##### 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 September 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    36Item 4. Controls and Procedures
    
    37Part II. Other InformationItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    48Item 3. Default Upon Senior Securities
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    48Item 5. Other Information
    
    48Item 6. Exhibits
    
    48Signature
    
    49EX-31.1EX-31.2EX-32.1EX-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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    305,143
    
    
    $
    476,697Short-term investments
    
    
    101,173
    
    
    
    79,932Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    70,427
    
    
    
    84,674Deferred costs, current portion
    
    
    8,221
    
    
    
    6,408Prepaid expenses and other current assets
    
    
    42,795
    
    
    
    33,845Total current assets
    
    
    527,759
    
    
    
    681,556Equipment, software, and leasehold improvements, at cost:Equipment and software
    
    
    131,254
    
    
    
    109,621Leasehold improvements
    
    
    30,795
    
    
    
    30,632Total equipment, software, and leasehold improvements, at cost
    
    
    162,049
    
    
    
    140,253Less accumulated depreciation and amortization
    
    
    98,877
    
    
    
    83,756Net equipment, software, and leasehold improvements
    
    
    63,172
    
    
    
    56,497Restricted cash equivalents and investments
    
    
    14,734
    
    
    
    15,509Equity investments
    
    
    9,277
    
    
    
    9,976Other assets
    
    
    17,821
    
    
    
    10,161Deferred tax assets, net
    
    
    35,564
    
    
    
    40,913Other intangible assets, net
    
    
    78,656
    
    
    
    107,677Goodwill
    
    
    315,517
    
    
    
    353,153Total assets
    
    $
    1,062,500
    
    
    $
    1,275,442LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    34,384
    
    
    $
    56,160Accrued and other liabilities
    
    
    111,507
    
    
    
    114,136Deferred revenue, current portion
    
    
    42,376
    
    
    
    39,564Related party payable
    
    
    15,663
    
    
    
    17,241Convertible debt
    
    
    
    
    
    
    100,000Accrued loss on excess office facilities, current portion
    
    
    4,299
    
    
    
    3,389Total current liabilities
    
    
    208,229
    
    
    
    330,490Deferred revenue, non-current portion
    
    
    1,138
    
    
    
    2,663Accrued loss on excess office facilities, non-current portion
    
    
    3,864
    
    
    
    7,311Deferred rent
    
    
    4,680
    
    
    
    4,518Deferred tax liabilities, net, non-current portion
    
    
    15,178
    
    
    
    22,060Other long-term liabilities
    
    
    10,644
    
    
    
    13,683Total liabilities
    
    
    243,733
    
    
    
    380,725Minority interest in Rhapsody America ($83.7 million redemption value at September 30, 2008)
    
    
    6,297
    
    
    
    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
140,204 shares in 2008 and 142,298 shares in 2007
    
    
    140
    
    
    
    142Additional paid-in capital
    
    
    655,872
    
    
    
    653,904Accumulated other comprehensive (loss) income
    
    
    (43,488
    )
    
    
    17,732Retained earnings
    
    
    199,946
    
    
    
    203,326Total shareholders equity
    
    
    812,470
    
    
    
    875,104Total liabilities and shareholders equity
    
    $
    1,062,500
    
    
    $
    1,275,442
  3




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REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue (A)
    
    $
    151,955
    
    
    $
    145,095
    
    
    $
    452,166
    
    
    $
    410,738Cost of revenue (B)
    
    
    62,164
    
    
    
    56,644
    
    
    
    173,202
    
    
    
    151,786Gross profit
    
    
    89,791
    
    
    
    88,451
    
    
    
    278,964
    
    
    
    258,952Operating expenses:Research and development
    
    
    31,076
    
    
    
    26,528
    
    
    
    85,147
    
    
    
    75,012Sales and marketing
    
    
    55,080
    
    
    
    52,812
    
    
    
    161,730
    
    
    
    152,593Advertising with related party
    
    
    15,153
    
    
    
    7,747
    
    
    
    31,733
    
    
    
    7,747General and administrative
    
    
    15,453
    
    
    
    16,750
    
    
    
    50,874
    
    
    
    51,167Restructuring costs
    
    
    
    
    
    
    
    
    
    
    686
    
    
    
    Subtotal operating expenses
    
    
    116,762
    
    
    
    103,837
    
    
    
    330,170
    
    
    
    286,519Antitrust litigation benefit, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,747
    )Total operating expenses, net
    
    
    116,762
    
    
    
    103,837
    
    
    
    330,170
    
    
    
    225,772Operating (loss) income
    
    
    (26,971
    )
    
    
    (15,386
    )
    
    
    (51,206
    )
    
    
    33,180Other income (expenses):Interest income, net
    
    
    2,865
    
    
    
    7,290
    
    
    
    11,198
    
    
    
