REALNETWORKS INC, 424B4, 1997-11-21

REALNETWORKS INC
424B4, 1997-11-21
COMPUTER PROGRAMMING SERVICES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-36553

3,000,000 SHARES
[REALNETWORKS LOGO] REALNETWORKS, INC.
(FORMERLY "PROGRESSIVE NETWORKS, INC.")

COMMON STOCK
(PAR VALUE $.001 PER SHARE)

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

All of the 3,000,000 shares of Common Stock offered hereby are being sold
by RealNetworks, Inc. Prior to the offering, there has been no public market for
the Common Stock. For factors considered in determining the initial public
offering price, see "Underwriting".

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

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "RNWK," subject to notice of issuance.

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

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

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

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) COMPANY(3)
------------------ ------------- -----------
<S> <C> <C> <C>
Per Share.......................... $12.50 $0.875 $11.625
Total(4)........................... $37,500,000 $2,625,000 $34,875,000
</TABLE>

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(1) In connection with the offering, the Underwriters have reserved up to
300,000 shares of Common Stock for sale at the initial public offering price
to employees and friends of the Company.

(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".

(3) Before deducting estimated expenses of $950,000 payable by the Company.

(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 450,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $43,125,000,
$3,018,750 and $40,106,250, respectively. See "Underwriting".

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

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
November 26, 1997, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES, INC.
------------------------

The date of this Prospectus is November 21, 1997.
<PAGE> 2

[SCREEN-SHOTS OF
WEB PAGES SUPERIMPOSED
OVER COMPANY LOGO]

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

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including the information under "Risk Factors."

Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters' over-allotment option will not be exercised; (ii)
reflects an amendment to the Company's Amended and Restated Articles of
Incorporation (the "Articles") to change the Company's authorized capital stock
to common stock (the "Common Stock"), nonvoting special common stock (the
"Special Common Stock") and preferred stock effective on the closing of the
offering; (iii) reflects the conversion of each outstanding share of the
Company's Series A Common Stock, Series B Common Stock, Series C Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock into one share of Common Stock effective on closing of
the offering; (iv) reflects the conversion of each outstanding share of the
Company's Series E Preferred Stock into one share of Special Common Stock
effective on closing of the offering; and (v) assumes the issuance of 964,303
shares of Common Stock, reflecting exercise of outstanding warrants at a
weighted average exercise price of $7.21 per share, on closing of the offering,
except as noted hereinafter. See "Description of Capital Stock."

THE COMPANY

RealNetworks, Inc. is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. Streaming technology enables the transmission and playback of
continuous "streams" of multimedia content, such as audio and video, over the
Internet and intranets and represents a significant advancement over earlier
technologies. The Company's products and services include its RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites.

The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium. These enhanced multimedia
capabilities, combined with the unique interactive properties of the Internet,
are attracting a large and expanding audience, a growing number of advertisers
and an increasing breadth and depth of content and online commercial
applications. As the Web continues to evolve as a mass communications medium,
the Company believes that certain types of content currently delivered through
traditional media, such as radio and television, increasingly will be delivered
over the Internet. The Company believes that streaming media technology is
essential to this evolution because it provides a more compelling user
experience, allowing the Internet to compete more effectively with traditional
media for audience share.

From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 28 million copies of its
RealPlayer software have been downloaded electronically. Over 200,000 copies of
its premium client product, RealPlayer Plus, have been sold electronically in
the product's first year of distribution. In addition, the Company believes that
more than 100,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. As a result of these activities
and the Company's aggressive promotional programs, the Company believes that its
"Real" brand has become one of the most widely recognized brands on the
Internet. The Company's customers, including ABC Radio Net, Bloomberg L.P., The
Boeing Company, Dow Jones & Company, Inc., NBC Desktop, The News Corporation
Limited, Starwave Corporation and 3Com Corporation, use its software products
and services to deliver a broad range of streaming audio and video news, sports,
entertainment and corporate information over the Internet and intranets.

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The Company's objective is to be the leading streaming media company,
providing software and services that enable the delivery of a broad range of
multimedia content over the Internet and intranets, thereby facilitating the
evolution of the Internet into a mass communications and commerce medium. The
key elements of this strategy include the extension of the Company's technology
leadership, a continued focus on product ubiquity and brand leadership, the
continued development of its electronic commerce and content aggregation
businesses, a focus on providing cross-platform product solutions that operate
in a wide variety of bandwidth environments, and the strengthening and expansion
of strategic relationships.

The Company was incorporated in Washington in February 1994, and therefore
has a limited operating history. Unless the context otherwise requires, the term
"Company" or "RealNetworks" refers to RealNetworks, Inc. and its subsidiaries:
RealNetworks, SARL, RealNetworks, Limited and RealNetworks Kabushiki Kaisha.
Prior to September 26, 1997, the Company's name was "Progressive Networks, Inc."
The Company's principal executive offices are located at 1111 Third Avenue,
Suite 2900, Seattle, Washington 98101, and its telephone number is (206)
674-2700. Information contained on the Company's Web sites will not be deemed to
be part of this Prospectus.

RealSystem(TM), RealAudio(R), RealVideo(R), RealPlayer(TM), RealPlayer
Plus(TM), RealPublisher(TM), RealServer(TM), RealEncoder(TM), Basic Server(TM),
RealNetworks(TM), Real(TM), the Real logo, RealStore(TM), Film.com(TM), Daily
Briefing(TM) and Timecast(TM) are registered and unregistered trademarks,
service marks and trade names of the Company. This Prospectus also includes
trademarks, service marks and trade names other than those identified in this
paragraph, all of which are the property of their respective holders.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........... 3,000,000 shares
Common stock to be outstanding after the
offering:
Common Stock................................ 27,688,155 shares(1)
Special Common Stock........................ 3,338,374 shares(1)
Use of proceeds............................... Working capital requirements and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol................. "RNWK"
</TABLE>

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(1) Excludes (i) 6,840,714 shares of Common Stock issuable at a weighted average
exercise price of $2.35 per share upon exercise of stock options outstanding
at November 14, 1997, (ii) 3,949,842 shares of Common Stock reserved for
future issuance under the Company's stock option plans and (iii) 1,000,000
shares of Common Stock reserved for issuance under the 1998 Employee Stock
Purchase Plan. See "Management -- Benefit Plans." Also excludes up to
3,709,305 shares of Special Common Stock issuable on exercise of a warrant
to purchase Series E Preferred Stock at an exercise price of $13.48 per
share (the "Series E Warrant") that terminates on the closing of the
offering. See "Description of Capital Stock."

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<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The summary
consolidated financial data for the period from February 9, 1994 (inception) to
December 31, 1994, for the years ended December 31, 1995 and 1996, and for the
nine months ended September 30, 1997, and as of December 31, 1996 and September
30, 1997, are derived from the Consolidated Financial Statements of the Company
audited by KPMG Peat Marwick LLP, independent accountants. The summary
consolidated financial data for the nine months ended September 30, 1996 are
derived from unaudited consolidated financial statements prepared by the Company
on a basis consistent with the Company's audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for such periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 1997.

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------
1994 1995 1996 1996 1997
---------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues................... $ -- $ 1,812 $14,012 $ 8,274 $22,417
Total cost of revenues............... -- 62 2,185 969 4,609
Gross profit......................... -- 1,750 11,827 7,305 17,808
Operating loss....................... (545) (1,595) (4,016) (2,475) (9,759)
Net loss............................. (545) (1,501) (3,789) (2,315) (8,575)
Pro forma net loss per share(1)...... $ (0.14) $ (0.32)
Shares used to compute pro forma net 27,779 28,315
loss per share(1)..................
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, --------------------------
1996 ACTUAL AS ADJUSTED(2)
------------ ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 19,595 $67,648 $108,529
Working capital....................................... 16,893 50,762 91,643
Total assets.......................................... 26,468 84,372 125,253
Redeemable, convertible preferred stock............... 23,153 49,278 --
Shareholders' equity (deficit)........................ (3,320) (8,089) 82,070
</TABLE>

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(1) For an explanation of pro forma net loss per share and the number of shares
used to compute pro forma net loss per share, see Note 1 of Notes to
Consolidated Financial Statements.

(2) As adjusted to give effect to the (i) conversion of all outstanding shares
of Series A Common Stock, Series B Common Stock, Series C Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock into Common Stock and Series E Preferred Stock
into Special Common Stock, in each case on closing of the offering; (ii)
sale by the Company of the 3,000,000 shares of Common Stock offered hereby
at the initial public offering price of $12.50 per share; (iii) application
of the estimated net proceeds of the offering; and (iv) issuance of 998,058
shares of Common Stock upon exercise of outstanding warrants at an average
exercise price of $6.97 per share (for an aggregate of $6,956,000). Excludes
up to 3,709,305 shares of Special Common Stock (representing additional cash
and shareholders' equity of up to $50,001,431) issuable on exercise of the
Series E Warrant. See "Use of Proceeds," "Capitalization" and "Description
of Capital Stock."

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RISK FACTORS

In addition to the other information contained in this Prospectus,
investors should consider carefully the following risk factors before making an
investment decision concerning the Common Stock. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in this "Risk Factors" section and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES

The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. Accordingly, the Company has a limited
operating history on which an evaluation of the Company and its prospects can be
based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in rapidly evolving markets such as media
delivery and electronic commerce over the Internet and intranets. The Company
has incurred significant losses since its inception and expects to continue to
incur substantial operating losses for the foreseeable future. As of September
30, 1997, the Company had an accumulated deficit of $14.8 million. As a result
of taxable income generated from a license agreement with Microsoft Corporation
("Microsoft"), the Company has recognized deferred tax assets to the extent of
its accrued taxes. The Company believes it is more likely than not that its net
deferred tax assets as of September 30, 1997 will be realized through the
reversal of temporary differences in 1998 and 1999. To achieve and sustain
profitability, the Company must, among other things, establish widespread market
acceptance of its existing products and services, successfully develop new
products and services, respond quickly and effectively to competitive, market
and technological developments, expand sales and marketing operations, broaden
customer support capabilities, control expenses and continue to attract, train
and retain qualified personnel. In addition, market prices for the Company's
products must attain a level at which the Company can generate revenues in
excess of its anticipated operating and other expenses. There can be no
assurance that the Company will achieve or sustain profitability. See
"-- Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results," "-- Competition; Relationship With Microsoft" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATION IN QUARTERLY
OPERATING RESULTS

As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
its revenues accurately. The Company expects to experience significant
fluctuations in its future quarterly operating results due to a variety of
factors, many of which are outside the Company's control, including (i) demand
for the Company's products and services, (ii) introduction or enhancement of
products and services by the Company and its competitors, (iii) market
acceptance of new products and services of the Company and its competitors, (iv)
price reductions by the Company or its competitors or changes in how products
and services are priced (such as the Company's recent decision to offer for
download free of charge a version of its Basic Server, which previously sold for
$295 to $995), (v) the mix of products and services sold by the Company and its
competitors, (vi) the mix of distribution channels through which the Company's
products are licensed and sold, (vii) the mix of international and U.S.
revenues, (viii) costs of litigation and intellectual property protection, (ix)
growth in the use of the Internet, (x) the Company's ability to attract, train
and retain qualified personnel, (xi) the amount and timing of operating costs
and capital expenditures related to expansion of the Company's business,
operations and infrastructure, (xii) technical difficulties with respect to the
use of the Company's products, (xiii) governmental regulations and (xiv) general
economic conditions and economic conditions specifically related to the
Internet. It often is difficult to forecast the effect such factors, or any
combination thereof, would have on the Company's results of operations for any
given fiscal quarter. There can be no assurance that the Company will be able to

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achieve historical revenue levels or maintain its historical growth rate. The
Company has used, and expects to continue to use, price promotions to increase
trial, purchase and use of its products, as well as to increase the overall
recognition of its brands. The effect of such promotions on revenues in a
particular period may be significant and extremely difficult to forecast. Based
on the foregoing, the Company believes that its quarterly revenues, expenses and
operating results could vary significantly in the future, and that
period-to-period comparisons should not be relied on as indications of future
performance.

Historically, the Company has received a significant portion of its
revenues from a limited number of sales and license agreements. The Company
believes that a customer's decision to purchase its server products or license
its technology is relatively discretionary and, for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any downturn
in the economy or in the business of potential customers could have a material
adverse effect on the Company's revenues and quarterly results of operations.

The Company generally distributes its software products in "beta" form to
the public prior to finalizing product features, functionality and operability.
This may cause certain customers to delay purchasing decisions until commercial
versions of the products are available, which could have a material adverse
effect on the Company's revenues and quarterly results of operations.

The Company derives a significant portion of its revenues from the sale of
technical support services and software upgrades to its installed customer base.
There can be no assurance that a sufficient number of the Company's customers
will continue to enter into support and upgrade contracts or will renew existing
support and upgrade contracts, or that revenues therefrom will continue to be
significant. The loss of a material portion of such revenues would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.

Management has observed that revenues from advertising sales have tended to
be higher in the second and fourth quarters, and retail sales have tended to be
highest in the fourth quarter. The Company typically operates with no backlog.
As a result, quarterly sales and operating results depend primarily on the
volume and timing of orders received in the quarter, both of which are difficult
to forecast. The Company typically recognizes a substantial portion of its
revenues in the last month of each quarter.

As a result of its limited operating history, the Company does not have
relevant historical financial data for a significant number of periods on which
to base planned operating expenses. The Company's expense levels are based in
part on its expectations with regard to future revenues, which also are
difficult to forecast. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. As a result, any
significant shortfall in demand for the Company's products and services relative
to the Company's expectations would have an immediate material adverse effect on
the Company's business, financial condition and results of operations. Due to
the foregoing factors, it is likely that in some future quarters the Company's
operating results will fall below the expectations of securities analysts and
investors, which would likely have a material adverse effect on the trading
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

COMPETITION; RELATIONSHIP WITH MICROSOFT

The Company engages primarily in the sale and licensing of audio and video
streaming products and services, electronic commerce and Internet advertising.
The Company's principal competitors in the development and distribution of audio
and video streaming solutions include Microsoft, VXtreme, Inc. ("VXtreme"),
VDOnet Corporation ("VDOnet"), Xing Technology Corporation ("Xing"), Precept
Software, Inc. ("Precept"), Cubic VideoComm, Inc. ("Cubic"), Motorola, Inc.
("Motorola"), Vivo

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Software, Inc. ("Vivo"), Vosaic LLC ("Vosaic") and Oracle Corporation
("Oracle"). The Company's RealSystem also competes to a lesser degree with
non-streaming audio and video delivery technologies such as AVI and Quicktime,
and indirectly with delivery systems for multimedia content other than audio and
video, such as Flash by Macromedia Inc. ("Macromedia") and Enliven by Narrative
Communications Corp. ("Narrative"). Competitive factors in this market include
the quality and reliability of software; features for creating, editing and
adapting content; ease of use and interactive user features; scaleability and
cost per user; and compatibility with the user's existing network components and
software systems. To expand its user base and further enhance the user
experience, the Company must continue to innovate and improve the performance of
its RealSystem. The Company is committed to the continued market penetration of
its brand, products and services, which, as a strategic response to changes in
the competitive environment, may require pricing, licensing, service or
marketing changes intended to extend its current brand and technology franchise.
For example, the Company recently made its Basic Server, which had previously
sold for $295 to $995, available for download free of charge. Continued price
concessions or the emergence of other pricing or distribution strategies by
competitors may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."

The Company derives significant revenues from sales of RealPlayer Plus, an
enhanced version of its free RealPlayer product. The Company's ability to
continue to generate revenues from sales of RealPlayer Plus is in large part
dependent on its ability to differentiate the features and functionality of
RealPlayer Plus from its own and competitors' free and for sale player products.
In addition, the demand for RealPlayer Plus is in part contingent on the demand
for and the volume of free player products in the market. The Company's failure
to continue to differentiate RealPlayer Plus, or to stimulate demand for its
free player or RealPlayer Plus, may have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Products and Services."

The Company anticipates that the consolidation that has occurred in the
streaming media industry and related industries, such as computer software,
media and communications, will continue. Consequently, competitors may be
acquired by, receive investments from, or enter into other commercial
relationships with, larger, well-established and well-financed companies. For
instance, Microsoft recently acquired VXtreme, a direct competitor of the
Company in the market for streaming media software. Microsoft also owns a
minority interest in VDOnet, a direct competitor of the Company in the market
for streaming video software. In addition, in June 1997 the Company and
Microsoft entered into a strategic agreement pursuant to which Microsoft
purchased a minority interest in the Company. See "-- Department of Justice
Subpoena," "Business -- Microsoft Relationship" and "Certain Transactions --
Microsoft Corporation."

