of our business, which has experienced increased revenues in the fourth
quarter of our fiscal year, and
 41




---



##### Table of Contents




    
    the general difficulty in forecasting our operating results and metrics, which could
result in actual results that differ significantly from expected results.
  New products and services may not achieve market acceptance or may be subject to legal challenge
that could negatively affect our operating results.
  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.
   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.
 We need to develop relationships and technical standards with manufacturers of non-PC media and
communication devices and interoperability of our services with these devices to grow our business.
  We may be unable to adequately protect our proprietary rights or leverage our patent portfolio, and
may face risks associated with third-party claims relating to our intellectual property.
   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.
  43




---



##### Table of Contents



Our network is subject to security risks that could harm our business and reputation and expose us
to litigation or liability.
  The growth of our business is dependent in part on successfully implementing our international
expansion strategy.
  We may be subject to market risk and legal liability in connection with the data collection
capabilities of our products and services.
  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.
  Risks Related to the Securities Markets and Ownership of Our Common Stock
 44




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##### Table of Contents



Our directors and executive officers beneficially own more than 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.
     
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    45




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##### Table of Contents



Approximate DollarTotal Number of
    
    
    Value of Shares thatShares Purchased as
    
    
    May Yet BePart of Publicly
    
    
    Purchased UnderTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orShares Repurchased
    
    
    Per Share
    
    
    Programs
    
    
    ProgramsPeriod
    
    (In thousands)5/1/2008  5/31/2008
    
    
    11
    
    
    $
    7.01
    
    
    
    11
    
    
    $
    7.016/1/2007  6/30/2007
    
    
    207
    
    
    
    6.86
    
    
    
    207
    
    
    
    6.86Total
    
    
    218
    
    
    $
    6.87
    
    
    
    218
    
    
    $
    6.87
  
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Directors Elected
    
    For
    
    WithheldJonathan D. Klein
    
    
    130,774,814
    
    
    
    1,362,025
  
  VotesFor
    
    
    131,411,965Against
    
    
    610,187Broker non-votes
    
    
    Abstain
    
    
    114,687
 
 Item 5. Other Information
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description10.1
    
    Offer Letter dated July 1, 2008 between RealNetworks, Inc. and John Giamatteo10.2
    
    Form of MBO Plan Document under the Real Networks, Inc. 2008 Executive Compensation Program10.3
    
    Form of MBO Plan Document under the RealNetworks, Inc. 2008 Chief Executive Officer
Compensation Program31.1
    
    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 2002
 46




---



##### Table of Contents



ExhibitNumber
    
    Description32.1
    
    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
 47




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##### Table of Contents



SIGNATURE
  REALNETWORKS, INC.By:
    /s/ Michael EggersMichael EggersTitle:
    Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial and
Accounting Officer) 48




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Offer Letter dated July 1, 2008 between RealNetworks, Inc. and John Giamatteo10.2
    
    Form of MBO Plan Document under the Real Networks, Inc. 2008 Executive Compensation Program10.3
    
    Form of MBO Plan Document under the RealNetworks, Inc. 2008 Chief Executive Officer
Compensation Program31.1
    
    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