    24,457Equity in net loss of investments
    
    
    (226
    )
    
    
    
    
    
    
    (424
    )
    
    
    (132
    )Gain on sale of equity investments, net
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    132Minority interest in Rhapsody America
    
    
    12,337
    
    
    
    6,466
    
    
    
    29,129
    
    
    
    6,466Gain on sale of interest in Rhapsody America
    
    
    7,405
    
    
    
    7,946
    
    
    
    14,502
    
    
    
    7,946Other income, net
    
    
    818
    
    
    
    38
    
    
    
    1,636
    
    
    
    990Other income, net
    
    
    23,199
    
    
    
    21,740
    
    
    
    56,263
    
    
    
    39,859Income (loss) before income taxes
    
    
    (3,772
    )
    
    
    6,354
    
    
    
    5,057
    
    
    
    73,039Income taxes
    
    
    (728
    )
    
    
    (2,012
    )
    
    
    (8,436
    )
    
    
    (27,409
    )Net
income (loss)
    
    $
    (4,500
    )
    
    $
    4,342
    
    
    $
    (3,379
    )
    
    $
    45,630Basic net
income (loss) per share
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.02
    )
    
    $
    0.30Diluted net income per share
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.02
    )
    
    $
    0.27Shares used to compute basic net income per share
    
    
    141,975
    
    
    
    149,667
    
    
    
    142,611
    
    
    
    154,670Shares used to compute diluted net income per share
    
    
    141,975
    
    
    
    163,094
    
    
    
    142,611
    
    
    
    169,840Comprehensive
income (loss):Net income (loss)
    
    $
    (4,500
    )
    
    $
    4,342
    
    
    $
    (3,379
    )
    
    $
    45,630Unrealized holding losses on short-term and equity
investments, net of income taxes
    
    
    (1,841
    )
    
    
    (3,228
    )
    
    
    (2,130
    )
    
    
    (8,947
    )Foreign currency translation gains (losses)
    
    
    (38,759
    )
    
    
    1,206
    
    
    
    (59,090
    )
    
    
    (453
    )Comprehensive income (loss)
    
    $
    (45,100
    )
    
    $
    2,320
    
    
    $
    (64,599
    )
    
    $
    36,230(A) Components of net revenue:License fees
    
    $
    28,394
    
    
    $
    23,869
    
    
    $
    82,762
    
    
    $
    67,918Service revenue
    
    
    123,561
    
    
    
    121,226
    
    
    
    369,404
    
    
    
    342,820$
    151,955
    
    
    $
    145,095
    
    
    $
    452,166
    
    
    $
    410,738(B) Components of cost of revenue:License fees
    
    $
    11,137
    
    
    $
    8,436
    
    
    $
    31,139
    
    
    $
    24,610Service revenue
    
    
    51,027
    
    
    
    48,208
    
    
    
    142,063
    
    
    
    127,176$
    62,164
    
    
    $
    56,644
    
    
    $
    173,202
    
    
    $
    151,786
  4




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##### Table of Contents



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net (loss) income
    
    $
    (3,379
    )
    
    $
    45,630Adjustments
to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    38,032
    
    
    
    32,865Stock-based compensation
    
    
    17,475
    
    
    
    17,291Loss on disposal of equipment, software, and leasehold improvements
    
    
    157
    
    
    
    275Equity in net loss of investments
    
    
    198
    
    
    
    132Gain on sale of equity investments, net
    
    
    (222
    )
    
    
    (132
    )Excess tax benefit from stock option exercises
    
    
    (108
    )
    
    
    Accrued loss on excess office facilities
    
    
    (2,537
    )
    
    
    (3,540
    )Unrealized gain on trading securities
    
    
    
    
    
    
    (5,426
    )Purchase of trading securities
    
    
    
    
    
    
    (270,000
    )Deferred income taxes
    
    
    2,640
    
    
    
    (13,224
    )Minority interest
    
    
    (29,129
    )
    
    
    (6,466
    )Gain on sale of interest in Rhapsody America
    
    
    (14,502
    )
    
    
    (7,946
    )Other
    
    
    111
    
    
    
    72Net change in certain operating assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    12,696
    
    
    
    (9,755
    )Prepaid expenses and other assets
    
    
    (26,066
    )
    
    
    (11,572
    )Accounts payable
    
    
    (16,766
    )
    
    
    (3,349
    )Accrued and other liabilities
    
    
    386
    
    
    
    28,334Net cash used in operating activities
    
    
    (21,014
    )
    
    
    (206,811
    )Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (24,807
    )
    
    
    (19,051
    )Purchases of short-term investments
    
    
    (151,378
    )
    
    
    (117,762
    )Proceeds from sales and maturities of short-term investments
    
    
    130,136
    
    
    