In connection with the Microsoft agreement, the Company granted Microsoft a
nonexclusive license to its Standard Code (as defined in the agreement), which
is comprised of certain substantial elements of the source code of the Company's
RealAudio/RealVideo Version 4.0 technology included in its basic RealPlayer and
substantial elements of its EasyStart Server (currently known as the Basic
Server), and related Company trademarks. Under the agreement, Microsoft may
sublicense its rights to the Standard Code to third parties under certain
circumstances. On two occasions during the first two years following delivery
under the agreement, Microsoft may acquire for $25 million and $35 million,
respectively, a nonexclusive license to subsequently developed versions of the
Standard Code, products based on which are currently distributed to end users by
the Company at no charge. If the Company elects in its sole discretion to grant
an Event License (as defined in the agreement), the agreement provides for a
full refund of each license fee during the first year, declining to 0% over the
following two years. The Company may not assign its obligations under the
agreement without Microsoft's consent, and a merger, the sale of substantially
all of the Company's assets and certain other events will be deemed to be an
assignment under the agreement. Microsoft is obligated to distribute the
Company's RealPlayer Version 4.0 for a defined term as long as the Company's
player supports certain Microsoft architectures. The Company also agreed to work
with Microsoft and several other companies to author and promote the Active
Streaming Format ("ASF") as a standard file format for streaming media. The
agreement also

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requires the Company to provide Microsoft with engineering consultation
services, certain error corrections and certain technical support over a defined
term. As a result of Microsoft's agreement with the Company, its acquisition of
VXtreme and its investment in VDOnet, Microsoft will be able to augment
substantially the functionality of NetShow, its streaming media product, which
could have a material adverse effect on the competitiveness of the Company's
products. See "-- Impact of Evolving Standards," "-- Uncertain Protection of
Intellectual Property; Risks Associated With Licensed Third-Party Technology"
and "Business -- Microsoft Relationship."

Microsoft currently competes with the Company in the market for streaming
media server and player software. The Company believes that Microsoft will
compete more directly with the Company in the future. The Company also believes
that Microsoft's commitment to and presence in the streaming media industry will
dramatically increase competitive pressure in the overall market for streaming
media software, leading to, among other things, increased pricing pressure and
longer sales cycles. Such pressures may result in further price reductions in
the Company's products and may also materially reduce the Company's market
share. The Company believes that Microsoft will incorporate streaming media
technology in its Web browser software and certain of its server software
offerings, possibly at no additional cost to the user. In addition,
notwithstanding the Company's cooperation with Microsoft regarding ASF,
Microsoft may promote technologies and standards not compatible with the
Company's technology. Microsoft has a longer operating history, a larger
installed base of customers and dramatically greater financial, distribution,
marketing and technical resources than the Company. As a result, there can be no
assurance that the Company will be able to compete effectively with Microsoft
now or in the future, or that the Company's business, financial condition and
results of operations will not be materially adversely affected by increased
competition in the streaming media industry. In addition, if considerable
industry consolidation occurs, there can be no assurance that the Company will
be able to compete effectively. Although Microsoft is a shareholder of the
Company, it is also a competitor and its interests may not always be aligned
with those of the Company and the other shareholders. Microsoft has indicated
that to the extent the relationship between the parties becomes more competitive
than complementary, and based on the outcome of issues between the parties,
including under the license agreement, it is likely to re-evaluate its
investment position in the Company. There can be no assurance that any such
issues, the evolving nature of the relationship, or economic factors would not
result in Microsoft selling all or a portion of its holdings in the Company when
contractually able to do so, which could have a material adverse effect on the
market price for the Common Stock. See "-- Volatility of Stock Price,"
"-- Impact of Exercise of the Series E Warrant," "-- Possible Adverse Effect on
Market Price of Common Stock of Shares Eligible for Future Sale After the
Offering," "Business -- Sales, Marketing and Distribution" and "-- Microsoft
Relationship" and "Shares Eligible for Future Sale -- Registration Rights."

The Company currently derives significant revenues from the electronic
distribution of certain of its products. The Company recently opened its
RealStore Web site, an online store for the sale of the Company's products,
third-party streaming media tools and utilities, and intranet-based training
products. The Company competes with a variety of Web sites, such as
Buydirect.Com and Software.Net, which also offer software products for download.
To compete successfully in the electronic commerce market, the Company must
attract sufficient commercial traffic to its RealStore Web site by offering
high-quality, competitively priced merchandise in a compelling, easy-to-purchase
format. There can be no assurance that the Company will be able to compete
successfully in this market, and any failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products and Services" and "-- Competition."

In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue also is growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the Company or that
revenues derived from such advertising will be material. In addition, if the
Company loses advertising customers, fails to attract new customers, is forced
to reduce advertising rates or

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otherwise modify its rate structure to retain or attract customers, or loses Web
site traffic, the Company's business, financial condition and results of
operations may be materially adversely affected. See "Business -- Products and
Services" and "-- Competition."

DEPARTMENT OF JUSTICE SUBPOENA

Shortly after the Company entered into the license agreement with
Microsoft, Microsoft acquired VXtreme and announced that it would incorporate
VXtreme technology, which competes with the Company's technology licensed to
Microsoft, into its NetShow product. In addition, Microsoft owns a minority
interest in VDOnet, a direct competitor of the Company, and has selected VDOnet
as a Microsoft Solution Provider for NetShow-based products. Microsoft's
acquisitions, investments and agreements in the streaming media industry
prompted a U.S. Department of Justice investigation into horizontal merger
activities within the industry. In August 1997, the Department of Justice served
several companies, including the Company and Microsoft, with subpoenas to
produce certain documents. The investigation, including interviews of Company
officers by Department of Justice personnel and document production requests, is
ongoing. The Company is cooperating fully with the Department of Justice's
investigation. See "-- Competition; Relationship With Microsoft" and
"Business -- Microsoft Relationship" and "-- Legal Proceedings."

As a result of the investigation, it is possible that the Department of
Justice will require certain actions by the Company, Microsoft or other
companies in the streaming media industry that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Department of Justice could decide to take actions that could materially and
adversely affect the Company's current relationship with Microsoft or other
companies, affect Microsoft's obligations with respect to the distribution of
the Company's products, result in certain penalties, require the Company to
refund all or a portion of the license fee paid by Microsoft to the Company,
require Microsoft to limit or divest certain of its acquisitions or investments
in the streaming media industry, including its investment in the Company, and,
if Microsoft were forced to rescind its agreement with the Company, place the
Company at a significant competitive disadvantage within the industry. There can
be no assurance that any such outcome would not have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

DEVELOPING MARKET; DEPENDENCE ON THE INTERNET AND INTRANETS AS MEDIUMS OF
COMMERCE AND COMMUNICATIONS

The market for the Company's streaming media products and services,
especially the market for the Company's intranet products and services, has
begun only recently to develop and is evolving rapidly, with continuing new
developments in technology, product distribution methods and marketing and
licensing relationships. The development of a market for the Company's streaming
media products also depends on increased use of the Internet and intranets for
information, publication, distribution and commerce. Continued growth in the use
of the Internet may depend on potential increases in available bandwidth or
transmission speeds or on other technological improvements. In particular, the
Company believes that continued growth in market acceptance of streaming media,
especially streaming video, depends on such developments. Changes in network
infrastructure, transmission and content delivery methods and underlying
software platforms, and the emergence of new Internet access devices, such as TV
set-top boxes, could dramatically change the structure and competitive dynamic
of the market for streaming media solutions. In particular, technological
developments or strategic partnerships that accelerate the adoption of "high
bandwidth" access technologies such as cable modems may have a material adverse
effect on the Company's business. Critical issues concerning use of the Internet
and intranets (including security, reliability, cost, ease of use and quality of
service) remain unresolved and may affect the growth of and the degree to which
business is conducted over the Internet and intranets. If the market for the
Company's products and services fails to grow, develops more slowly than
expected or becomes saturated with competing products or services, the Company's
business, financial condition

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and results of operations will be materially adversely affected. See
"-- Availability and Quality of Content" and "-- Online Commerce Security
Risks."

Because electronic commerce over the Internet is relatively new and
evolving, it is difficult to predict whether the Internet will be a viable
commercial marketplace or whether the Internet or intranets will be viable
mediums of communication. Sales of the Company's products will continue to
depend in large part on the emergence of the Internet as a viable commercial
marketplace with a strong and reliable infrastructure. The Internet has
experienced substantial growth in the number of users and amount of traffic, and
there can be no assurance that its technological infrastructure will be able to
support the demands placed on it by continued growth. Delays in the development
or adoption of new technological standards and protocols, or increased
governmental regulation, could also affect the degree of use of the Internet. In
addition, developments in Internet infrastructure such as broadband Internet
access may significantly affect the market for streaming media products. There
can be no assurance that the infrastructure or complementary services necessary
to make the Internet a viable commercial medium will be developed or, if
developed, that the Internet will become a viable commercial medium for products
and services such as those offered by the Company. See "Business -- Industry
Background."

EVOLVING BUSINESS MODEL; DEVELOPMENT OF NEW PRODUCTS AND OTHER REVENUE SOURCES

The Company's success depends in part on its ability to develop new
products in a timely manner and provide new services that achieve rapid and
broad market acceptance. There can be no assurance that the Company can identify
new product and service opportunities successfully and develop and bring to
market new products and services in a timely manner or that any such product
innovations will achieve the market penetration or price stability necessary for
profitability.

As the online medium continues to evolve, the Company plans to leverage its
technology by developing complementary products and services as additional
sources of revenue. Accordingly, the Company may change its business model to
take advantage of new business opportunities, including business areas in which
the Company does not have extensive experience. For example, the Company
recently focused on, and will continue to devote significant resources to, the
development of its electronic commerce business, as well as its
advertising-supported content aggregation business, as extensions of its
business model. There can be no assurance that the Company will develop these or
other business models successfully.

In addition, the Company must continue to innovate and develop new versions
of its software to remain competitive in the market for streaming media
solutions. The Company's product and software development efforts inherently are
difficult to manage and keep on schedule. The Company on occasion has
experienced development delays and related cost overruns, and there can be no
assurance that it will not encounter such problems in the future. In addition,
products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. There can be no
assurance that errors will not occur in current or new products, the result of
which may be adverse publicity, loss of or delay in market acceptance, or claims
by customers against the Company, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.

Expansion of the Company's operations to take advantage of new
opportunities and to sustain a leadership position in the market for streaming
media software may require significant additional expenditures and may strain
the Company's management, financial and operational resources. A lack of market
acceptance of new products or services or the Company's inability to generate
satisfactory revenues from such new products and services to offset their cost
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Strategy."

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company's performance depends substantially on the continued services
of its executive officers and key employees, and in particular on Mr. Glaser,
the Company's Chairman of the Board and

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<PAGE> 12

Chief Executive Officer. The loss of the services of Mr. Glaser or any of its
other executive officers or key employees could have a material adverse effect
on the Company's business, financial condition and results of operations. None
of the Company's executive officers has a contract that guarantees employment.
Other than a $2,000,000 insurance policy on the life of Mr. Glaser, the Company
does not maintain "key person" life insurance policies. Given the Company's
early stage of development, the Company depends on its ability to attract, train
and retain qualified personnel, specifically those with management, technical
and product development skills. Competition for such personnel is intense,
particularly in geographic areas recognized as high technology centers such as
the Pacific Northwest. There can be no assurance that the Company will be able
to attract, train or retain additional highly qualified technical and managerial
personnel in the future, which failure could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management."

CONTROL BY MR. GLASER; ANTITAKEOVER PROVISIONS

Immediately after the closing of the offering, Mr. Glaser, the Company's
founder, will own of record 14,083,419 shares of the outstanding Common Stock,
which will represent approximately 50.9% of the outstanding voting rights
(approximately 50.1% if the Underwriters' over-allotment option is exercised in
full). Following the closing of the offering, Mr. Glaser intends to donate
approximately 700,000 shares of Common Stock to various charitable
organizations. Mr. Glaser will have significant influence over the election of
directors and other matters submitted to a vote of the Company's shareholders.
Control by Mr. Glaser may discourage certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of Common Stock might receive a premium for their shares over
prevailing market prices. See "Principal Shareholders."

The Articles provide that on closing of the offering, a Strategic
Transactions Committee of the Board of Directors shall be created, which
Committee shall be comprised of three directors. Without the prior approval of
such Committee, and subject to certain limited exceptions, the Board of
Directors will not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the Company's voluntary
dissolution or (iv) take any action that has the effect of clauses (i) through
(iii). In connection therewith, the Company entered into an agreement (the
"Strategic Transactions Agreement") providing Mr. Glaser with a direct
contractual right to require the Company to abide by and perform all terms of
the Articles with respect to the Strategic Transactions Committee. The Strategic
Transactions Agreement also provides that so long as Mr. Glaser owns a specified
number of shares, the Company shall use its best efforts to cause him to be
nominated to, elected to, and not removed from, the Board of Directors. In
addition, the Articles provide that on closing of the offering, Mr. Glaser will
serve, or will appoint another officer of the Company to serve, as the Company's
Policy Ombudsman, with the exclusive authority to adopt or change the editorial
policies of the Company as reflected on the Company's Web sites or in other
communications or media in which the Company has a significant editorial or
media voice. The provisions with respect to the authority of the Strategic
Transactions Committee and the Policy Ombudsman may be amended only with the
approval of 90% of the shares entitled to vote on an amendment to the Articles.
The foregoing provisions, as well as those relating to a classified Board of
Directors, the availability of "blank check" preferred stock and certain
provisions of Washington corporate law, the Microsoft agreement and the
shareholder rights plan that the Company intends to adopt prior to closing of
the offering, could have the effect of making it more difficult or more
expensive for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. These provisions may also have
the effect of limiting the price that investors might be willing to pay in the
future for the Common Stock. See "Management" and "Description of Capital
Stock."

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<PAGE> 13

UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS ASSOCIATED WITH LICENSED
THIRD-PARTY TECHNOLOGY

The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreements in every case. Despite such protections, a third
party could, without authorization, copy or otherwise obtain and use the
Company's products or technology, or develop similar technology. There can be no
assurance that the Company's agreements with employees, consultants and others
who participate in product development activities will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or independently developed by
competitors.

The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need to either obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. A significant portion of the Company's
marks begin with the word "Real" (such as RealSystem, RealAudio and RealVideo).
The Company is aware of other companies that use "Real" in their marks alone or
in combination with other words, and the Company does not expect to be able to
prevent all third-party uses of the word "Real" for all goods and services. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S., and effective
patent, copyright, trademark and trade secret protection may not be available in
such jurisdictions. The Company licenses certain of its proprietary rights to
third parties, and there can be no assurance that such licensees will abide by
compliance and quality control guidelines with respect to such proprietary
rights or that such licensees will not take actions that would materially
adversely affect the Company's business, financial condition and results of
operations.

To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, there can be no assurance that the Company's efforts to protect its
intellectual property rights through patent, copyright, trademark and trade
secret laws will be effective to prevent misappropriation of its technology, or
to prevent the development and design by others of products or technologies
similar to or competitive with those developed by the Company, and the Company's
failure or inability to protect its proprietary rights could materially
adversely affect its business, financial condition and results of operations.

The computer software market is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome. In the
future, the Company may need to pursue litigation to enforce and protect its
intellectual property and trade secrets or to defend against a claim of
infringement or invalidity. The Company has been and expects to continue to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of third-party
proprietary rights by the Company and its licensees. The Company attempts to
avoid infringing known

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<PAGE> 14

proprietary rights of third parties in its product development efforts. However,
the Company has not conducted and does not conduct comprehensive patent searches
to determine whether the technology used in its products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation regarding alleged infringement could be
avoided or settled without substantial expense and damage awards. Any claims
against the Company relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing the Company
from distributing certain products. Such claims could materially adversely
affect the Company's business, financial condition and results of operations.

The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in the Company's products, to perform key functions.
There can be no assurance that such third-party technology licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of any of these technologies could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
although the Company is generally indemnified against claims that such
third-party technology infringes the proprietary rights of others, such
indemnification is not always available for all types of intellectual property
rights (for example, patents may be excluded), and in some cases the scope of
such indemnification is limited. Even if the Company receives broad
indemnification, third-party indemnitors are not always well capitalized and may
not be able to indemnify the Company in the event of infringement, resulting in
substantial exposure to the Company. There can be no assurance that infringement
or invalidity claims arising from the incorporation of third-party technology,
and claims for indemnification from the Company's customers resulting from such
claims, will not be asserted or prosecuted against the Company. Such claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product
redevelopment costs and delays, all of which could materially adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."

AVAILABILITY AND QUALITY OF CONTENT

The availability of compelling content for the Internet and intranets is
critical to the continued and increasing use and sales of the Company's
RealSystem software. The willingness of content providers to offer and license
content that appeals to end users and attracts advertisers is an important
factor in promoting the continued and increasing use of the Company's products
and services. There can be no assurance that such content will continue to be
available on acceptable terms, if at all. Historically, the Company has
recognized increased revenues from sales of RealPlayer Plus in months in which
the Company bundled compelling content with its products. If the Company were
unable to bundle compelling content with its products, license desirable content
on favorable terms, or otherwise offer content that is widely accepted by a
broad market audience, the Company's business, financial condition and results
of operations would likely be materially adversely affected. It is possible that
associations that represent collectives of content owners will seek to and
successfully establish minimum royalties or other conditions that apply to the
licensing or distribution of content over the Internet, which may limit the
availability of such content or increase the cost to the Company to use such
content. The imposition of any such mandatory royalty payments may increase the
Company's cost of revenues significantly, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Products and Services -- Media Publishing Products and
Services."

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MANAGEMENT OF GROWTH; ACQUISITION RISKS

The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, technical, operational
and financial resources. None of the Company's executive officers has had senior
management experience in a public company in the position he or she currently
holds. From September 30, 1996 to September 30, 1997, the Company grew from 157
employees to 297 employees, which rapid growth the Company expects to continue
for the foreseeable future. To manage its growth, the Company must implement and
improve its operational and financial systems and expand, train and manage its
workforce. The Company will also need to manage an increasing number of complex
relationships with customers, marketing partners and other third parties. In
addition, the Company may pursue the acquisition of new or complementary
businesses, products or technologies, although it has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments in third parties. Any such future acquisitions would be accompanied
by the risks commonly encountered in acquisitions of companies. Such risks
include, among other things, the difficulty of assimilating the operations and
personnel of the acquired companies, the potential disruption of the Company's
ongoing business, the inability of management to succeed in incorporating
acquired technology and rights into the Company's products, services and media
offerings, additional expense associated with amortization of acquired
intangible assets, the difficulty of maintaining uniform standards, controls,
procedures and policies, and the potential impairment of relationships with
employees, customers and strategic partners.

There can be no assurance that the Company's systems, procedures or
controls will be adequate to support its current or future operations or that
the Company's management will be able to manage the expansion and still achieve
the rapid execution necessary to exploit fully the market for the Company's
products and services. The Company's future operating results will also depend
on its ability to expand its sales and marketing organizations, implement and
manage new distribution channels to penetrate different and broader markets,
including the market for intranet software products, and expand its support
organization accordingly. If the Company were to fail to manage its growth
effectively, its business, financial condition and results of operations would
be materially adversely affected. See "-- Dependence on Key Personnel; Need for
Additional Personnel" and "-- Risk of Capacity Constraints; Reliance on
Internally Developed Systems; System Development Risks."

IMPACT OF EVOLVING STANDARDS

The Company's current streaming media products are based on protocols
designed around certain standards, and the Company's business, financial
condition and results of operations would be materially adversely affected if
any of the Company's competitors were to establish a competing technology as the
de facto industry standard for streaming audio and video transmission. The
Company and Netscape Communications Corporation co-authored the Real Time
Streaming Protocol ("RTSP"), a proposed protocol for standardizing the control
and delivery of streaming media over the Internet. RTSP is a unified standard
for a broad range of media data types and is intended to promote a greater level
of interoperability among various streaming media solutions by providing a
standard way for clients and servers from multiple vendors to stream multimedia
content. RTSP is built on top of a number of other Internet standard protocols
and is complementary with ASF, a file format for streaming media that does not
specify a method of client-server interaction. RTSP provides the client-server
specification necessary to stream ASF files (and many other file types) on the
Internet. There can be no assurance that RTSP will be established as the de
facto industry standard or, if so accepted, that existing competitors and new
entrants would not be able to compete more effectively with the Company's
products. See "-- Competition; Relationship With Microsoft" and
"Business -- Technology."

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS

The satisfactory performance, reliability and availability of the Company's
Web sites, transaction-processing systems and network infrastructure are
critical to the Company's reputation and ability to

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attract and retain customers and maintain adequate customer service. Any system
interruptions that result in the unavailability of the Company's Web sites would
adversely affect the Company's ability to conduct business. The Company's Web
sites are complex and require considerable technical expertise to maintain.
Personnel with technological expertise in this area are in great demand, and
there can be no assurance that the Company can attract, train or retain such
personnel. Many of the software systems used to support the Company's Web sites,
including its electronic commerce operations, were developed internally. These
systems will need to be enhanced over time or replaced with equivalent
commercial products, either of which could entail considerable effort and
expense.

The Company's ability to provide a consistent level of high-quality
customer service depends in part on the efficient and uninterrupted operation of
its computer and communications hardware systems. Substantially all of the
Company's computer and communications hardware is located at a single leased
facility in Seattle, Washington. The Company's systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Because
the Company does not presently have fully redundant systems or a formal disaster
recovery plan, there can be no assurance that a system failure would not have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence of any of the foregoing risks could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Technology."

ONLINE COMMERCE SECURITY RISKS

Online commerce and communications depend to a significant extent on the
ability to conduct secure transmission of confidential information over public
networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication intended
to effect secure transmission of confidential information, such as customer
credit card numbers. There can be no assurance that the Company's efforts in
this area or advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect customer transaction
data. Any compromise of the Company's security could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. In addition, there can be no assurance that credit card
companies will not restrict online credit card transactions in the future for
reasons such as fraudulent credit card transactions or other risks associated
with online commerce transactions, which restrictions could have a material
adverse effect on the Company's business, financial condition and results of
operations. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
security breaches could damage the Company's reputation and expose the Company
to a risk of litigation and possible liability. There can be no assurance that
the Company's security measures will prevent security breaches or that the
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, financial condition and results of operations.

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

For the year ended December 31, 1996 and the nine months ended September
30, 1997, approximately 22% and 27%, respectively, of the Company's total net
revenues were generated from sources outside the U.S. As a result, the Company
is subject to the risks of doing business abroad, including unexpected changes
in regulatory requirements, export and import restrictions, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, potential adverse
tax consequences, exchange rate fluctuations, in-

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creased risks of piracy, limits on the Company's ability to enforce its
intellectual property rights, discontinuity of network infrastructures, limits
on repatriation of funds and political risks that may limit or disrupt
international sales. Such limitations and interruptions could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, operations of the Company's foreign subsidiaries are
translated from local currency into U.S. dollars based on average monthly
exchange rates. The Company currently does not hedge its foreign currency
transactions and is therefore subject to the risk of changes in exchange rates.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales, Marketing and Distribution."

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES

The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses, although certain U.S. export controls and import controls of other
countries, including controls on the use of encryption technologies, may apply
to the Company's products. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted in
the U.S. and abroad with particular applicability to the Internet. It is
possible that governments will enact legislation that may be applicable to the
Company in areas such as content, network security, encryption and the use of
key escrow, data and privacy protection, electronic authentication or "digital"
signatures, illegal and harmful content, access charges and retransmission
activities. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. The majority of such laws were adopted before the
widespread use and commercialization of the Internet and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business or
increase the Company's legal exposure, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company faces potential liability for claims based on the nature and
content of the materials that it distributes over the Internet, including claims
for defamation, negligence or copyright, patent or trademark infringement, which
claims have been brought, and sometimes successfully litigated, against Internet
companies. The Company's general liability insurance may not cover claims of
this type or may not be adequate to indemnify the Company for any liability that
may be imposed. Any liability not covered by insurance or in excess of insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. Although sections of the
Communications Decency Act of 1996 (the "CDA") that, among other things,
proposed to impose criminal penalties on anyone distributing "indecent" material
to minors over the Internet, were held to be unconstitutional by the U.S.
Supreme Court, there can be no assurance that similar laws will not be proposed
and adopted. While the Company does not distribute the types of materials that
the CDA may have deemed illegal, the nature of such similar legislation and the
manner in which it may be interpreted and enforced cannot be fully determined
and, therefore, legislation similar to the CDA could subject the Company to
potential liability, which in turn could have an adverse effect on the Company's
business, financial condition and results of operations. Such laws also could
damage the growth of the Internet generally and decrease the demand for the
Company's products and services, which could adversely affect the Company's
business, financial condition and results of operations. See
"Business -- Governmental Regulation" and "-- Intellectual Property."

VOLATILITY OF STOCK PRICE

The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations or
new products or enhancements by the Company or its competitors, sales by
competitors (including sales to the Company's customers), sales of the Common
Stock into the public market (including sales by members of management),
exercise of, or failure to exercise, warrants to purchase shares of the
Company's common stock

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(including the Series E Warrant), developments in the Company's relationships
with its customers, partners, distributors and suppliers, shortfalls or changes
in revenues, gross margins, earnings or losses or other financial results from
analysts' expectations, regulatory developments, fluctuations in results of
operations and conditions in the Company's market or the markets served by the
Company's customers or the economy could cause the price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization and technology
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. There
can be no assurance that the market price of the Common Stock will not
experience significant fluctuations in the future, including fluctuations
unrelated to the Company's performance. Such fluctuations could materially
adversely affect the market price of the Common Stock.

SALES AND OTHER TAXES

The Company currently does not collect sales or similar taxes with respect
to the sale of products, license of technology, or provision of services in
states and countries other than states in which the Company has offices.
However, one or more states or foreign countries may seek to impose sales or
other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or any foreign
country that the Company should collect sales or other taxes on the sale of
products, license of technology or provision of services, or remit payment of
sales or other taxes for prior periods, could have a material adverse effect on
the Company's business, financial condition and results of operations.

IMPACT OF EXERCISE OF THE SERIES E WARRANT

In connection with Microsoft's investment in the Company in July 1997, the
Company issued the Series E Warrant. If it is not exercised, the Series E
Warrant will terminate on the closing of the offering. If the Series E Warrant
is exercised in full, Microsoft will own of record approximately 20.3% of the
Company's outstanding capital stock immediately after the offering. There can be
no assurance that Microsoft will exercise any or all of the Series E Warrant.
Because the Series E Warrant may be exercised at any time until the closing of
the offering, it is impossible to predict the impact that the exercise thereof
will have on the market price of the Common Stock. See "-- Volatility of Stock
Price" and "Principal Shareholders."

NO SPECIFIC USE OF PROCEEDS

The Company has not designated any specific use for the net proceeds from
the sale of the Common Stock offered hereby. The Company intends to use the net
proceeds primarily for general corporate purposes, including working capital to
fund anticipated operating losses and capital expenditures. Accordingly,
management will have significant flexibility in applying the net proceeds of the
offering. The failure of management to apply such funds effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds."

NO PRIOR MARKET FOR COMMON STOCK

Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock in the future.
There can be no assurance that an active trading market will develop or be
sustained after the offering. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.

BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS

The offering will provide benefits to the current shareholders of the
Company, including the creation of a public market for the Common Stock and the
unrealized gain of approximately $285,459,000 in the value of the total equity
interest of all current shareholders in the Company.

18
<PAGE> 19

POSSIBLE ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK OF SHARES ELIGIBLE FOR
FUTURE SALE AFTER THE OFFERING

On closing of the offering, the Company will have outstanding 31,026,529
shares of Common Stock and Special Common Stock (31,476,529 shares if the
Underwriters' over-allotment option is exercised in full), of which the
3,000,000 shares offered hereby (3,450,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely transferable in the
public market without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), except to the extent such shares
are held by affiliates of the Company as that term is defined in Rule 144 under
the Securities Act ("Affiliates") and except that an aggregate of 121,575 shares
of Common Stock offered for sale, at the initial public offering price, through
a directed share program are subject to agreements prohibiting the sale, offer
or other disposition of such shares for a period of 180 days following the date
of this Prospectus. The remaining 28,026,529 shares of Common Stock and Special
Common Stock (the "Restricted Shares") outstanding on completion of the offering
(assuming no exercise of options after November 14, 1997) were issued by the
Company in reliance on exemptions from registration under the Securities Act,
and public sale thereof is restricted except to the extent they are registered
under the Securities Act or sold in accordance with an exemption from such
registration. Of these Restricted Shares, 3,338,374 are shares of Special Common
Stock that are convertible into the same number of shares of Common Stock on a
bona fide sale to a purchaser who is not an affiliate of the holder. The Company
and certain holders of these Restricted Shares have entered into lock-up
agreements (the "Lock-Up Agreements") with the Underwriters not to sell, offer
to sell or otherwise dispose of any shares of Common Stock owned of record or
beneficially as of the date of this Prospectus, including securities convertible
into or exercisable or exchangeable for shares of Common Stock as of such date,
as well as any shares of Common Stock later acquired by reason of the
conversion, exercise or exchange of such securities, for a period of 180 days
after the date of this Prospectus without the prior written consent of Goldman,
Sachs & Co., on behalf of the Underwriters, except that persons other than
officers, directors and holders of 1% or more of the capital stock of the
Company will be free to sell or otherwise dispose of up to 5,000 shares of
Common Stock to the extent permissible under Rule 144 or Rule 701 under the
Securities Act. On closing of the offering, 27,692,639 of the Restricted Shares
will be subject to restriction pursuant to the Lock-Up Agreements. Of the
remaining 333,890 Restricted Shares, 11,947 shares will be eligible for
immediate public sale under Rule 144(k) under the Securities Act as currently in
effect, 320,943 shares will be eligible for public sale 90 days after the date
of this Prospectus pursuant to Rule 701 under the Securities Act, and the
remaining 1,000 shares will be eligible for public sale subject to compliance
with the holding period and volume and manner of sale restrictions of Rule 144,
unless earlier registered under the Securities Act. At November 14, 1997,
options for 6,840,714 shares of Common Stock were outstanding, of which options
for 1,700,286 shares may be exercised during the 180 days following the date of
this Prospectus and potentially will be eligible for public sale 90 days after
the date of this Prospectus pursuant to Rule 701 under the Securities Act; of
these shares, 1,335,194 will be subject to Lock-Up Agreements. Warrants to
purchase an additional 4,673,608 shares of Common Stock, including the Series E
Warrant to purchase up to 3,709,305 shares of Special Common Stock, will be
exercisable prior to closing of the offering, and the shares issued upon
exercise thereof will be eligible for public sale, subject to compliance with
Rule 144. All of these shares are subject to Lock-Up Agreements. The holders of
an aggregate of 16,390,753 shares of common stock (including shares of Common
Stock and Special Common Stock issuable upon exercise of outstanding warrants)
have the right to require the Company to register their shares for sale under
the Securities Act beginning six months after closing of the offering. Sales of
substantial numbers of shares of Common Stock in the public market following the
offering could have a material adverse effect on the market price for the Common
Stock. See "Shares Eligible for Future Sale."

DONATION OF NET INCOME TO CHARITY

The Company's philosophy includes a commitment to charitable
responsibility. If sustained profitability is achieved, the Company intends to
donate approximately 5% of its annual net income to charitable organizations.
The Company's net income will be reduced by the amount of any such charitable

19
<PAGE> 20

donations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Donation of Net Income to Charity" and
"Business -- Position on Charitable Responsibility."

ABSENCE OF DIVIDENDS

The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."

DILUTION

Investors in Common Stock in the offering will experience immediate and
substantial dilution in the net tangible book value of their shares. At the
initial public offering price of $12.50 per share, dilution to new investors
will be $9.85 per share. Additional dilution will occur upon exercise of
outstanding stock options. See "Dilution."

20
<PAGE> 21

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby at the initial public offering price of $12.50 per
share, after deducting the underwriting discount and estimated offering expenses
payable by the Company, are estimated to be $33,925,000 ($39,156,250 if the
Underwriters' over-allotment option is exercised in full).

The principal purposes of the offering are to increase the Company's
working capital, to create a public market for the Common Stock, to increase the
visibility of the Company in the marketplace and to facilitate future access by
the Company to public equity markets. The Company has no specific plans for the
net proceeds. The Company intends to use the net proceeds primarily for general
corporate purposes, including working capital to fund anticipated operating
losses and capital expenditures. The Company may, when and if the opportunity
arises, use an unspecified portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies. The Company has no present
understandings, commitments or agreements with respect to any material
acquisition or investment in third parties. Pending use of the net proceeds for
the above purposes, the Company intends to invest such funds in
interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operations of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.

21
<PAGE> 22

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the (i) conversion of all
outstanding shares of Series A Common Stock, Series B Common Stock, Series C
Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock into Common Stock and Series E
Preferred Stock into Special Common Stock, in each case on closing of the
offering; (ii) sale by the Company of the 3,000,000 shares of Common Stock
offered hereby at the initial public offering price of $12.50 per share (after
deducting the underwriting discount and estimated expenses of the offering); and
(iii) issuance of 998,058 shares of Common Stock reflecting exercise of
outstanding warrants at an average exercise price of $6.97 per share on the
closing of the offering, except as noted below. See "Use of Proceeds" and Note 7
of Notes to Consolidated Financial Statements. The information set forth below
is unaudited and should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Note payable........................................................ $ 959 $ 959
Redeemable, convertible preferred stock, par value $0.001 per share:
16,206,998 shares authorized; 11,683,390 shares issued and
outstanding, actual; no shares authorized, issued and outstanding,
as adjusted(1).................................................... 49,278 --
Shareholders' equity (deficit):
Convertible preferred stock, par value $0.001 per share:
13,713,439 shares authorized; 13,713,439 issued and
outstanding, actual; no shares authorized, issued and
outstanding, as adjusted(1).................................... 14 --
Preferred stock, undesignated, par value $0.001 per share:
30,079,563 shares authorized; no shares issued and
outstanding(1)................................................. -- --
Common stock, par value $0.001 per share: 300,000,000 shares
authorized; 1,543,292 shares issued and outstanding, actual;
27,599,805 shares issued and outstanding, as adjusted(2)....... 1 28
Special Common Stock, par value $0.001 per share: no shares
authorized; no shares issued and outstanding, actual; 3,338,374
shares issued and outstanding, as adjusted(2).................. -- 3
Additional paid-in capital........................................ 6,755 96,898
Foreign currency translation adjustment........................... (72) (72)
Accumulated deficit............................................... (14,787) (14,787)
-------- --------
Total shareholders' equity (deficit)........................... (8,089) 82,070
-------- --------
Total capitalization...................................... $ 42,148 $ 83,029
======== ========
</TABLE>

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

(1) At September 30, 1997, the Company had 60,000,000 shares of preferred stock
authorized, of which 13,713,439 shares were designated Series A Preferred
Stock, 3,059,701 shares were designated Series B Preferred Stock, 3,004,305
shares were designated Series C Preferred Stock, 3,095,313 shares were
designated Series D Preferred Stock and 7,047,679 shares were designated
Series E Preferred Stock.