    154,251Purchases of other intangible assets
    
    
    (1,808
    )
    
    
    (2,723
    )Decrease in restricted cash equivalents and investments, net
    
    
    776
    
    
    
    1,800Payment of acquisition costs, net of cash acquired
    
    
    (10,192
    )
    
    
    (25,316
    )Purchase of equity investments
    
    
    (4,500
    )
    
    
    Proceeds from sales of equity investments
    
    
    1,225
    
    
    
    1,615Net cash used in investing activities
    
    
    (60,548
    )
    
    
    (7,186
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and
exercise of stock options
    
    
    8,834
    
    
    
    14,058Payments of convertible debt obligations
    
    
    (100,000
    )
    
    
    Excess tax benefit from stock option exercises
    
    
    108
    
    
    
    Net proceeds from sales of interest in Rhapsody America
    
    
    31,640
    
    
    
    15,007Repurchase of common stock
    
    
    (23,062
    )
    
    
    (142,150
    )Net cash used in financing activities
    
    
    (82,480
    )
    
    
    (113,085
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (7,512
    )
    
    
    (412
    )Net decrease in cash and cash equivalents
    
    
    (171,554
    )
    
    
    (327,494
    )Cash and cash equivalents, beginning of period
    
    
    476,697
    
    
    
    525,232Cash and cash equivalents, end of period
    
    $
    305,143
    
    
    $
    197,738Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    11,170
    
    
    $
    28,750Supplemental disclosure of non-cash investing and financing activities:Accrued acquisition costs
    
    $
    
    
    
    $
    310Accrued acquisition consideration
    
    
    
    
    
    
    8,596
  5




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REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 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. Accounting for the Sales of Stock of a Subsidiary
 Note 2. Recent Accounting Pronouncements
 Business Combinations
 Noncontrolling Interest in Consolidated
Financial Statements
 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
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    2.95
    %
    
    
    4.44
    %
    
    
    2.65
    %
    
    
    4.56
    %Expected life (years)
    
    
    4.2
    
    
    
    4.1
    
    
    
    4.2
    
    
    
    4.1Volatility
    
    
    45
    %
    
    
    42
    %
    
    
    45
    %
    
    
    42
    %
  Quarters
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of service revenue
    
    $
    696
    
    
    $
    208
    
    
    $
    1,592
    
    
    $
    520Research and development
    
    
    2,247
    
    
    
    1,740
    
    
    
    6,307
    
    
    
    5,153Sales and marketing
    
    
    1,458
    
    
    
    2,395
    
    
    
    4,798
    
    
    
    6,985General and administrative
    
    
    1,554
    
    
    
    1,641
    
    
    
    4,778
    
    
    
    4,633Total stock-based compensation expense
    
    $
    5,955
    
    
    $
    5,984
    
    
    $
    17,475
    
    
    $
    17,291
  Note 4. Rhapsody America
 Formation
  8




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##### Table of Contents




    
    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 $17.0 million and $31.4 million during the
quarter and nine months ended September 30, 2008, respectively. As a result,
RealNetworks realized and recorded gains of $8.7 million and $16.0 million, as all of the SAB 51
gain criteria were met. As of September 30, 2008, $56.4 million in payments have been
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
 Accounting for
Derivatives and Hedging Activities Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity
  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
  Fair Value Measurements as ofSeptember 30, 2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash equivalentsMoney market funds
    
    $
    138,490
    
    
    $
    138,490
    
    
    $
    
    
    
    $
    Corporate notes and bonds
    
    
    91,876
    
    
    
    91,876
    
    
    
    
    
    
    
    Short-term investmentsCorporate notes and bonds
    
    
    24,186
    
    
    
    24,186
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    76,987
    
    
    
    76,987
    
    
    
    
    
    
    
    Equity investmentsPublicly traded investments
    
    
    4,654
    
    
    
    4,654
    
    
    
    
    
    
    
    Total
    
    $
    336,193
    
    
    $
    336,193
    
    
    $
    
    
    
    $
    
  10




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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
    
    $
    74,777
    
    
    $
    
    
    
    $
    
    
    
    $
    74,777Money market mutual funds
    
    
    138,490
    
    
    
    
    
    
    
    
    
    
    
    138,490Corporate notes and bonds
    
    
    91,876
    
    
    
    
    
    
    
    
    
    
    
    91,876Total cash and cash equivalents:
    
    
    305,143
    
    
    
    
    
    
    
    
    
    
    
    305,143Short-term investments:Corporate notes and bonds
    
    
    25,097
    
    
    
    1
    
    
    
    (912
    )
    
    
    24,186U.S. Government agency securities
    
    
    76,919
    
    
    
    119
    
    
    
    (51
    )
    
    
    76,987Total short-term investments:
    
    
    102,016
    
    
    
    120
    
    
    
    (963
    )
    
    
    101,173Total cash, cash equivalents and short-term investments
    
    $
    407,159
    
    
    $
    120
    
    
    $
    (963
    )
    
    $
    406,316Restricted cash equivalents and investments
    
    $
    14,734
    
    
    $
    
    
    
    $
    
    
    
    $
    14,734
  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
    
    $
    93,848
    
    
    $
    93,908Between one year and five years
    
    
    8,168
    
    
    
    7,265Total available-for-sale investments
    
    $
    102,016
    
    
    $
    101,173
 11




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##### Table of Contents



Note 7.
    
    Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
Receivable
    
    
    Sales
ReturnsBalances, December 31, 2007
    
    $
    1,117
    
    
    $
    1,338Additions charged to expenses/revenue
    
    
    525
    
    
    
    2,599Amounts written off
    
    
    (323
    )
    
    
    (2,797
    )Balances, September 30, 2008
    
    $
    1,319
    
    
    $
    1,140
  Note 8.
    
    Equity Investments
   September 30, 2008
    
    
    December 31, 2007Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValuePublicly traded investments
    
    $
    855
    
    
    $
    4,654
    
    
    $
    933
    
    
    $
    8,085Privately held investments
    
    
    5,364
    
    
    
    4,623
    
    
    
    2,740
    
    
    
    1,891Total equity investments
    
    $
    6,219
    
    
    $
    9,277
    
    
    $
    3,673
    
    
    $
    9,976
 Note 9.
    
    Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    70,404
    
    
    $
    21,228
    
    
    $
    49,176Developed technology
    
    
    44,159
    
    
    
    23,418
    
    
    
    20,741Patents, trademarks and tradenames
    
    
    13,099
    
    
    
    6,935
    
    
    
    6,164Service contracts and other
    
    
    6,029
    
    
    
    3,454
    
    
    
    2,575Total other intangible assets
    
    $
    133,691
    
    
    $
    55,035
    
    
    $
    78,656
  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
 12




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##### Table of Contents



2008 (remaining three months)
    
    $
    6,1302009
    
    
    23,0632010
    
    
    16,9612011
    
    
    11,8982012
    
    
    10,705Thereafter
    
    
    9,899Total
    
    $
    78,656
 Note 10.
    
    Goodwill
  Balance, December 31, 2007
    
    $
    353,153Increases due to current year acquisitions
    
    
    1,817Decreases for the reduction of liabilities assumed
related to the acquisition of Sony NetServices GmbH
    
    
    (538
    )Effects of foreign currency translation
    
    
    (38,915
    )Balance, September 30, 2008
    
    $
    315,517
 Note 11.
    
    Accrued and Other Liabilities
  September 30,
    
    
    December 31,2008
    
    
    2007Royalties and other fulfillment costs
    
    $
    48,654
    
    
    $
    37,554Employee compensation, commissions and benefits
    
    
    19,849
    
    
    
    21,639Sales, VAT and other taxes payable
    
    
    12,580
    
    
    
    18,156Legal fees and contingent legal fees
    
    
    2,676
    
    
    
    3,439Other
    
    
    27,748
    
    
    
    33,348Other
    
    $
    111,507
    
    
    $
    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
    
    
    (2,537
    )Accrued loss on excess office facilities, September 30, 2008
    
    
    8,163Less current portion
    
    
    (4,299
    )Accrued loss on excess office facilities, non-current portion
    
    $
    3,864
 13




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##### Table of Contents



Note 13.
    
    Repurchase of Common Stock
  Note 14.
    
    Earnings Per Share
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average common shares outstanding used to
compute basic net income per share
    
    
    141,975
    
    
    
    149,667
    
    
    
    142,611
    
    
    
    154,670Dilutive potential common shares:Stock options and restricted stock
    
    
    
    
    
    
    2,677
    
    
    
    
    
    
    
    4,420Convertible debt
    
    
    
    
    
    
    10,750
    
    
    
    
    
    
    
    10,750Shares used to compute diluted net income per share
    
    
    141,975
    
    
    
    163,094
    
    
    
    142,611
    
    
    
    169,840
  Note 15.
    
    Commitments and Contingencies
 Borrowing Arrangements
   14




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##### Table of Contents



Purchase
Obligations
 Litigation
     15




---



##### Table of Contents



Note 16.
    