(2) Excludes (i) 6,442,714 shares of Common Stock issuable at a weighted average
exercise price of $1.80 per share upon exercise of stock options outstanding
at September 30, 1997, (ii) 4,421,192 shares of Common Stock reserved for
future issuance under the Company's stock option plans, (iii) 1,000,000
shares of Common Stock reserved for issuance under the 1998 Employee Stock
Purchase Plan and (iv) up to 3,709,305 shares of Special Common Stock
(representing additional cash and shareholders' equity of up to $50,001,431)
issuable on exercise of the Series E Warrant. See "Management -- Benefit
Plans," "Certain Transactions -- Microsoft Corporation," "Description of
Capital Stock -- Warrants to Purchase Preferred Stock and Common Stock" and
Note 7 of Notes to Consolidated Financial Statements.

22
<PAGE> 23

DILUTION

The pro forma net tangible book value of the Company at September 30, 1997
is $48,145,000, or $1.72 per share, as adjusted to give effect to the (i)
conversion of all outstanding shares of Series A Common Stock, Series B Common
Stock, Series C Common Stock, Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock into Common Stock
and Series E Preferred Stock into Special Common Stock, in each case on closing
of the offering; (ii) exclusion of up to 3,709,305 shares of Special Common
Stock (representing additional cash and shareholders' equity of up to
$50,001,431 and an increase to tangible book value per share of $1.58) issuable
on exercise of the Series E Warrant; and (iii) issuance of 998,058 shares of
Common Stock, reflecting exercise of outstanding warrants at an average exercise
price of $6.97 per share on closing of the offering. Pro forma net tangible book
value per share represents total tangible assets of the Company less total
liabilities divided by the aggregate number of shares of Common Stock and
Special Common Stock outstanding. After giving effect to the application of the
estimated net proceeds from the sale of 3,000,000 shares of Common Stock offered
by the Company at the initial public offering price of $12.50 per share, the
adjusted pro forma net tangible book value of the Company at September 30, 1997
would have been approximately $82,070,000 or $2.65 per share of Common Stock and
Special Common Stock. This represents an immediate increase in the pro forma net
tangible book value of $0.93 per share of Common Stock and Special Common Stock
to existing shareholders and an immediate dilution of $9.85 per share to new
investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share....................................... $12.50
Pro forma net tangible book value per share at September 30, 1997............. $1.72
Increase per share attributable to new investors.............................. 0.93
-------
Adjusted pro forma net tangible book value per share after the offering....... 2.65
-------
Dilution per share to new investors........................................... $ 9.85
=======
</TABLE>

The following table summarizes on a pro forma basis at September 30, 1997,
after giving effect to the offering, the difference between existing
shareholders and investors in the offering with respect to the number of shares
of Common Stock and Special Common Stock purchased from the Company, the total
consideration paid and the average price paid per share.

<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 27,938,179 90.3% $ 63,767,800 63.0% $ 2.28
New investors................... 3,000,000 9.7 37,500,000 37.0 12.50
---------- ----- ---------- -----
Total.................. 30,938,179 100.0% $ 101,267,800 100.0%
========== ===== ========== =====
</TABLE>

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

(1) The table assumes no exercise of the Underwriters' over-allotment option.
Exercise of the over-allotment option in full would (i) reduce the
proportion of shares held by existing shareholders to 89.0% of the total
number of shares outstanding after the offering and (ii) increase the number
of shares held by investors in the offering to 3,450,000 shares, or 11.0% of
the total number of shares.

23
<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The selected
consolidated financial data as of December 31, 1994, and for the period from
February 9, 1994 (inception) to December 31, 1994, as of and for the years ended
December 31, 1995 and 1996 and as of and for the nine months ended September 30,
1997 are derived from the Consolidated Financial Statements of the Company
audited by KPMG Peat Marwick LLP, independent accountants. The selected
consolidated financial data for the nine months ended September 30, 1996 are
derived from unaudited consolidated financial statements prepared by the Company
on a basis consistent with the Company's audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for such periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 1997.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............. $ -- $ 6,116 $19,595 $67,648
Working capital (deficit)..................................... (49) 5,948 16,893 50,762
Total assets.................................................. 64 7,574 26,468 84,372
Redeemable, convertible preferred stock....................... -- 7,655 23,153 49,278
Shareholders' equity (deficit)................................ 15 (1,111) (3,320) (8,089)
</TABLE>

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

(1) For an explanation of pro forma net loss per share and the number of shares
used to compute pro forma net loss per share, see Note 1 of Notes to
Consolidated Financial Statements.

24
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. From inception through December 31, 1995, the
Company's operating activities related primarily to recruiting personnel,
raising capital, purchasing operating assets, conducting research and
development, building the RealAudio brand and establishing the market for
streaming audio. During 1996, the Company continued to invest heavily in
research and development, marketing, building domestic and international sales
channels and general and administrative infrastructure. In August 1996, the
Company began selling RealPlayer Plus, a premium version of its RealPlayer
product. RealPlayer continues to be available for download free of charge from
the Company's Web sites. In February 1997, the Company released a "beta" version
of its RealVideo product and, in June 1997, it released the commercial version
of RealVideo Version 4.0. In October 1997, the Company released a "beta" version
of its RealSystem Version 5.0, a streaming media solution that includes
RealAudio and RealVideo technology.

The Company has a limited operating history on which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in rapidly evolving markets such as media delivery and electronic commerce over
the Internet and intranets. To achieve and sustain profitability, the Company
must, among other things, establish widespread market acceptance of its existing
products and services, successfully develop new products and services, respond
quickly and effectively to competitive, market and technological developments,
expand sales and marketing operations, broaden customer support capabilities,
control expenses and continue to attract, train and retain qualified personnel.
There can be no assurance that the Company will achieve or sustain
profitability.

The Company has incurred significant losses since its inception, and as of
September 30, 1997 had an accumulated deficit of $14,787,000. The Company
believes that its success will depend largely on its ability to extend its
technological leadership and continue to build its brand position. Accordingly,
the Company intends to invest heavily in research and development and sales and
marketing. The Company expects to continue to incur substantial operating losses
for the foreseeable future. In view of the rapidly evolving nature of the
Company's business and its limited operating history, the Company believes that
period-to-period comparisons of its revenues and operating results, including
its gross profit margin and operating expenses as a percentage of total net
revenues, are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has experienced
significant percentage growth in total net revenues, it does not believe that
its historical growth rates are sustainable or indicative of future growth. The
Company has used, and expects to continue to use, price promotions to increase
trial, purchase and use of its products, as well as to increase overall
recognition of its brands.

25
<PAGE> 26

The effect of such promotions on revenues in a particular period may be
significant and extremely difficult to forecast.

The following table sets forth certain financial data for the periods
indicated as a percentage of total net revenues:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues:
Software license fees............ 98.4% 84.8% 87.2% 78.3%
Advertising...................... -- 7.2 5.1 6.9
Service revenues................. 1.6 8.0 7.7 14.8
----- ----- ----- -----
Total net revenues....... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license fees............ 1.6 9.6 5.7 9.3
Advertising...................... -- 2.0 2.2 2.6
Service revenues................. 1.8 4.0 3.8 8.7
----- ----- ----- -----
Total cost of revenues... 3.4 15.6 11.7 20.6
----- ----- ----- -----
Gross profit.................. 96.6 84.4 88.3 79.4
Operating expenses:
Research and development......... 76.2 34.3 37.1 40.7
Selling and marketing............ 67.2 53.8 53.1 62.6
General and administrative....... 41.2 24.9 28.0 19.7
----- ----- ----- -----
Total operating
expenses............... 184.6 113.0 118.2 123.0
----- ----- ----- -----
Operating loss................ (88.0) (28.6) (29.9) (43.6)
Other income (expense):
Interest income, net............. 5.2 2.1 2.3 5.4
Other expense.................... -- (0.5) (0.4) (0.1)
----- ----- ----- -----
Net other income................... 5.2 1.6 1.9 5.3
----- ----- ----- -----
Net loss........................... (82.8)% (27.0)% (28.0)% (38.3)%
===== ===== ===== =====
</TABLE>

RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997

REVENUES

The Company generates revenues primarily from three sources: software
license fees, advertising and services. Software license fees are recognized
upon delivery, net of allowances for estimated returns, provided that no
significant obligations of the Company remain and collection of the resulting
receivable is deemed probable. Revenues from software license agreements with
original equipment manufacturers ("OEMs") are recognized when the OEM delivers
its product incorporating the Company's software to the end user. In the case of
prepayments from an OEM, the Company generally recognizes revenues based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue generally is recognized on the
straight-line method over the term of the contract. The Company recognizes
revenues from software license agreements with value-added resellers ("VARs"),
provided the following conditions are met: the software product has been
delivered to the VAR, the fee to the Company is fixed or determinable, and
collectibility is probable. Advertising revenues are recognized over the period
in which the advertisement is displayed on one of the Company's Web pages. The
Company guarantees to certain advertising customers a minimum number of page
impressions to be delivered to users of its Web sites for a particular period.
To the extent minimum guaranteed page impression deliveries are not met, the
Company defers recognition of the corresponding advertising revenues until

26
<PAGE> 27

guaranteed page impression delivery levels are achieved. Service revenues
include payments under support and upgrade contracts, commissions from
electronic sales of third-party products, and fees from consulting, content
hosting and user conferences. Support and upgrade revenues are recognized
ratably over the term of the contract, which typically is 12 months. Payments
for support and upgrade contracts generally are made in advance and are
nonrefundable. Other service revenues are recognized when the service is
performed.

Software License Fees. Software license fees were $7,213,000 and
$17,550,000 for the nine months ended September 30, 1996 and 1997, respectively.
The increase was due primarily to a greater volume of products sold as a result
of growing market acceptance of the Company's server and player products,
including the introduction of RealPlayer Plus in August 1996 and RealVideo in
February 1997, successful product promotions and diversification of the
Company's sales channels, including electronic distribution. Server product
sales were $5,799,000 and $10,379,000 for the nine months ended September 30,
1996 and 1997, respectively. In June 1997, the Company entered into a
$30,000,000 license agreement with Microsoft. The agreement requires the Company
to provide Microsoft with engineering consultation services, certain error
corrections and certain technical support over a defined term. The Company
recognizes revenue from the agreement over the three-year term of the Company's
ongoing obligations. Included in server product sales for the nine months ended
September 30, 1997 was $2,417,000 related to the Microsoft license agreement.
Player product sales were $1,414,000 and $7,171,000 over the same respective
periods. The Company began selling products electronically from its Web site in
August 1996. Electronic sales of both server and player products for the nine
months ended September 30, 1996 and 1997 were $650,000 and $6,038,000,
respectively, or 9% and 34%, respectively, of software license fees in the
period. The Company has used price promotions to increase the trial, purchase
and use of its software products. In February 1997, the Company reduced the
prices of its server products. In July 1997, the Company made its Basic Server
available for download free of charge.

Advertising Revenues. Advertising revenues were $426,000 and $1,557,000
for the nine months ended September 30, 1996 and 1997, respectively. The Company
began selling advertising space on its Web sites in March 1996. Increased
revenues in 1997 were due in part to a full period of advertising sales and the
Company's success in attracting a greater number of advertisers.

Service Revenues. Service revenues were $635,000 and $3,310,000 for the
nine months ended September 30, 1996 and 1997, respectively. Revenues from
upgrade and support contracts were $630,000 and $2,453,000 for the nine months
ended September 30, 1996 and 1997, respectively. This increase was primarily due
to a greater installed base of the Company's products. Service revenues for the
nine months ended September 30, 1997 also included fees of $498,000 related to
the Company's first RealMedia conference.

International Revenues. International revenues were 21% and 27% of total
net revenues for the nine months ended September 30, 1996 and 1997,
respectively. The increase in international revenues was due in part to the
creation of the Company's three foreign subsidiaries. The Company incorporated
its French and Japanese subsidiaries in November 1996 and its U.K. subsidiary in
February 1997. Substantially all of the Company's international revenues were
generated in Europe and Asia. The functional currency of the Company's foreign
subsidiaries is the local currency in the country in which the subsidiary is
incorporated. Operations of the Company's foreign subsidiaries are translated
from local currency into U.S. dollars based on average monthly exchange rates.
The Company currently does not hedge its foreign currency transactions and
therefore is subject to the risk of changes in exchange rates. The Company
expects that international revenues will continue to increase. The cost
structures of both domestic and international revenues are substantially the
same.

COST OF REVENUES

Cost of Software License Fees. Cost of software license fees includes cost
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology and fees paid to third-

27
<PAGE> 28

party vendors for order fulfillment. Cost of software license fees was $470,000
and $2,080,000 for the nine months ended September 30, 1996 and 1997,
respectively, and 7% and 12%, respectively, of software license fees. The
increase in absolute dollars was due primarily to higher sales volume. The
increase in percentage terms was due to a shift in product mix toward
lower-margin player products, a greater percentage of sales through indirect
channels, and the utilization of a third-party order fulfillment agency.

Cost of Advertising Revenues. Cost of advertising revenues includes
personnel associated with content creation and bandwidth expenses related to the
Company's Web sites. Cost of advertising revenues was $187,000 and $572,000 for
the nine months ended September 30, 1996 and 1997, respectively, and 44% and
37%, respectively, of advertising revenues. The increase in absolute dollars was
due primarily to increased head count associated with content creation and
higher bandwidth expenses. The decrease in percentage terms was due to revenues
growing at a faster rate than expenses.

Cost of Service Revenues. Cost of service revenues includes the cost of
in-house and contract personnel providing services, bandwidth expenses for
hosting services and user conference expenses. Cost of service revenues was
$312,000 and $1,957,000 for the nine months ended September 30, 1996 and 1997,
respectively, and 49% and 59%, respectively, of service revenues. The increase
in absolute dollars was primarily due to increased staff and other costs
associated with providing these services to a greater number of customers, and,
in March 1997, the Company incurred $1,000,000 of costs associated with its
RealMedia conference. No such costs were incurred in the comparable period in
1996. Excluding the effects of the RealMedia conference, cost of service
revenues was 49% and 34% of service revenues for the nine months ended September
30, 1996 and 1997, respectively. This decrease was attributable primarily to
better utilization of service personnel associated with an increased customer
base.

Gross margins may be affected by the mix of distribution channels used by
the Company, the mix of products sold, the mix of product revenues versus
service revenues and the mix of international versus U.S. revenues. The Company
typically realizes higher gross margins on direct channel sales relative to
indirect channels and higher gross margins on software license fees relative to
service revenues. If sales through indirect channels increase as a percentage of
total net revenues, or if, as the Company anticipates, service revenues increase
as a percentage of total net revenues, the Company's gross margins will be
adversely affected.

OPERATING EXPENSES

Research and Development. Research and development expenses consist
primarily of salaries and consulting fees to support product development and
costs of technology acquired from third parties to incorporate into products
currently under development. To date, all research and development costs have
been expensed as incurred because technological feasibility of the Company's
products is established upon completion of a working model. To date, costs
incurred between completion of a working model and general release of products
have been insignificant. The Company believes that continued investment in
research and development is critical to attaining its strategic objectives and,
as a result, expects research and development expenses to increase
significantly. Research and development expenses were $3,073,000 and $9,130,000
for the nine months ended September 30, 1996 and 1997, respectively, and 37% and
41%, respectively, of total net revenues. The increase was due primarily to
increases in internal development personnel, travel, and consulting expenses. In
addition, during the nine months ended September 30, 1997, the Company expensed
approximately $998,000 related to the cost of technology purchased from third
parties. The Company expects to incur similar types of expenditures in future
periods. Research and development expenses incurred for the nine months ended
September 30, 1997 were primarily related to enhancements made to existing
products and development of new technology and products.

Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions, consulting fees paid, trade show expenses, advertising
and cost of marketing collateral. The Company

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<PAGE> 29

intends to continue its aggressive branding and marketing campaign and therefore
expects selling and marketing expenses to increase significantly. Selling and
marketing expenses were $4,389,000 and $14,024,000 for the nine months ended
September 30, 1996 and 1997, respectively, and 53% and 63%, respectively, of
total net revenues. The increases were due in large part to growth in sales
personnel, commissions and costs related to the continued development and
implementation of the Company's branding and marketing campaigns. During the
nine months ended September 30, 1997, the Company also incurred approximately
$694,000 in marketing expenses related to the launch of RealVideo.

General and Administrative. General and administrative expenses consist
primarily of salaries and fees for professional services. The Company expects
general and administrative expenses to increase as the Company expands its
staff, incurs additional costs related to growth of its business, and becomes a
publicly traded company. General and administrative expenses were $2,318,000 and
$4,413,000 for the nine months ended September 30, 1996 and 1997, respectively,
and 28% and 20%, respectively, of total net revenues. The increase in absolute
dollars was primarily a result of increased personnel and facility expenses
necessary to support the Company's growth. The decrease in percentage terms was
a result of revenues growing at a faster rate than expenses.

NET OTHER INCOME

Net other income consists primarily of earnings on the Company's cash and
cash equivalents and short-term investments. Net other income was $160,000 and
$1,184,000 for the nine months ended September 30, 1996 and 1997, respectively.
The increase was due primarily to interest income resulting from additional
invested cash and cash equivalents and short-term investments.

INCOME TAXES

The Company had a net operating loss for each period from inception through
December 31, 1996. As of September 30, 1997, the Company anticipates fully
utilizing its net operating loss and other credit carryforwards by December 31,
1997 as a result of taxable income generated from a license agreement with
Microsoft. For financial reporting purposes, those license fees are recognized
over the three-year term of the Company's ongoing obligations. As a result, the
Company has recognized deferred tax assets to the extent of its accrued income
taxes. See Note 4 of Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996

REVENUES

Software License Fees. Software license fees were $1,782,000 and
$11,876,000 for 1995 and 1996, respectively. The Company first began recognizing
revenues from software license fees in July 1995. The increase in software
license fees in 1996 was due primarily to a greater volume of products sold as a
result of a full period of sales, growing market acceptance of the Company's
products, the introduction of RealPlayer Plus in August 1996 and diversification
of sales channels, including electronic distribution. All of the Company's
software license fees in 1995 were from the sale of its server software. In
1996, server product sales were $8,188,000 and player product sales were
$3,688,000.

Advertising Revenues. Advertising revenues were $1,016,000 for 1996. The
Company began selling advertising space on its Web sites in March 1996, and, as
a result, no advertising revenues were generated in 1995.

Service Revenues. Service revenues were $30,000 and $1,120,000 for 1995
and 1996, respectively. The increase in service revenues in 1996 was due
primarily to additional support and upgrade contracts associated with a larger
installed base of the Company's products. Consulting, content hosting and user
conference revenues were not significant in either period.

International Revenues. International revenues as a percentage of total
net revenues were 17% and 22% for 1995 and 1996, respectively. Substantially all
international revenues were generated in Europe and Asia.

29
<PAGE> 30

COST OF REVENUES

Cost of Software License Fees. Cost of software license fees was $29,000
and $1,343,000 for 1995 and 1996, respectively, and 2% and 11%, respectively, of
software license fees. The increase in absolute dollars was primarily due to
higher sales volume. The increase in percentage terms was due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels, and the utilization of a third-party order
fulfillment agency.

Cost of Advertising Revenues. Cost of advertising revenues was $288,000
for 1996, and was 28% of advertising revenues. Since the Company did not begin
selling advertising until 1996, all content creation costs in 1995 were charged
to research and development and selling and marketing expenses.

Cost of Service Revenues. Cost of service revenues was $33,000 and
$554,000 for 1995 and 1996, respectively, and was 110% and 49%, respectively, of
service revenues. The increase in absolute dollars was due primarily to
increased staff and other costs associated with providing these services to a
greater number of customers. The decrease in percentage terms was due to better
utilization of service personnel associated with an increased customer base.

OPERATING EXPENSES

Research and Development. Research and development expenses were
$1,380,000 and $4,812,000 for 1995 and 1996, respectively, and 76% and 34%,
respectively, of total net revenues. The increase in absolute dollars was
attributable primarily to increased personnel and related costs associated with
enhancement of existing products and development of new products. The decrease
in percentage terms was a result of revenues growing at a faster rate than
research and development expenses.

Selling and Marketing. Selling and marketing expenses were $1,218,000 and
$7,540,000 for 1995 and 1996, respectively, and 67% and 54%, respectively, of
total net revenues. The increase in absolute dollars was due primarily to
increased salaries, direct sales personnel, commissions, costs associated with
international expansion and promotional expenses. The decrease in percentage
terms was a result of revenues growing at a faster rate than selling and
marketing expenses.

General and Administrative. General and administrative expenses were
$747,000 and $3,491,000 for 1995 and 1996, respectively, and 41% and 25%,
respectively of total net revenues. The increase in absolute dollars was
primarily a result of increased salaries and related expenses associated with
the hiring of additional personnel and increased facilities expenses. The
decrease in percentage terms was a result of revenues growing at a faster rate
than general and administrative expenses.

NET OTHER INCOME

Net other income was $94,000 and $227,000 for 1995 and 1996, respectively.
The increase was due primarily to interest income resulting from higher invested
cash and cash equivalents and short-term investments.

INCOME TAXES

As of December 31, 1996, the Company had approximately $2,802,000 of net
operating loss and other credit carryforwards for federal income tax purposes
that will expire in 2010 and 2011 if not utilized. See Note 4 of Notes to
Consolidated Financial Statements.

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<PAGE> 31

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly statement of
operations data for the five quarters ended September 30, 1997. In the opinion
of management, this information has been prepared substantially on the same
basis as the audited Consolidated Financial Statements appearing elsewhere in
this Prospectus, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited quarterly results of operations. The quarterly data should
be read in conjunction with the audited Consolidated Financial Statements of the
Company and the Notes thereto appearing elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1997 1997 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues....................... $ 4,030 $ 5,738 $ 6,356 $ 7,010 $ 9,051
Total cost of revenues................... 575 1,216 2,021 1,033 1,555
---- ------ ------- ------- -------
Gross profit........................ 3,455 4,522 4,335 5,977 7,496
Operating expenses:
Research and development................ 1,334 1,739 2,725 2,738 3,667
Selling and marketing................... 2,125 3,151 4,350 4,811 4,863
General and administrative.............. 906 1,173 1,171 1,325 1,917
---- ------ ------- ------- -------
Total operating expenses....... 4,365 6,063 8,246 8,874 10,447
---- ------ ------- ------- -------
Operating loss...................... (910) (1,541) (3,911) (2,897) (2,951)
Net other income......................... 43 67 205 231 748
---- ------ ------- ------- -------
Net loss................................. $ (867) $(1,474) $(3,706) $(2,666) $(2,203)
==== ====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1997 1997 1997
--------- -------- --------- -------- ---------
(AS A PERCENTAGE OF TOTAL NET REVENUES)
<S> <C> <C> <C> <C> <C>
Total net revenues....................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Total cost of revenues................... 14.3 21.2 31.8 14.7 17.2
----- ----- ----- ----- -----
Gross profit........................ 85.7 78.8 68.2 85.3 82.8
Operating expenses:
Research and development............... 33.1 30.3 42.9 39.1 40.5
Selling and marketing.................. 52.7 54.9 68.4 68.6 53.7
General and administrative............. 22.5 20.5 18.4 18.9 21.2
----- ----- ----- ----- -----
Total operating expenses....... 108.3 105.7 129.7 126.6 115.4
----- ----- ----- ----- -----
Operating loss...................... (22.6) (26.9) (61.5) (41.3) (32.6)
Net other income......................... 1.1 1.2 3.2 3.3 8.3
----- ----- ----- ----- -----
Net loss................................. (21.5)% (25.7)% (58.3)% (38.0)% (24.3)%
===== ===== ===== ===== =====
</TABLE>

The Company's total net revenues have increased in all quarters presented
as a result of increasing market acceptance of the Company's products,
diversification of the Company's sales channels, including electronic
distribution, expansion of the Company's direct sales efforts and continued
increases in its installed customer base. In the third quarter of 1996, the
Company released RealPlayer Plus. During the first quarter of 1997, the Company
released a "beta" version of RealVideo and began recognizing revenues on the
commercial release of RealVideo in the second quarter of 1997. In the third
quarter of 1997, the Company recognized $2,417,000 related to a license
agreement with Microsoft. The Company recognizes revenues from the agreement
over the three-year term of the Company's ongoing obligations. The increases in
total cost of revenues as a percentage of total net revenues in the third and
fourth

31
<PAGE> 32

quarters of 1996 were due to a shift in product mix toward RealPlayer Plus
products, a greater percentage of sales through indirect channels and the
utilization of a third-party order fulfillment agency. In the first quarter of
1997, the Company held its first RealMedia conference and recognized revenues
and cost of revenues of $498,000 and $1,000,000, respectively, which increased
total cost of revenues as a percentage of total net revenues.

Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting the Company's products, as well
as building the Company's market presence. Research and development expenses
have increased as a result of continued enhancements to existing products and
development of new products. Selling and marketing expenses increased as a
result of increased sales personnel and commissions. In the first and second
quarters of 1997, the Company increased marketing activities associated with the
release of RealVideo. The trend of increasing general and administrative
expenses is due primarily to additional personnel and facilities costs. In the
third quarter of 1997, general and administrative expenses increased due in part
to costs incurred in responding to the Department of Justice subpoena.

FACTORS AFFECTING OPERATING RESULTS

As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
accurately its revenues. The Company's expense levels are based in part on its
expectations with regard to future revenues. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
As a result, any significant shortfall in demand for the Company's products and
services relative to the Company's expectations would have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Further, as a strategic response to changes in the competitive
environment, the Company may from time to time implement pricing, service or
marketing changes that could have a material adverse effect on its business,
financial condition and results of operations. See "Risk
Factors -- Unpredictability of Future Revenues; Potential Fluctuation in
Quarterly Operating Results," "-- Competition; Relationship With Microsoft" and
"Business -- Competition."

The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control, including (i) demand for the Company's products
and services, (ii) introduction or enhancement of products and services by the
Company and its competitors, (iii) market acceptance of new products and
services of the Company and its competitors, (iv) price reductions by the
Company or its competitors or changes in how products and services are priced
(such as the Company's recent decision to offer for download free of charge a
version of its Basic Server, which previously sold for $295 to $995), (v) the
mix of products and services sold by the Company and its competitors, (vi) the
mix of distribution channels through which the Company's products are licensed
and sold, (vii) the mix of international and U.S. revenues, (viii) costs of
litigation and intellectual property protection, (ix) growth in the use of the
Internet, (x) the Company's ability to attract, train and retain qualified
personnel, (xi) the amount and timing of operating costs and capital
expenditures related to expansion of the Company's business, operations and
infrastructure, (xii) technical difficulties with respect to the use of the
Company's products, (xiii) governmental regulations and (xiv) general economic
conditions and economic conditions specifically related to the Internet. It
often is difficult to forecast the effect such factors, or any combination
thereof, would have on the Company's results of operations for any given fiscal
quarter. The Company has used, and expects to continue to use, price promotions
to increase trial, purchase and use of its products, as well as to increase the
overall recognition of its brands. The effect of such promotions on revenues in
a particular period may be significant and extremely difficult to forecast.
Based on the foregoing, the Company believes that its quarterly revenues,
expenses and operating results could vary significantly in the future, and that
period-to-period comparisons should not be relied upon as indications of future
performance.

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<PAGE> 33

significant commitment of capital resources. Therefore, any downturn in the
economy or in the business of potential customers could have a material adverse
effect on the Company's revenues and quarterly results of operations.

Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse affect on the
trading price of the Common Stock.

DONATION OF NET INCOME TO CHARITY

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations primarily
through private sales of preferred stock and common stock and contributions of
capital by the Company's founder. Net proceeds from these sales and
contributions totaled $55,480,000.

Net cash used in operating activities was $1,240,000 and $635,000 in 1995
and 1996, respectively. Cash used in operating activities in 1995 was due
primarily to a net loss of $1,501,000. For 1996, cash used in operating
activities resulted primarily from a net loss of $3,789,000 and an increase of
$2,608,000 in trade accounts receivable, largely offset by increases of
$2,267,000 in deferred revenue, $2,220,000 in accounts payable and $822,000 in
other accrued expenses. Net cash provided by operating activities was
$21,870,000 for the nine months ended September 30, 1997. This was primarily
attributable to a net loss of $8,575,000, an increase of $1,079,000 in trade
accounts receivable, and an increase of $29,406,000 in deferred revenue related
primarily to the Microsoft license agreement. See "Recent Developments."

Net cash used in investing activities of $3,660,000, $4,837,000, and
$22,785,000 for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997, respectively, was primarily related to purchases of
property and equipment and increases in short-term investments.

Cash provided by financing activities of $8,029,000 in 1995 consisted
primarily of $7,405,000 in net proceeds from the issuance of Series B and C
Preferred Stock and a capital contribution by the founder of $372,000. Cash
provided by financing activities of $17,091,000 in 1996 was primarily from net
proceeds of $17,047,000 from the issuance of Series D Preferred Stock. Cash
flows provided by financing activities

33
<PAGE> 34

of $30,980,000 for the nine months ended September 30, 1997 were primarily from
net proceeds of $29,869,000 from the issuance of Series E Preferred Stock and
$991,000 of proceeds from the issuance of a note payable. In connection with the
Series E Preferred Stock financing, the Company issued a warrant to purchase up
to 3,709,305 shares of Series E Preferred Stock at an exercise price of $13.48
per share.

As of September 30, 1997, the Company had $44,751,000 of cash and cash
equivalents and $22,897,000 in short-term investments. As of September 30, 1997,
the Company's principal commitments consisted of obligations outstanding under
operating leases and a $959,000 note payable. The note is denominated in
Japanese yen and bears interest at a rate not to exceed the Japanese Short Term
Prime Rate (1.63% at September 30, 1997). Interest on the note is payable
monthly, and the principal is due in May 2000. The terms of the note contain no
restrictions or covenants. The note is secured by the Company's shares in its
Japanese joint venture. See "Certain Transactions -- Japanese Joint Venture."
Although the Company has no material commitments for capital expenditures,
management anticipates a substantial increase in its capital expenditures and
lease commitments consistent with anticipated growth in operations,
infrastructure and personnel.

The Company conducts its operations using primarily three currencies: the
United States dollar, the Japanese yen, and the British pound. Historically,
neither fluctuations in foreign exchange rates nor changes in foreign economic
conditions has had a significant impact on the Company's financial condition or
results of operations. As a result, the Company currently does not hedge its
foreign currency transactions and is therefore subject to the risk of exchange
rates. The Company monitors its foreign exchange exposure and in the future may
choose to hedge foreign currency transactions, enter into currency contracts, or
take other such actions as deemed necessary to mitigate exchange rate risks. The
Company is unaware of any existing foreign government policies that would
significantly impact the Company's operations.

In August 1997, the Department of Justice commenced an investigation into
horizontal merger activities within the streaming media industry. The Department
of Justice served several companies, including the Company and Microsoft, with
subpoenas to produce certain documents. As a result of the investigation, it is
possible that the Department of Justice will require certain actions by the
Company, Microsoft or other companies in the streaming media industry that could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Department of Justice could decide to take
actions that could materially and adversely affect the Company's current
relationship with Microsoft or other companies, affect Microsoft's obligations
with respect to the distribution of the Company's products, result in certain
penalties, require the Company to refund all or a portion of the license fee
paid by Microsoft to the Company, require Microsoft to limit or divest certain
of its acquisitions or investments in the streaming media industry, including
its investment in the Company, and, if Microsoft were forced to rescind its
agreement with the Company, place the Company at a significant competitive
disadvantage within the industry. There can be no assurance that any such
outcome would not have an immediate material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Department of Justice Subpoena."

Since its inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of the Company's cash resources.
The Company believes that the net proceeds from the offering, together with its
current cash, cash equivalents and short-term investments, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures for
at least the next 12 months.

RECENT DEVELOPMENTS

In June 1997, the Company entered into the license agreement with
Microsoft. The terms of the agreement provide that a $30,000,000 software
license fee will be paid to the Company in two installments. The first
installment of $20,000,000 was due within 30 days of the signing of the software
license agreement, and the remaining $10,000,000 is due within 30 days of the
earlier of (i) the

34
<PAGE> 35

Company's completion of six "man months" of consulting services and (ii) six
months after delivery of the specified source code to Microsoft. In July 1997,
the Company believes it delivered the Standard Code and subsequently received
from Microsoft a payment of $30,000,000 representing Microsoft's payment of both
installments under the agreement although payment of the second installment of
$10,000,000 was not due at that time. In October 1997, Microsoft requested that
the Company return the $10,000,000 installment that Microsoft had paid prior to
its due date. Although not legally required to do so, the Company refunded the
$10,000,000 to Microsoft. The Company expects Microsoft to make this second
installment payment in accordance with the terms of the agreement.

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("Statement 128"). Statement 128 establishes standards for the computation,
presentation and disclosure of earnings per share ("EPS"), replacing the
presentation of the currently required Primary EPS with a presentation of Basic
EPS. It also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for entities with complex capital structures. Basic EPS
is based on the weighted average number of common shares outstanding during the
period. Diluted EPS is based on the potential dilution that would occur on
exercise or conversion of securities into common stock using the treasury stock
method. Statement 128 is effective for financial statements for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of Statement 128 to be material to its reported EPS amounts.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement
130, which is effective for fiscal years beginning after December 15, 1997,
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company anticipates that implementing the
provisions of Statement 130 will not have a significant impact on the Company's
existing disclosures. The Company has not determined the manner in which it will
present the information required by Statement 130.

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company anticipates that implementing the provisions of Statement 131 will
not have a significant impact on the Company's existing disclosures. The Company
has not determined the manner in which it will present the information required
by Statement 131.

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<PAGE> 36

BUSINESS

THE COMPANY

RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. The Company's products and services include its RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites. As the Web continues to evolve as a mass communications medium, the
Company believes that certain types of content currently delivered through
traditional media, such as radio and television, increasingly will be delivered
over the Internet. The Company believes that streaming media technology is
essential to this evolution because it enables a more compelling user
experience, allowing the Internet to compete more effectively with traditional
media for audience share.