    Segment Information
 Disclosures about Segments of an Enterprise and
Related Information
      Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    41,591
    
    
    $
    58,731
    
    
    $
    51,633
    
    
    $
    
    
    
    $
    151,955Cost of revenue
    
    
    23,787
    
    
    
    14,790
    
    
    
    23,587
    
    
    
    
    
    
    
    62,164Gross profit
    
    
    17,804
    
    
    
    43,941
    
    
    
    28,046
    
    
    
    
    
    
    
    89,791Operating expenses
    
    
    42,355
    
    
    
    44,476
    
    
    
    29,719
    
    
    
    212
    
    
    
    116,762Operating income (loss)
    
    
    (24,551
    )
    
    
    (535
    )
    
    
    (1,673
    )
    
    
    (212
    )
    
    
    (26,971
    )Total non-operating income, net
    
    
    19,742
    
    
    
    
    
    
    
    
    
    
    
    3,457
    
    
    
    23,199Income (loss) before income taxes
    
    $
    (4,809
    )
    
    $
    (535
    )
    
    $
    (1,673
    )
    
    $
    3,245
    
    
    $
    (3,772
    )
 16




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##### Table of Contents



Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    116,840
    
    
    $
    181,121
    
    
    $
    154,205
    
    
    $
    
    
    
    $
    452,166Cost of revenue
    
    
    65,999
    
    
    
    41,765
    
    
    
    65,438
    
    
    
    
    
    
    
    173,202Gross profit
    
    
    50,841
    
    
    
    139,356
    
    
    
    88,767
    
    
    
    
    
    
    
    278,964Operating expenses
    
    
    107,978
    
    
    
    126,137
    
    
    
    94,683
    
    
    
    1,372
    
    
    
    330,170Operating income (loss)
    
    
    (57,137
    )
    
    
    13,219
    
    
    
    (5,916
    )
    
    
    (1,372
    )
    
    
    (51,206
    )Total non-operating income, net
    
    
    43,631
    
    
    
    
    
    
    
    
    
    
    
    12,632
    
    
    
    56,263Income (loss) before income taxes
    
    $
    (13,506
    )
    
    $
    13,219
    
    
    $
    (5,916
    )
    
    $
    11,260
    
    
    $
    5,057
  Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    37,658
    
    
    $
    54,166
    
    
    $
    53,271
    
    
    $
    
    
    
    $
    145,095Cost of revenue
    
    
    20,891
    
    
    
    10,326
    
    
    
    25,427
    
    
    
    
    
    
    
    56,644Gross profit
    
    
    16,767
    
    
    
    43,840
    
    
    
    27,844
    
    
    
    
    
    
    
    88,451Operating expenses
    
    
    33,426
    
    
    
    36,782
    
    
    
    33,428
    
    
    
    201
    
    
    
    103,837Operating income (loss)
    
    
    (16,659
    )
    
    
    7,058
    
    
    
    (5,584
    )
    
    
    (201
    )
    
    
    (15,386
    )Total non-operating income, net
    
    
    14,412
    
    
    
    
    
    
    
    
    
    
    
    7,328
    
    
    
    21,740Income (loss) before income taxes
    
    $
    (2,247
    )
    
    $
    7,058
    
    
    $
    (5,584
    )
    
    $
    7,127
    
    
    $
    6,354
  Technology Products
    
    
    ReconcilingMusic
    
    
    Consumer
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    108,586
    
    
    $
    155,393
    
    
    $
    146,759
    
    
    $
    
    
    
    $
    410,738Cost of revenue
    
    
    59,570
    
    
    
    28,890
    
    
    
    63,326
    
    
    
    
    
    
    
    151,786Gross profit
    
    
    49,016
    
    
    
    126,503
    
    
    
    83,433
    
    
    
    
    
    
    
    258,952Operating expenses
    
    
    82,412
    
    
    
    104,503
    
    
    
    97,062
    
    
    
    (58,205
    )
    
    
    225,772Operating income (loss)
    
    
    (33,396
    )
    
    
    22,000
    
    
    
    (13,629
    )
    
    
    58,205
    
    
    
    33,180Total non-operating income, net
    
    
    14,412
    
    
    
    
    
    
    
    
    
    
    
    25,447
    
    
    
    39,859Income (loss) before income taxes
    
    $
    (18,894
    )
    
    $
    22,000
    
    
    $
    (13,629
    )
    
    $
    83,652
    
    
    $
    73,039
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    102,363
    
    
    $
    91,281
    
    
    $
    302,430
    
    
    $
    263,870Europe
    
    
    27,151
    
    
    
    22,150
    
    
    
    78,514
    
    
    
    60,382Republic of Korea
    
    
    12,171
    
    
    
    20,591
    
    
    
    38,261
    
    
    
    57,875Rest of the World
    
    
    10,270
    
    
    
    11,073
    
    
    
    32,961
    
    
    
    28,611Total net revenue
    
    $
    151,955
    
    
    $
    145,095
    
    
    $
    452,166
    
    
    $
    410,738
 17




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007United States
    
    $
    196,293
    
    
    $
    186,665Republic of Korea
    
    
    172,221
    
    
    
    235,728Europe
    
    
    81,339
    
    
    
    87,181Rest of the World
    
    
    7,492
    
    
    