From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 28 million copies of its
RealPlayer software have been downloaded electronically. Over 200,000 copies of
its premium client product, RealPlayer Plus, have been sold electronically in
the product's first year of distribution. In addition, the Company believes that
more than 100,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. The Company's customers, including
ABC Radio Net, Bloomberg L.P., The Boeing Company, Dow Jones & Company, Inc.
("Dow Jones"), NBC Desktop, The News Corporation Limited ("News Corp."),
Starwave Corporation ("Starwave") and 3Com Corporation ("3Com"), use its
software products and services to deliver a broad range of streaming audio and
video news, sports, entertainment and corporate information over the Internet
and intranets.

INDUSTRY BACKGROUND

The Internet has grown rapidly in recent years, driven by the development
of the Web and graphically intuitive Web browsers, the proliferation of
multimedia PCs, increasingly robust network architectures and the emergence of
compelling Web-based content and commerce applications. The broad acceptance of
the standard Internet Protocol ("IP") has also led to the emergence of intranets
and the development of a wide range of non-PC devices that allow users to access
the Internet and intranets. International Data Corporation ("IDC") estimates
that the number of Web users worldwide will continue to grow rapidly from 28
million in 1996 to 175 million in 2001. In addition, users are spending an
increasing amount of time on the Web. A recent study by the Georgia Institute of
Technology indicates that 51% of total Internet users access the Internet for 10
or more hours per week as of April 1997, compared with 29% as of April 1995.

The development of the Web has contributed to the transition of the
Internet from a text and e-mail-focused data-sharing network to a richer
environment, capable of delivering graphical and interactive content. The Web
has a number of features unavailable in traditional media and commerce channels
that attract online users, content providers, advertisers and merchants. The
relatively low barriers to publishing content on the Web have led to an
explosion of Web-based content and the development of a large and diverse group
of Web-based communication channels. As an interactive, searchable,
user-controlled medium, the Web provides a highly engaging user experience and
allows users to access this broad range of online content on demand and at their
convenience. The narrow-casting capabilities of the Web enable content providers
and advertisers to establish customized, personalized interactions with
consumers.

The development of streaming media technology has further enhanced the
graphical capabilities of the Internet and intranets. Streaming technology
enables the transmission and playback of continuous "streams" of multimedia
content, such as audio and video, over the Internet and intranets, and
represents a significant advancement over earlier technologies. Prior to the
advent of streaming technology, users could not initiate the playback of audio
or video clips until such content was

36
<PAGE> 37

downloaded in its entirety, resulting in significant waiting times. As a result,
live broadcasts of audio and video content over the Internet or intranets were
not possible.

MARKET OPPORTUNITY

The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium and has accelerated the
adoption of corporate intranets as a means to improve communications within
enterprises. Many businesses and content providers now offer interactive audio,
video and other multimedia content as a means of enriching and differentiating
their Web sites. The Company believes that more than 100,000 hours per week of
live audio and video content are broadcast over the Web using RealAudio and
RealVideo technology, with a substantially greater amount of recorded media
available on demand.

These enhanced multimedia capabilities, combined with the unique
interactive properties of the Internet, are attracting a large and expanding
audience, a growing number of advertisers and an increasing breadth and depth of
content and online commercial applications. The market for Web advertising
revenues is expected to grow from $180 million in 1996 to $2.9 billion in 2000,
according to IDC. Overall usage growth, together with the Internet's unique
interactive properties, has also led to a rapidly evolving online commerce
opportunity. IDC estimates that worldwide revenues generated by Web-based
commerce will grow from $2.6 billion in 1996 to $223 billion in 2001. As a
result of the growth in business opportunities on the Internet, the market for
software solutions that focus on the Internet and intranets is also growing
rapidly. IDC estimates that Internet-focused software revenues will grow from
$359 million in 1995 to $4.3 billion in 2000.

As the Web continues to evolve as a mass communications medium, the Company
believes that certain types of content currently delivered through traditional
media, such as radio and television, increasingly will be delivered over the
Internet. The Company believes that streaming media technology is essential to
this evolution because it provides a more compelling user experience, allowing
the Internet to compete more effectively with traditional media for audience
share.

The Company believes that to successfully capitalize on this opportunity,
streaming media providers must address the following challenges:

DELIVER COMPELLING STREAMING MEDIA CONTENT IN BANDWIDTH CONSTRAINED
ENVIRONMENTS. The Internet was designed to transmit discrete packets of data and
is not inherently well suited to the delivery of continuous streams of
multimedia data without additional software. In addition, bandwidth is limited
in Internet and intranet environments, posing significant technological
challenges for delivery of high-quality streaming audio and video content.

ENABLE BROAD-BASED ACCESS TO STREAMING MEDIA TECHNOLOGY. Online content
providers, advertisers and merchants must make a significant investment to
create and deliver streaming media content and need to reach a sufficiently
large audience to generate an adequate return on such investment. As a result,
content providers must consider the popularity and quality of a particular
streaming media solution before committing resources to delivering content using
that solution.

DRIVE CONSUMER USAGE. The Company believes that consumer interest in
streaming media content is driven in large part by the ability to locate and
experience such content easily. As a result, the Company believes that the
development of well-marketed, compelling Web sites that aggregate streaming
media content is central to the continued growth of multimedia content on the
Web.

The Company believes that a substantial opportunity exists to provide
software solutions and content aggregation and delivery services that address
these challenges and support the development of large and growing advertising
and electronic commerce markets on the Web.

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THE REALNETWORKS SOLUTION

RealNetworks enables and promotes the transmission of real-time streaming
media content over the Internet and intranets. The Company provides branded
streaming media software products and services, including its RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites. Each of the Company's products and services has been designed to address
the technological and market development challenges that confront streaming
media content providers.

STREAMING MEDIA TECHNOLOGY. RealNetworks has been a pioneer in the
development of streaming media technology and continues to offer leading
streaming media software solutions. The Company's products use advanced
compression and error-correction technologies to deliver acceptable performance
even in bandwidth-constrained environments. The Company has won numerous awards
for its technology, including PC Magazine Editor's Choice award for streaming
video in October 1997. The Company's recent "beta" release of its RealSystem
Version 5.0 offers software products with streaming animation capabilities and
improved audio and video quality, including full-screen video at higher
bandwidths. RealSystem Version 5.0 also enables incorporation of seamless
in-stream advertising into existing broadcasts or on-demand clips. The Company
believes in-stream advertising offers increased revenue opportunities for its
RealSystem Server customers. In addition, RealSystem Version 5.0 enables
password-protected access to content, allowing content providers to incorporate
subscription-based or "pay-per-view" streaming media content access over the
Internet. The Company's software runs on a broad range of operating systems and
hardware platforms, enabling content providers to reach a broad audience and
enterprises to deliver intranet content in heterogeneous computing environments.

REALPLAYER UBIQUITY AND BRAND STRENGTH. From its inception, the Company has
strategically chosen to offer its RealPlayer software to individual users free
of charge to promote the widespread adoption of its client software and speed
the acceptance of Internet multimedia. The Company believes that more than 28
million copies of its RealPlayer software have been downloaded electronically
and that more than 150,000 Web pages use the Company's software. In addition,
over 1,200 third-party developers have joined the Company's Real Developer
Program. To continue the broad market adoption of its server products, the
Company now offers its Basic Server free of charge. As a result of these
activities and the Company's aggressive promotional programs, the Company
believes that the "Real" brand has become one of the most widely recognized
brands on the Internet.

ELECTRONIC COMMERCE DISTRIBUTION CHANNEL. The Company has pursued an
electronic commerce distribution strategy designed to further accelerate product
adoption and drive upgrade and cross-selling opportunities among its existing
installed user base. The Company's online distribution efforts have resulted in
electronic sales of over 200,000 copies of the Company's RealPlayer Plus in its
first year of distribution and the collection of a database of information that
includes over 7 million names. Recently, the Company opened its RealStore Web
site, an online store for the sale of the Company's products, third-party
streaming media tools and utilities, and intranet-based training products. The
Company believes that it will be able to continue to facilitate the adoption and
growth of streaming media content by providing a concentrated marketplace and a
low-cost distribution mechanism for emerging streaming media tools and their
developers.

STREAMING MEDIA CONTENT AND AGGREGATION. The Company's
advertising-supported Web sites, including Timecast, LiveConcerts.com and
Film.com, aggregate, organize and provide streaming media programming in order
to build consumer awareness and Web site traffic for streaming media content.
According to I/Pro, Inc., the Company's network of Web sites attracted an
average of 380,000 visitors and generated over 2 million page impressions per
day. The Company's Daily Briefing and Destination Button services provide
one-click access to a range of third-party programming. In addition to
generating advertising revenues, the Company believes these sites and services
stimulate demand for and creation of streaming media content using the Company's
RealSystem.

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STRATEGY

EXTEND TECHNOLOGY LEADERSHIP. The Company has established a reputation as
a leader in streaming media technology and intends to continue to maintain its
reputation for quality and innovation by expanding the features and breadth of
its audio and video product offerings. The Company recently introduced streaming
animation, in-stream advertising and password-protected access to content as
part of the "beta" release of its RealSystem Version 5.0. The Company believes
that the fundamental architecture of its products also can be expanded to
support synchronized streaming of a wide variety of other time-based data types,
such as MIDI, images and multimedia presentations. As part of its strategy, the
Company has devoted and will continue to commit significant resources to the
development of technologies that increase the scaleability of streaming media
solutions.

MAXIMIZE MARKET PENETRATION AND BRAND NAME RECOGNITION. The Company
believes that it is a recognized leader in the streaming media technology and
that its "Real" brand is one of the most widely recognized brand names on the
Internet. Since its inception, the Company has sought to achieve rapid and broad
adoption of its technologies and strong brand recognition. This strategy has
been pursued through various means, such as offering the Company's RealPlayer to
individual users free of charge over the Internet, bundling the Company's
products with those of other major vendors and using multiple distribution
channels, including both direct sales and indirect OEM and retail relationships.
The Company recently has intensified its efforts to proliferate its streaming
technology by offering its Basic Server free of charge and entering into a
licensing and distribution agreement with Microsoft. The Company also intends to
continue to promote the adoption of industry standards that are either based on
or compatible with its technologies. For example, the Company is one of the
principal co-authors of RTSP, a proposed industry standard for the control and
delivery of streaming media.

LEVERAGE MARKET POSITION TO EXPAND BUSINESS MODEL. Management believes
that the Company's technology leadership, market position and brand name are
significant assets that the Company can leverage to maintain and increase its
market share and diversify its revenue base. The Company intends to leverage
these assets as follows:

- GROW STREAMING MEDIA SOFTWARE BUSINESS. The Company intends to
capitalize on the growth in demand for streaming media software by
continuing to develop, market and support industry-leading products and
services. The Company also plans to strengthen its marketing, sales and
customer support efforts as the size of its market opportunity and
customer base increases.

- EXPAND INTERNET COMMERCE BUSINESS. The Company's Web sites provide
product information and fulfillment resources for streaming media content
users and developers. The Company recently opened its RealStore Web site,
an online store for the sale of the Company's products, third-party
streaming media tools and utilities, and intranet-based training
products. The Company believes that it will be able to continue to
facilitate the adoption and growth of streaming media content by
providing a concentrated marketplace and a low-cost distribution
mechanism for emerging streaming media tools and their developers.

- OFFER LEADING CONTENT AGGREGATION SITES FOR STREAMING MEDIA. The Company
has developed a network of Web sites that aggregate links to third-party
streaming media programming. The Company plans to continue building Web
site traffic with these activities to increase Web site advertising
revenues, increase visibility and sales of the Company's products,
promote the use of streaming media content on the Internet or intranets
and promote the Company's Internet commerce platform.

DEVELOP AND MARKET STREAMING MEDIA SOLUTIONS FOR A VARIETY OF PLATFORMS AND
BANDWIDTHS. The Company's rapid growth is attributable in part to the wide
acceptance of the

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streaming media solutions it has developed for PCs networked in low-bandwidth
environments. However, significant efforts are underway to make the Internet
available on a wider range of platforms, including non-PC Internet appliances,
and over higher-speed connections, including cable modems. Accordingly, the
Company seeks to design its solutions to add value in a range of bandwidth
environments and to be flexible enough to port easily to new platforms. As a
result, management believes that the Company is positioned to capitalize on
possibly significant platform and bandwidth changes.

STRENGTHEN STRATEGIC RELATIONSHIPS. The Company has established strategic
relationships with a variety of industry participants, including software and
hardware vendors, entertainment companies, content publishers and broadcast
media companies. The Company's relationship with Microsoft enables wider
distribution of the Company's products and promotes interoperability among
numerous streaming media technologies. In addition to its relationship with
Microsoft, the Company has formed strategic distribution relationships with
several other companies, including Starlight Networks Incorporated and
Macromedia, has formed a joint venture in Japan with NTT PC Communications, Inc.
("NTT"), Kokusai Denshin Denwa Co., Ltd. ("KDD") and Trans Cosmos, Inc. ("Trans
Cosmos") and has entered into a pilot program with MCI Communications
Corporation ("MCI") to distribute the RealNetwork broadcast service. The Company
pursues strategic relationships for a variety of purposes, such as maximizing
rapid penetration, validation and adoption of its technologies; aiding the
development of compelling content to build consumer demand for streaming media
over the Internet; and expanding the range of commercial activities based on its
technology and brand name. The Company has also collaborated with other industry
leaders for the purpose of developing software protocols for proposed adoption
as industry standards. Although the Company has not engaged in significant joint
technology development relationships to date, it anticipates that it may form
third-party development relationships in the future as it seeks to expand the
fundamental architecture of its technology and influence the direction of
technological developments in the industry.

PRODUCTS AND SERVICES

The Company develops and markets software products and services that enable
the delivery of streaming audio and video content over the Internet and
intranets. The Company also conducts electronic commerce and sells advertising
through its Web sites, provides audio and video broadcast services to third
parties, and provides various other services designed to promote widespread
usage of the Company's technology.

MEDIA SYSTEM

The Company's streaming media system allows content providers to encode
content such as audio, video or other multimedia programming into discrete data
packets that can be broadcast to large numbers of simultaneous users.

BASIC SERVER. The Company offers a Basic Server free of charge from its Web
sites. This product enables content providers to stream both audio and video to
as many as 60 simultaneous users.

BASIC SERVER PLUS. The Basic Server Plus is an enhanced server that can be
downloaded from the Company's Web sites for $695. In addition to the Basic
Server functions, Basic Server Plus supports streaming animation and enhanced
administration capabilities and includes RealPublisher, technical support and
upgrades.

REALSERVER INTERNET SOLUTION. The Internet Solution is designed for use by
commercial Web sites, including media content providers that distribute audio,
video or animation content over the Internet to a broad base of consumers. The
Internet Solution includes the RealServer, which offers the Basic Server Plus
functions as well as advanced administrative features, the ability to reach a
larger audience and in-stream advertising insertion and rotation. The Internet
Solution also includes the RealPublisher and the RealEncoder. Internet Solution
licenses start at $4,995 and are priced based on the number of streams licensed.

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REALSERVER INTRANET SOLUTION. The Intranet Solution is a RealServer
designed specifically for use in intranet applications. The Intranet Solution
includes the RealPublisher, the RealEncoder and a site license for the
RealPlayer. A 10-user Intranet Solution is available free of charge from the
Company's Web sites. Larger system licenses start at $6,995 and are priced
according to the number of licensed users.

COMMERCE SOLUTION. The Commerce Solution is an integrated system that can
be used with the Internet or Intranet Solution to provide secure, selective
access to streaming media content. The Commerce Solution is comprised of the
Commerce RealServer, which includes all the functions of the RealServer as well
as user and workstation authentication, encrypted challenge/response systems and
broad database and Web-based commerce systems compatibility. Commerce Solution
licenses are priced based on the number of streams licensed.

REALPUBLISHER. The RealPublisher is a software tool that enables users to
create and publish RealAudio and RealVideo content-enabled Web pages without
having to program in HTML. The RealPublisher can be downloaded from the
Company's Web sites for $49.99.

REALENCODERS. The Company's RealEncoders enable content providers to
compress live or recorded audio and video programming into the Company's file
format. This highly compressed file format increases the efficiency of
limited-bandwidth transmissions and is readable by the Company's players. The
RealEncoder can be downloaded free of charge from the Company's Web site.

REALNETWORK BROADCAST SERVICE. The Company operates the RealNetwork
broadcast service, which uses the Company's splitter technology to broadcast
content to thousands of simultaneous users through IP multicasting or
traditional unicasting. In August 1997, the Company and MCI commenced a pilot
program in which the Company's technology will be incorporated into MCI's
Internet backbone. The RealNetwork broadcast service enables broadcasters to
reach up to 50,000 users simultaneously by combining MCI's nationwide network of
datalines and computer centers with the Company's streaming media and splitter
technologies. Current content providers using the RealNetwork broadcast service
include ABC News, Inc., Atlantic Recording Corporation, ESPN, Inc., and Major
League Baseball teams, including the Los Angeles Dodgers and the Seattle
Mariners. The Company often uses the RealNetwork broadcast service to host its
own content. In select cases, the Company has and will continue to enter into
relationships with content providers in which the providers' content is hosted
on the RealNetwork broadcast service at the Company's expense in exchange for a
share of the advertising or other revenue generated.

In May 1997, the Company entered into a joint venture with NTT, KDD and
Trans Cosmos in Japan to establish J-Stream Co. Inc. ("J-Stream"), which, like
the Company's RealNetwork broadcast service, streams audio and video content to
users through IP multicasting or traditional unicasting. The Company supplies
its RealAudio and RealVideo system and technical support for the operation of
the J-Stream broadcast network. The Company holds a 24% interest in J-Stream.
See "Certain Transactions -- Japanese Joint Venture."

CONSULTING. The Company provides a range of consulting services that
principally relate to the creation and maintenance of streaming media networks
based on the Company's technology. Commonly provided services include sound
editing, video production assistance and network design.

CONSUMER PRODUCTS AND ELECTRONIC COMMERCE

The Company's player enables a user to listen to or view content from Web
sites that use the Company's server products. The player decompresses and
decodes audio, video or animation packets transmitted by the server, reassembles
them in the correct order, identifies and requests retransmission of any missing
data packets, and then plays back the reassembled audio, video or animation
content for the user in real-time. The players can be easily installed and used
by nontechnical computer users, even using dial-up modems over standard
voice-grade telephone lines.

REALPLAYER. RealPlayer, the Company's standard player, can be downloaded
free of charge from the Company's Web site and currently is distributed by a
number of third parties in combination with their own products. RealPlayer
offers basic functions such as play, stop, fast-forward, rewind and volume

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adjustment, as well as the ability to program six Destination Buttons, which
provide one-click access to preprogrammed audio, video or animation content.

REALPLAYER PLUS. The RealPlayer Plus is an enhanced player that can be
downloaded from the Company's Web site or purchased in a retail store for a
suggested price of $29.99. RealPlayer Plus not only offers basic RealPlayer
functions, but also features a scan function and 40 programmable buttons that
allow users to preset favorite content. Customers who purchase a RealPlayer Plus
also have access to special content available only to RealPlayer Plus users.

ELECTRONIC COMMERCE AND REALSTORE. Since August 1996, the Company has sold
its products electronically. On September 8, 1997, it opened its RealStore Web
site, an online store for the sale of the Company's products, third-party
streaming media tools and utilities, and intranet-based training products.
Through this distribution channel, the Company is able to offer a broad
selection of products with little inventory risk or merchandising expense.

MEDIA PUBLISHING PRODUCTS AND SERVICES

The Company's network of Web sites aggregates, organizes and provides
streaming media programming through a variety of navigational and theme-oriented
content sites. These sites derive revenues from the sale of advertising to third
parties such as General Motors Corporation, International Business Machines
Corporation, AT&T Corp. and Microsoft. The Company has been instrumental in
pioneering new forms of Internet advertising, including in-stream advertising,
in which streamed audio and video advertisements are inserted into selected
programming.

In addition to its main Web site, the Company's network of Web sites
includes:

Timecast, a guide to RealAudio and RealVideo content that offers
programming information from and links to over 2,500 Web sites, including
over 500 radio and television stations;

LiveConcerts.com, which, in cooperation with House of Blues, offers
live streamed music concerts using the Company's products as well as access
to services, including up-to-date concert schedules;

Film.com, which the Company began hosting in September 1997, provides
in-depth information about, and streaming media clips of, movies, including
reviews and previews; and

Daily Briefing, which allows customers to design their own custom
streaming media newscasts from over 35 short programs in the areas of news,
sports, entertainment, weather and business/technology, and to receive the
custom newscasts daily. Daily Briefing providers include NBC News, The
Weather Channel, CBS/SportsLine and Warner Bros. Inc.

TECHNOLOGY

The Company's client/server software system is designed to optimize the
delivery of streaming media over the Internet, intranets or any IP-based
network. The system is based on open industry standards and works with a broad
range of operating systems, hardware platforms and media types.

CODECS

The Company's system uses multiple compression/decompression algorithms (or
"codecs") to translate time-based data-intensive content such as audio, video or
animation data into discrete data packets and then broadcast (or "stream") the
packets to the client (or "player"). The player then reassembles the packets in
the correct order and plays back the streaming media content in real time. The
compression process enables the data to be streamed to the player even in very
low bandwidth (14.4 kbps) or congested network environments by reducing the
amount of data to be streamed.

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TRANSMISSION TECHNOLOGY AND PROTOCOLS

Neither of the two basic Internet transport protocols, User Datagram
Protocol ("UDP") and Transport Control Protocol ("TCP"), was originally designed
to handle the transmission of real-time content. UDP is able to transmit data
packets efficiently and without delays, but is not generally robust enough to
ensure delivery of all data packets. TCP generates robust and reliable
transmissions, but is not designed for efficient and continuous real-time
delivery of content. Higher level Internet protocols, such as File Transfer
Protocol ("FTP") and Hypertext Transfer Protocol ("HTTP"), were designed
originally for one-way continuous transmissions and as such do not efficiently
allow the player to communicate back to the server to activate functions such as
fast forward, pause and rewind or to select a particular portion of a clip for
playing.

To address the inherent limitations of the Internet with respect to
multimedia delivery, the Company has developed its own client/server software
architecture based on advanced transmission technologies and protocols. Key
elements of the Company's technology solution include:

- BUFFERING: Because the streaming of continuous, time-based content such
as audio or video must occur in real-time and with minimal transmission
loss, the Company's technology incorporates a time delay (or "buffering")
feature that allows the player extra time to accumulate data packets and,
if any are missing, request retransmission of particular packets. As a
result, transmission and playback quality can be optimized, even in highly
congested transmission environments.

- BIDIRECTIONAL COMMUNICATION: The Company's server and player communicate
during transmission regarding the bandwidth and quality of the user's
connection to optimize the transmission by using the system's bandwidth
negotiation and dynamic connection management capabilities. For example,
the system is able to detect the available bandwidth and the extent of
packet loss and performance degradation.

- ERROR-MITIGATION: To the extent that buffering and packet retransmission
efforts are insufficient to maintain acceptable quality of user
experience, the Company's system draws on several techniques designed to
mitigate performance degradation, including interpolation methods that
"reconstruct" lost data packets based on approximations regarding adjacent
or closely related data packets, UDP-based retransmission of lost packets
and forward error correction.

- SMART NETWORKING: This feature allows a server to stream content to the
player via unicasting or IP multicasting and automatically select the
appropriate transmission protocol (UDP, TCP or HTTP) depending on current
network conditions and the presence of firewalls or proxies.

- VIDEO-OPTIMIZED TRANSMISSION: Because video transmissions are more
data-intensive than audio transmissions, the encoding of video streams for
low bandwidth requires a higher compression ratio. In addition to standard
compression techniques, the Company uses a technique known as interframe
compression, which reduces unnecessary repetition of redundant background
data in neighboring video frames, thereby reducing the number of data
packets being transmitted. The system also incorporates "stream thinning"
technology that responds to episodes of performance degradation by
dynamically reducing the amount of video content being streamed to the
user, thereby preserving bandwidth for audio packets to maintain the
continuity of the audio stream, which is often more central to the user
experience than video.

In addition to its core client/server technology, the Company has adopted
RTSP, a proposed protocol for standardizing the control and delivery of
streaming media over the Internet. RTSP is a unified standard for a broad range
of media data types and is intended to promote a greater level of
interoperability among various streaming media solutions. RTSP is built on top
of a number of other Internet standard protocols such as HTTP, TCP/IP and Real
Transport Protocol, and is complementary with ASF, a file format for streaming
media that does not specify a method of client-server interaction. RTSP provides
the client-server specification necessary to stream ASF files (and many other
file types)

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on the Internet. RTSP was submitted to the IETF in October 1996 with the support
of over 40 companies. See "-- Microsoft Relationship" and "Risk
Factors -- Impact of Evolving Standards."

NETWORKED MULTIMEDIA FOR LARGE-SCALE DELIVERY

The Company's splitter technology allows broadcasters to transmit large
numbers of simultaneous streams. Traditionally, a stand-alone server sends a
separate signal to each individual user, which is an inefficient use of network
bandwidth because the same signal often is distributed through many of the same
links on the network.

The Company's splitter technology enables one "central" server to broadcast
a signal to a set of servers distributed around a network, which servers then
transmit the signal to the end user, thereby minimizing the use of the network
backbone and improving signal quality. The Company uses this technology in its
RealNetwork broadcasting service, as well as in its J-Stream joint venture in
Japan. See "-- Strategy -- Strengthen Strategic Relationships" and "-- Products
and Services -- Media System."

RESEARCH AND DEVELOPMENT

The Company devotes a substantial portion of its resources to developing
new products and product features, expanding and improving its fundamental
streaming technology, and strengthening its technological expertise. During the
fiscal year ended December 31, 1996, and the nine months ended September 30,
1997, the Company expended approximately 34% and 41%, respectively, of its total
net revenues on research and development activities. The Company intends to
continue to devote substantial resources toward research and development for the
next several years. As of September 30, 1997, the Company had 93 employees, or
approximately 31% of its workforce, engaged in research and development
activities. The Company must hire additional skilled software engineers to
further its research and development efforts. The Company's business, financial
condition and results of operations could be adversely affected if it is not
able to hire, train and retain the required number of engineers.

SALES, MARKETING AND DISTRIBUTION

The Company believes that any individual or company that desires to
transmit or receive streaming media content over the Internet or intranets is a
potential Company customer. To reach as many customer segments as possible, the
Company markets its products and services through several direct and indirect
distribution channels, including over the Internet, through a direct sales
force, through OEMs and VARs, and internationally through distributors and the
J-Stream joint venture. As of September 30, 1997, the Company had 103 employees,
or approximately 35% of its workforce, engaged in sales and marketing
activities.

ELECTRONIC COMMERCE. The Company's Consumer and E-Commerce Divisions are
responsible for electronic commerce sales and marketing of the Company's
products as well as third-party multimedia development products sold on the
Company's RealStore Web site. Substantially all of the Company's products may be
downloaded directly from the Company's Web sites, with over 28 million product
downloads to date. The Company sells third-party products on its RealStore Web
site on a consignment basis and, accordingly, incurs no inventory risk with
respect to such products. Electronic distribution provides the Company with a
low-cost, globally accessible, 24-hour sales channel.

DIRECT SALES FORCE. The Company's direct sales force markets the Company's
products and services primarily to corporate customers worldwide. The direct
sales force is comprised of the Major Accounts, National Accounts and Telesales
groups of the Company's Media Systems Division. The Major Accounts and National
Accounts groups market and sell to corporate customers primarily interested in
server products for commercial Internet Web sites or intranets. The Telesales
group develops and pursues leads generated from inquiries on the Company's Web
sites and from downloads of its EasyStart Server.

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OEMS AND VARS. The Strategic Channels, OEM and Consulting groups of the
Company's Media Systems Division market and establish indirect distribution
agreements. The Company has entered into various distribution relationships with
third parties pursuant to which the Company's products are incorporated into, or
bundled with, the third party's products for delivery by the third party to end
users. Such third parties include Creative Labs, Inc., Apple Computer, Inc.,
Network Computer, Inc., WebTV Networks, Inc. and Microsoft.

ADVERTISING SALES. The Company's Advertising Sales group markets and sells
advertising on the Company's Web sites and within media streams that the Company
hosts on behalf of its corporate customers.

INTERNATIONAL SALES. The Company has three international subsidiaries that
market and sell the Company's products outside the U.S. The Company distributes
its products internationally through a direct sales force and distribution
arrangements.

MARKETING PROGRAMS. The Company participates in trade shows, conferences
and seminars, provides product information through the Company's Web sites,
promotes and co-promotes special events, places advertising for the Company's
products and services in print and electronic media, and sponsors special
programs for software developers, including its own conference. The Company's
marketing programs are aimed at informing distributors and end users about the
capabilities and benefits of the Company's products and services, increasing
brand name awareness, stimulating demand across all market segments and
encouraging independent software developers to develop products and applications
that are compatible with the Company's products and technology.

MICROSOFT RELATIONSHIP

In June 1997, the Company entered into a strategic agreement with Microsoft
pursuant to which the Company granted Microsoft a nonexclusive license to its
Standard Code, which is comprised of certain substantial elements of the source
code of the Company's RealAudio/RealVideo Version 4.0 technology included in its
basic RealPlayer and substantial elements of its EasyStart Server (currently
known as the Basic Server), and related Company trademarks. Under the agreement,
Microsoft may sublicense its rights to the Standard Code to third parties under
certain circumstances. On two occasions during the first two years following
delivery under the agreement, Microsoft may acquire for $25 million and $35
million, respectively, a nonexclusive license to subsequently developed versions
of the Standard Code, products based on which are currently distributed to end
users by the Company at no charge. If the Company elects in its sole discretion
to grant an Event License, the agreement provides for a full refund of each
license fee during the first year, declining to 0% over the following two years.
The Company may not assign its obligations under the agreement without
Microsoft's consent, and a merger, the sale of substantially all of the
Company's assets and certain other events will be deemed to be an assignment
under the agreement. Microsoft is obligated to distribute the Company's
RealPlayer Version 4.0 for a defined term as long as the Company's player
supports certain Microsoft architectures. The Company also agreed to work with
Microsoft and several other companies to author and promote ASF as a standard
file format for streaming media. The agreement also requires the Company to
provide Microsoft with engineering consultation services, certain error
corrections and certain technical support over a defined term.

In connection with the agreement, Microsoft also purchased a minority
interest in the Company. Microsoft currently offers its own streaming media
product, NetShow. In addition, Microsoft recently acquired VXtreme, a direct
competitor of the Company in the market for streaming media software. Microsoft
also owns a minority interest in VDOnet, a direct competitor of the Company in
the market for streaming video software. As a result of Microsoft's agreement
with the Company, its acquisition of VXtreme and its investment in VDOnet,
Microsoft will be able to augment substantially the functionality of NetShow,
its streaming media product, which could have a material adverse effect on the
competitiveness of the Company's products. See "Risk Factors -- Department of
Justice Subpoena."

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Although Microsoft is a shareholder of the Company, it is also a competitor
and its interests may not always be a aligned with those of the Company and the
other shareholders. Microsoft has indicated that to the extent the relationship
between the parties becomes more competitive than complementary, and based on
the outcome of issues between the parties, including under the license
agreement, it is likely to re-evaluate its investment position in the Company.
There can be no assurance that any such issues, the evolving nature of the
relationship, or economic factors would not result in Microsoft selling all or a
portion of its holdings in the Company when contractually able to do so, which
could have a material adverse effect on the market price for the Common Stock.
See -- "Risk Factors -- Competition; Relationship With Microsoft,"
"-- Volatility of Stock Price," "-- Impact of Exercise of the Series E Warrant"
and "-- Possible Adverse Effect on Market Price of Common Stock of Shares
Eligible for Future Sale After the Offering" and "Shares Eligible for Future
Sale -- Registration Rights."

CUSTOMERS

Since the Company's inception, the following companies have paid $45,000 or
more to the Company for the purchase of products or services or the license of
technology: ABC Radio Net, Apple Computer, Inc., Bandai Digital Entertainment
Corporation, Bloomberg L.P., Boeing-Inform, Cisco Systems, Inc., Creative Labs,
Inc., Dow Jones, Forefront Graphics Corporation, Internet Canada Corporation,
Merrill Lynch & Co. Inc, Microsoft, Multiple Zones International, Inc., Muzak
Limited Partners, Navio Communications, Inc., NBC Desktop, NetRadio Network,
Network Computer Inc., News Corp., Prodigy Inc., Starwave, Tele2 Danmark A/S,
Teledanmark In, Telia AB, 3Com, United Technologies Corporation, WavePhore, Inc.
and WebTV Networks, Inc. The Company's customers consist primarily of resellers
and users located in the U.S. and various foreign countries. Sales to customers
outside the U.S., primarily in Asia and Europe, were approximately 17%, 22% and
27% of total net revenues in the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, respectively. Software license fees under
a license agreement with Microsoft accounted for approximately 11% of total net
revenues for the nine months ended September 30, 1997.

CUSTOMER SUPPORT

The Company's customers have a choice of support options depending on the
level of service desired. The Company maintains a technical support hotline to
answer inquiries and provides an online database of technical information. The
Company's support staff also responds to e-mail inquiries. The Company tracks
all support requests through a series of customer databases, including current
status reports and historical customer interaction logs. The Company uses
customer feedback as a source of

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<PAGE> 47

ideas for product improvements and enhancements. As of September 30, 1997, the
Company employed eight technical representatives to respond to customer requests
for support.

COMPETITION

The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company. The Company's principal competitors in the
development and distribution of audio and video streaming solutions include
Microsoft, VXtreme, VDOnet, Xing, Precept, Cubic, Motorola, Vivo, Vosaic and
Oracle. The Company's RealSystem also competes to a lesser degree with
non-streaming audio and video delivery technologies such as AVI and Quicktime,
and indirectly with delivery systems for multimedia content other than audio and
video, such as Flash by Macromedia and Enliven by Narrative. Competitive factors
in this market include the quality and reliability of software; features for
creating, editing and adapting content; ease of use and interactive user
features; scaleability and cost per user; and compatibility with the user's
existing network components and software systems. To expand its user base and
further enhance the user experience, the Company must continue to innovate and
improve the performance of its RealSystem. The Company anticipates that
consolidation will continue in the streaming media industry and related
industries such as computer software, media and communications. Consequently,
competitors may be acquired by, receive investments from or enter into other
commercial relationships with, larger, well-established and well-financed
companies. There can be no assurance that the Company can establish or sustain a
leadership position in this market segment. See "-- Microsoft Relationship."