    7,753Total long-lived assets
    
    $
    457,345
    
    
    $
    517,327
  September 30,
    
    
    December 31,2008
    
    
    2007United States
    
    $
    560,902
    
    
    $
    576,994Republic of Korea
    
    
    173,306
    
    
    
    228,153Europe
    
    
    75,220
    
    
    
    79,410Rest of the World
    
    
    9,339
    
    
    
    10,160Total net assets
    
    $
    818,767
    
    
    $
    894,717
  September 30,
    
    
    December 31,2008
    
    
    2007Music
    
    $
    37,029
    
    
    $
    37,029Consumer
    
    
    129,158
    
    
    
    129,621Technology products and solutions
    
    
    149,330
    
    
    
    186,503Total goodwill
    
    $
    315,517
    
    
    $
    353,153
 Note 17.
    
    Related Party Transactions
 Transactions with MTVN.
  18




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##### Table of Contents



Note 18.
    
    Convertible Debt
  19




---



##### 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, Exomi Oy
and Trymedia, 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;
    
    the effects of legislation, regulations, administrative proceedings, court rulings,
settlement negotiations and other factors that may impact music publishing royalty
rates;
    
    the potential outcomes and effects of claims and legal proceedings on our business,
prospects, financial condition or results of operations;
    
    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 .
 20




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Overview
       21




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##### 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;
    
    Minority interest;
    
    Accounting for gains on sale of subsidiary stock;
    
    Accounting for income taxes; and
    
    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
  22




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Music Publishing Rights and Music Royalty Accruals.
 Recoverability of Deferred Costs.
  Allowances for Doubtful Accounts and Sales Returns.
 23




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##### Table of Contents



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 Accounting for Stock Issued to Employees
 Minority Interests. Consolidated Financial Statements
 24




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Accounting for Gains on Sale of Subsidiary Stock. Accounting for the Sales of
Stock of a Subsidiary
 Accounting for Income Taxes.
     Accounting for Taxes Collected From Customers
 Revenue by Segment
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Music
    
    $
    41,591
    
    
    
    10
    %
    
    $
    37,658
    
    
    $
    116,840
    
    
    
    8
    %
    
    $
    108,586Consumer
    
    
    58,731
    
    
    
    8
    
    
    
    54,166
    
    
    
    181,121
    
    
    
    17
    
    
    
    155,393Technology Products and Solutions
    
    
    51,633
    
    
    
    (3
    )
    
    
    53,271
    
    
    
    154,205
    
    
    
    5
    
    
    
    146,759Total net revenue
    
    $
    151,955
    
    
    
    5
    %
    
    $
    145,095
    
    
    $
    452,166
    
    
    
    10
    %
    
    $
    410,738
 25




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##### Table of Contents



Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Music
    
    
    27
    %
    
    
    26
    %
    
    
    26
    %
    
    
    26
    %Consumer
    
    
    39
    
    
    
    37
    
    
    
    40
    
    
    
    38Technology Products and Solutions
    
    
    34
    
    
    
    37
    
    
    
    34
    
    
    
    36Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Music.
   Consumer.
  Technology
Products and Solutions.
 26




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##### Table of Contents



Consumer Revenue
  Quarters Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Games
    
    $
    34,200
    
    
    
    19
    %
    
    $
    28,820
    
    
    $
    100,943
    
    
    
    30
    %
    
    $
    77,617Media Software and Services
    
    
    24,531
    
    
    
    (3
    )
    
    
    25,346
    
    
    
    80,178
    
    
    
    3
    
    
    
    77,776Total consumer products and services revenue
    
    $
    58,731
    
    
    
    8
    %
    
    $
    54,166
    
    
    $
    181,121
    
    
    
    17
    %
    
    $
    155,393
 Games.
   Media Software and Services.
  27




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Geographic Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007United States
    
    $
    102,363
    
    
    
    12
    %
    
    $
    91,281
    
    
    $
    302,430
    
    
    
    15
    %
    
    $
    263,870Europe
    
    
    27,151
    
    
    
    23
    
    
    
    22,150
    
    
    
    78,514
    
    
    
    30
    
    
    
    60,382Republic of Korea
    
    
    12,171
    
    
    
    (41
    )
    
    
    20,591
    
    
    
    38,261
    
    
    
    (34
    )
    
    
    57,875Rest of the world
    
    
    10,270
    
    
    
    (7
    )
    
    
    11,073
    
    
    
    32,961
    
    
    
    15
    
    
    
    28,611Total net revenue
    
    $
    151,955
    
    
    
    5
    %
    
    $
    145,095
    
    
    $
    452,166
    
    
    
    10
    %
    
    $
    410,738
 Revenue by Segment  Games and Music
 Revenue by Segment -Games and Technology Products and
Solutions
 Revenue by Segment  Technology Products and Solutions
 License and Service Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007License fees
    
    $
    28,394
    
    
    
    19
    %
    
    $
    23,869
    
    
    $
    82,762
    
    
    
    22
    %
    
    $
    67,918Service revenue
    
    
    123,561
    
    
    
    2
    
    
    
    121,226
    
    
    
    369,404
    
    
    
    8
    
    
    
    342,820Total net revenue
    
    $
    151,955
    
    
    
    5
    %
    
    $
    145,095
    
    
    $
    452,166
    
    
    
    10
    %
    
    $
    410,738
 28




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##### Table of Contents



Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 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.
  Deferred Revenue
  Cost of Revenue by Segment
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Music
    
    $
    23,787
    
    
    
    14
    %
    
    $
    20,891
    
    
    $
    65,999
    
    
    
    11
    %
    
    $
    59,570Consumer
    
    
    14,790
    
    
    
    43
    
    
    
    10,326
    
    
    
    41,765
    
    
    
    45
    
    
    
    28,890Technology products and solutions
    
    
    23,587
    
    
    
    (7
    )
    
    
    25,427
    
    
    
    65,438
    
    
    
    3
    
    
    
    63,326Total cost of revenue
    
    $
    62,164
    
    
    
    10
    %
    
    $
    56,644
    
    
    $
    173,202
    
    
    
    14
    %
    
    $
    151,786
 29




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##### Table of Contents



Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Music
    
    
    57
    %
    
    
    55
    %
    
    
    56
    %
    
    
    55
    %Consumer
    
    
    25
    
    
    
    19
    
    
    
    23
    
    
    
    19Technology products and solutions
    
    
    46
    
    
    
    48
    
    
    
    42
    
    
    
    43Total cost of revenue
    
    
    41
    %
    
    
    39
    %
    
    
    38
    %
    
    
    37
    %
 Cost of Music.
 Cost of Consumer.
 Cost of Technology Products and Solutions.
 Cost of License and Service Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007License fees
    
    $
    11,137
    
    
    
    32
    %
    
    $
    8,436
    
    
    $
    31,139
    
    
    
    27
    %
    
    $
    24,610Service revenue
    
    
    51,027
    
    
    
    6
    
    
    
    48,208
    
    
    
    142,063
    
    
    
    12
    
    
    
    127,176Total cost of revenue
    
    $
    62,164
    
    
    
    10
    %
    
    $
    56,644
    
    
    $
    173,202
    
    
    
    14
    %
    
    $
    151,786
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007License fees
    
    
    39
    %
    
    
    35
    %
    
    
    38
    %
    
    
    36
    %Service revenue
    
    
    41
    
    
    
    40
    
    
    
    38
    
    
    
    37Total cost of revenue
    
    
    41
    %
    
    
    39
    %
    
    
    38
    %
    
    
    37
    %
 30




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Cost of License Fees.
 Cost of Service Revenue.
 Operating Expenses
 Research and Development
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007Research and development
    
    $
    31,076
    
    
    
    17
    %
    
    $
    26,528
    
    
    $
    85,147
    
    
    
    14
    %
    
    $
    75,012As a percentage of total net revenue
    
    
    20
    %
    
    
    
    
    
    
    18
    %
    
    
    19
    %
    
    
    
    
    
    
    18
    %
  Sales and Marketing
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007Sales and marketing
    
    $
    55,080
    
    
    
    4
    %
    
    $
    52,812
    
    
    $
    161,730
    
    
    
    6
    %
    
    $
    152,593As a percentage of total net revenue
    
    
    36
    %
    
    
    
    
    
    
    36
    %
    
    
    36
    %
    
    
    
    
    
    
    37
    %
  31




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##### Table of Contents



General and Administrative
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    Change
    
    2007
    
    2008
    
    Change
    
    2007General and administrative
    
    $
    15,453
    
    
    
    (8
    )%
    
    $
    16,750
    
    
    $
    50,874
    
    
    
    (1
    )%
    
    $
    51,167As a percentage of total net revenue
    
    
    10
    %
    
    
    
    
    
    
    12
    %
    
    
    11
    %
    
    
    
    
    
    
    12
    %
  Advertising with Related Party
  Antitrust Litigation Benefit, Net
  Other Income, Net
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    Change
    
    
    2007
    
    
    2008
    
    
    Change
    
    
    2007Interest income, net
    
    $
    2,865
    
    
    
    (61
    )%
    
    $
    7,290
    
    
    $
    11,198
    
    
    
    (54
    )%
    
    $
    24,457Equity in net loss of investments
    
    
    (226
    )
    
    
    n/a
    
    
    
    
    
    
    
    (424
    )
    
    
    221
    
    
    
    (132
    )Gain on sale of equity investments, net
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    222
    
    
    
    68
    
    
    
    132Minority interest in Rhapsody America
    
    
    12,337
    
    
    
    91
    
    
    
    6,466
    
    
    
    29,129
    
    
    
    350
    
    
    
    6,466Gain on sale of interest in Rhapsody America
    
    
    7,405
    
    
    
    (7
    )
    
    
    7,946
    
    
    
    14,502
    
    
    
    83
    
    
    
    7,946Other income, net
    
    
    818
    
    
    
    2,053
    
    
    
    38
    
    
    
    1,636
    
    
    
    65
    
    
    
    990Other income, net
    
    $
    23,199
    
    
    
    7
    %
    
    $
    21,740
    
    
    $
    56,263
    
    
    
    41
    %
    
    $
    39,859
 32




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##### Table of Contents



Income Taxes
    New Accounting Pronouncements
 Business Combinations
 Noncontrolling Interest in Consolidated
Financial Statements, an amendment of ARB No. 51
 Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles
 33




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##### Table of Contents



Liquidity and Capital Resources
  September 30,
    
    December 31,2008
    
    2007Working capital
    
    $
    319,530
    
    
    $
    351,066Cash, cash equivalents, and short-term investments
    
    
    406,316
    
    
    
    556,629Restricted cash
    
    
    14,734
    
    
    
    15,509
   Nine Months EndedSeptember 30,2008
    
    2007Cash used in operating activities
    
    $
    (21,014
    )
    
    $
    (206,811
    )Cash used in investing activities
    
    
    (60,548
    )
    
    
    (7,186
    )Cash used in financing activities
    
    
    (82,480
    )
    
    
    (113,085
    )
       34




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##### Table of Contents



Off-Balance Sheet Agreements
  35




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 Investment Risk.
 Foreign Currency Risk.
     36




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##### 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
    37




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##### Table of Contents



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 further delayed or not completed, our
stock price and business may be adversely affected.
   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.
  38




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##### Table of Contents



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,
    
    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.
 39




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##### Table of Contents



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.
   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.
  40




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##### Table of Contents



Our RealDVD PC application is currently the subject of pending litigation, and we could incur
significant expenses or be further prevented from selling RealDVD.
  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.
   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.
  41




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##### Table of Contents



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.
    The mobile entertainment market is highly competitive.
  42




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##### Table of Contents



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
    
    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.
  43




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##### Table of Contents



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.
    
    
    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.
  44




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##### Table of Contents



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.
  Our network is subject to security risks that could harm our business and reputation and expose us
to litigation or liability.
  45




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##### Table of Contents



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.
  An impairment in the carrying value of our goodwill or other intangible assets could adversely
affect our financial condition and results of operations.
 Goodwill and Other Intangible Assets
 Risks Related to the Securities Markets and Ownership of Our Common Stock
 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.
 46




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##### Table of Contents




    
    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.
     47




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Not applicable(b) Not applicable(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers (in thousands,
except per share amounts):
 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 orPeriod
    
    Shares Repurchased
    
    
    Per Share
    
    
    Programs
    
    
    Programs(In thousands)7/1/2008  7/31/2008
    
    
    884
    
    
    $
    6.78
    
    
    
    884
    
    
    $
    6.788/1/2008  8/31/2008
    
    
    1,191
    
    
    
    6.63
    
    
    
    1,191
    
    
    
    6.639/1/2008  9/30/2008
    
    
    1,536
    
    
    
    5.90
    
    
    
    1,536
    
    
    
    5.90Total
    
    
    3,611
    
    
    $
    6.36
    
    
    
    3,611
    
    
    $
    6.36
  
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description10.1
    
    Offer Letter dated July 1, 2008 between
RealNetworks, Inc. and John Giamatteo
(incorporated by reference from
Exhibit 10.1 to RealNetworks, Inc.s
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2008 filed
with the Securities and Exchange Commission
on August 11, 2008)10.2
    
    Offer Letter dated October 28, 2008 between
RealNetworks, Inc. and John Barbour
(incorporated by reference from
Exhibit 10.1 to RealNetworks, Inc.s
Current Report on Form 8-K filed with the
Securities and Exchange Commission on
November 3, 2008)31.1
    
    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
 48




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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) 49




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Offer Letter dated July 1, 2008 between
RealNetworks, Inc. and John Giamatteo
(incorporated by reference from
Exhibit 10.1 to RealNetworks, Inc.s
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2008 filed
with the Securities and Exchange Commission
on August 11, 2008)10.2
    
    Offer Letter dated October 28, 2008 between
RealNetworks, Inc. and John Barbour
(incorporated by reference from
Exhibit 10.1 to RealNetworks, Inc.s
Current Report on Form 8-K filed with the
Securities and Exchange Commission on
November 3, 2008)31.1
    
    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
 50