The Company is committed to the continued market penetration of its brand,
products and services, which, as a strategic response to changes in the
competitive environment, may require pricing, licensing, service or marketing
changes intended to extend its current brand and technology franchise. For
example, the Company recently made its Basic Server, which had previously sold
for $295 to $995, available for download free of charge. Continued price
concessions or the emergence of other pricing or distribution strategies by
competitors may have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company currently derives significant revenues from the electronic
distribution of certain of its products. The Company recently opened its
RealStore Web site, an online store for the sale of the Company's products,
third-party streaming media tools and utilities, and intranet-based training
products. The Company competes with a variety of Web sites, such as
Buydirect.Com and Sofware.Net, which also offer software products for download.
To compete successfully in the electronic commerce market, the Company must
attract sufficient commercial traffic to its RealStore Web site by offering
high-quality, competitively priced merchandise in a compelling, easy-to-purchase
format. There can be no assurance that the Company will be able to compete
successfully in this market, and any failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue is also growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the Company or that
revenues derived from such advertising will be material. In addition, if the
Company loses advertising customers, fails to attract new customers, is forced
to reduce advertising rates or otherwise modify its rate structure to retain or
attract customers, or loses Web site traffic, the Company's business, financial
condition and results of operations may be materially adversely affected.

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<PAGE> 48

POSITION ON CHARITABLE RESPONSIBILITY

Following closing of the offering, Mr. Glaser will contribute 5%, or
approximately 700,000 shares, of his Common Stock to charitable organizations.
In addition, Mr. Jacobsen intends to contribute approximately 60,000 shares of
his Common Stock to charitable organizations. The Company is strongly committed
to charitable responsibility, as evidenced by its donations of software to
charitable organizations. If sustained profitability is achieved, the Company
intends to donate approximately 5% of its annual net income to charitable
organizations. The Company hopes to encourage employee giving by using a portion
of its intended contribution to match charitable donations made by employees.
See "Risk Factors -- Donation of Net Income to Charity."

GOVERNMENTAL REGULATION

The Company faces potential liability for claims based on the nature and
content of the materials that it distributes over the Internet, including claims
for defamation, negligence or copyright, patent or trademark infringement, which
claims have been brought, and sometimes successfully litigated, against Internet
companies. The Company's general liability insurance may not cover claims of
this type or may not be adequate to indemnify the Company for any liability that
may be imposed. Any liability not covered by insurance or in excess of insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. Although sections of the CDA
that, among other things, proposed to impose criminal penalties on anyone
distributing "indecent" material to minors over the Internet, were held to be
unconstitutional by the U.S. Supreme Court, there can be no assurance that
similar laws will not be proposed and adopted. While the Company does not
distribute the types of materials that the CDA may have deemed illegal, the
nature of such similar legislation and the manner in which it may be interpreted
and enforced cannot be fully determined and, therefore, legislation similar to
the CDA could subject the Company to potential liability, which in turn could
have an adverse effect on the Company's business, financial condition and
results of operations. Such laws also could damage the growth of the Internet
generally and decrease the demand for the Company's products and services, which
could adversely affect the Company's business, financial condition and results
of operations.

INTELLECTUAL PROPERTY

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<PAGE> 49

can be no assurance that the Company's agreements with employees, consultants
and others who participate in product development activities will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or independently
developed by competitors.

The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need to either obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. As of September 30, 1997, the Company had
nine registered U.S. trademarks or service marks, and had applications pending
for an additional 27 U.S. trademarks. A significant portion of the Company's
marks begin with the word "Real" (such as RealSystem, RealAudio and RealVideo).
The Company is aware of other companies that use "Real" in their marks alone or
in combination with other words, and the Company does not expect to be able to
prevent all third-party uses of the word "Real" for all goods and services. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S., and effective
patent, copyright, trademark and trade secret protection may not be available in
such jurisdictions. The Company licenses certain of its proprietary rights to
third parties, and there can be no assurance that such licensees will abide by
compliance and quality control guidelines with respect to such proprietary
rights or that such licensees will not take actions that would materially
adversely affect the Company's business, financial condition and results of
operations.

The computer software market is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive and
involves a significant diversion of resources and uncertainty of outcome. In the
future, the Company may need to pursue litigation to enforce and protect its
intellectual property and trade secrets or to defend against a claim of
infringement or invalidity. The Company has been and expects to continue to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of third-party
proprietary rights by the Company and its licensees. The Company attempts to
avoid infringing known proprietary rights of third parties in its product
development efforts. However, the Company has not conducted and does not conduct
comprehensive patent searches to determine whether the technology used in its
products infringes patents held by third parties. In addition, it is difficult
to proceed with certainty in a rapidly evolving technological environment in
which there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. If the Company
were to discover that its products violate third-party proprietary rights, there
can be no assurance that it would be able to obtain licenses to continue
offering such products without substantial

49
<PAGE> 50

reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation regarding alleged infringement could be
avoided or settled without substantial expense and damage awards. Any claims
against the Company relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing the Company
from distributing certain products. Such claims could materially adversely
affect the Company's business, financial condition and results of operations.

EMPLOYEES

As of September 30, 1997, the Company had 296 full-time employees and one
part-time employee, 268 of whom were based at the Company's executive offices in
Seattle, Washington, 24 of whom were based at the Company's offices in Japan,
England or France and five of whom were salespersons based at other locations.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company believes that its relations with its employees are good.

FACILITIES

The Company's executive offices are located in downtown Seattle, Washington
in an office building in which, as of September 30, 1997, the Company leases an
aggregate of 80,345 square feet at a current monthly rental of $122,411. The
lease agreement terminates on April 30, 2001. The Company has an option to
extend the lease agreement for two additional five-year terms.

The Company anticipates that it will require additional space within the
next 12 months, but that suitable additional space will be available on
commercially reasonable terms, although there can be no assurance in this
regard. The Company does not own any real estate.

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<PAGE> 51

LEGAL PROCEEDINGS

From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business,
including claims of alleged infringement of third-party trademarks and other
intellectual property rights by the Company and its licensees. Such claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources.

In August 1997, the Company was served with a subpoena by the U.S.
Department of Justice in connection with its investigation into horizontal
merger activity within the streaming media industry. The investigation,
including interviews of Company officers by Department of Justice personnel and
document production requests, is ongoing. As a result of the investigation, it
is possible that the Department of Justice will require certain actions by the
Company or other companies in the streaming media industry, which could have a
material adverse effect on the Company's competitive position and on its
business, financial condition and results of operations. The Company is
cooperating fully with the investigation. The Company is not aware of any other
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, financial condition and
results of operations. See "Risk Factors -- Department of Justice Subpoena" and
"-- Uncertain Protection of Intellectual Property; Risks Associated With
Licensed Third-Party Technology."

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<PAGE> 52

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company as of November 14, 1997
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Robert Glaser(1).......... 35 Chairman of the Board, Chief Executive Officer, Secretary and
Treasurer
Bruce Jacobsen(2)......... 37 President, Chief Operating Officer and Director
Mark Klebanoff............ 35 Chief Financial Officer
Len Jordan................ 31 Senior Vice President -- Media Systems
Phillip Barrett........... 44 Senior Vice President -- Media Systems
Maria Cantwell............ 39 Senior Vice President -- Consumer and E-Commerce
James Higa................ 39 Vice President -- Asia/Rest of World ("ROW")
John Atcheson............. 38 Vice President -- Media Publishing
James Wells............... 50 Vice President -- Sales
Kelly Jo MacArthur........ 33 Vice President and General Counsel
Erik Moris................ 38 Vice President -- Marketing
Jeff Lehman............... 40 Vice President -- Advertising Sales
Philip Rosedale........... 29 Vice President -- Media Systems
James Breyer(1)(2)........ 36 Director
Mitchell Kapor(1)(2)...... 47 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Set forth below is certain information regarding the business experience
during the past five years for each of the above-named persons.

ROBERT GLASER has served as Chairman of the Board, Chief Executive Officer
and Treasurer of the Company since its inception in February 1994, and as
Secretary since March 1995. On closing of the offering, he will also serve as
the Company's Policy Ombudsman, with the exclusive authority to adopt or change
the editorial policies of the Company as reflected on the Company's Web sites or
in other communications or media in which the Company has a significant
editorial or media voice. See "Risk Factors -- Control by Mr. Glaser;
Antitakeover Provisions" and "Description of Capital Stock -- Certain Voting and
Other Matters." From 1983 to 1993, Mr. Glaser was employed at Microsoft, most
recently as Vice President of multimedia and consumer systems, where he focused
on the development of new businesses related to the convergence of the computer,
consumer electronics and media industries. Mr. Glaser holds a B.A. and an M.A.
in Economics and a B.S. in Computer Science from Yale University. Mr. Glaser has
been elected as a Class 3 director.

BRUCE JACOBSEN has served as President and Chief Operating Officer of the
Company since February 1996 and as a Director since August 1997. From April 1995
to February 1996, Mr. Jacobsen was Chief Operating Officer of Dreamworks
Interactive, a joint venture between Microsoft and Dreamworks SKG, a partnership
among Steven Spielberg, Jeffery Katzenberg and David Geffen. From August 1986 to
April 1995, Mr. Jacobsen was employed at Microsoft in a number of capacities,
including General Manager of the Kids/Games business unit. Mr. Jacobsen
graduated summa cum laude with Honors from Yale University and holds an M.B.A.
from Stanford University. Mr. Jacobsen has been elected as a Class 2 director.

MARK KLEBANOFF has served as Chief Financial Officer of the Company since
June 1996. From May 1992 to June 1996, Mr. Klebanoff was Vice President of
Finance and Operations of Industrial Systems, Inc., a client/server process
information management software vendor that merged with Aspen

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<PAGE> 53

Technology, Inc. in 1995. From 1989 to 1992, Mr. Klebanoff worked in a number of
general management capacities for the Japanese trading company Itochu
Corporation. Mr. Klebanoff holds a B.A. from Yale University and a Masters
degree from the Yale School of Management.

LEN JORDAN has served as Senior Vice President -- Media Systems of the
Company since January 1997. From November 1993 to November 1996, Mr. Jordan was
employed at Creative Multimedia, Inc., a developer and publisher of
CD-ROM/Internet products in a number of capacities, most recently as President.
From September 1989 to November 1993, Mr. Jordan was employed at Central Point
Software, Inc., a utility software publisher. Mr. Jordan graduated magna cum
laude from the Eccles School of Business at the University of Utah with B.S.
degrees in Finance and Economics.

PHILLIP BARRETT has served as Senior Vice President -- Media Systems of the
Company since January 1997, and from November 1994 to January 1997 as Vice
President -- Software Development. From March 1986 to October 1994, Mr. Barrett
was a Development Group Manager at Microsoft, where he led development efforts
for Windows 386, Windows 3.0 and Windows 3.1. Mr. Barrett holds an A.B. in
Mathematics from Rutgers University and an M.S. in Computer Sciences from the
University of Wisconsin, Madison.

MARIA CANTWELL has served as Senior Vice President -- Consumer and
E-Commerce of the Company since July 1997. From April 1995 to July 1997, Ms.
Cantwell served as Vice President -- Marketing of the Company. From February
1995 to April 1995, Ms. Cantwell was a consultant to the Company. From 1992 to
January 1995, Ms. Cantwell served as a member of the 103rd Congress. Ms.
Cantwell holds a B.A. in Public Administration from Miami University.

JAMES HIGA has served as Vice President -- Asia/ROW of the Company since
September 1996. From January 1989 to August 1996, Mr. Higa was the Director for
Asia/Pacific for NeXT Software, Inc. From 1986 to 1989, Mr. Higa served as
Director of Product Marketing at Apple Computer Japan, Inc. Mr. Higa holds a
B.A. in Political Science from Stanford University.

JOHN ATCHESON has served as Vice President -- Media Publishing of the
Company since January 1997. From March 1990 to May 1996, Mr. Atcheson was
President and Chief Executive Officer of MNI Interactive, Inc., a developer and
distributor of consumer interactive services. Mr. Atcheson holds a B.A. from
Brown University and an M.B.A. from the Stanford Graduate School of Business.

JAMES WELLS has served as Vice President -- Sales of the Company since May
1995. From March 1994 to April 1995, Mr. Wells served as a consultant in sales,
marketing and product strategy at Aldus Corporation, a developer and marketer of
publishing software. From January 1991 to February 1994, Mr. Wells served in
various senior sales and marketing positions with Apple Computer, Inc. Mr. Wells
holds a B.S. in Engineering from Lamar University and an M.B.A. from the
University of Delaware.

KELLY JO MACARTHUR has served as Vice President and General Counsel of the
Company since October 1996. From January 1995 to March 1996, Ms. MacArthur
served as General Counsel and Director of Business Affairs for Compton's
NewMedia, Inc., which was acquired by Learning Co., Inc. in 1996. From July 1989
to December 1994, Ms. MacArthur was an attorney at Sidley & Austin. Ms.
MacArthur graduated summa cum laude from the University of Illinois at
Champaign-Urbana and holds a J.D. from Harvard Law School.

ERIK MORIS has served as Vice President -- Marketing of the Company since
August 1997. From April 1997 to July 1997, Mr. Moris served in various marketing
capacities as an employee of the Company. From September 1996 to April 1997, Mr.
Moris was a consultant to the Company. From April 1995 to August 1996, Mr. Moris
worked at Microsoft, first as a consultant and later as an employee, where he
managed advertising for the Windows 95 launch and was Group Manager for the
Internet Platform and Tools Division. From 1985 to 1994, Mr. Moris was a Senior
Vice President at McCann-Erickson Advertising. Mr. Moris holds a B.A. in
Communications and Business from Western Washington University.

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<PAGE> 54

JEFF LEHMAN has served as Vice President -- Advertising Sales of the
Company since October 1997. From September 1985 to September 1997, Mr. Lehman
was employed by Ziff-Davis/Softbank in a number of Vice President, Director, and
other publishing positions. Mr. Lehman graduated cum laude from The University
of Central Florida with a B.S.B.A. and an M.B.A. with Honors.

PHILIP ROSEDALE has served as Vice President -- Media Systems of the
Company since October 1997. From February 1996 to October 1997, Mr. Rosedale
served as General Manager, Software Development of the Company. From June 1986
to February 1996, Mr. Rosedale was founder and Chief Executive Officer of
Automated Management Systems, a developer and marketer of software applications.
Mr. Rosedale graduated cum laude from the University of California, San Diego
with a B.S. in Physics.

JAMES BREYER has been a Director of the Company since October 1995. Mr.
Breyer has served as a Managing Partner of Accel Partners L.P. in Palo Alto/San
Francisco since November 1995 and as a general partner from 1990 to 1995. At
Accel Partners L.P., Mr. Breyer has sponsored investments in over a dozen
companies that have completed public offerings or successful mergers.
Previously, Mr. Breyer was a management consultant at McKinsey & Company, Inc.,
and worked in product management and marketing at Apple Computer, Inc. and
Hewlett-Packard Corporation. Mr. Breyer holds a B.S. from Stanford University
and an M.B.A. from Harvard University, where he was named a Baker Scholar. Mr.
Breyer has been elected as a Class 2 director.

MITCHELL KAPOR has been a Director of the Company since October 1995. From
1990 to 1993, Mr. Kapor was President, from 1993 to 1995 he was Chairman and
from 1995 to 1996 he was a director, of the Electronic Frontier Foundation, a
nonprofit public Internet organization that he co-founded in 1990. Mr. Kapor
designed Lotus 1-2-3, and founded Lotus Development Corporation in 1982 and
served as its President and Chief Executive Officer from April 1982 to July
1986. Mr. Kapor holds a B.A. in Cybernetics from Yale University and an M.A. in
Psychology from Beacon College. Mr. Kapor has been elected as a Class 1
director.

NUMBER, TERM AND ELECTION OF DIRECTORS

The Articles provide that the number of directors shall be determined in
the manner provided by the Company's Bylaws. The Bylaws provide that the number
of directors shall not be less than one or more than seven, with the precise
number to be determined by resolution of the Board of Directors. The Board of
Directors has determined that the number of directors shall be seven. Four
directors currently serve on the Board, with three vacancies currently existing.

Prior to October 1997, each director was elected to serve until the next
annual meeting of shareholders or until the election and qualification of his or
her successor or his or her earlier resignation or removal. In October 1997, the
Company established a classified Board of Directors with three classes (Class 1,
Class 2 and Class 3), each class as nearly equal in number of directors as
possible. Each of the current directors was elected in October 1997 to one of
these three classes. Mr. Kapor was elected to Class 1 with a term expiring at
the annual shareholders meeting in 1998; Messrs. Breyer and Jacobsen were
elected to Class 2 with terms expiring at the annual shareholders meeting in
1999; and Mr. Glaser was elected to Class 3 with a term expiring at the annual
shareholders meeting in 2000. Commencing with the annual shareholders meeting in
1998 and thereafter, each newly elected director shall serve for a term ending
at the third annual meeting of shareholders following such director's election.

CONTRACTUAL ARRANGEMENTS

Pursuant to the terms of a Second Amended and Restated Investors' Rights
Agreement (the "Investors' Rights Agreement"), the holders of Series B Preferred
Stock are entitled to nominate one member to the Board of Directors, the holders
of Series C Preferred Stock are entitled to nominate one member to the Board of
Directors, and the holders of Series E Preferred Stock are entitled to nominate
one member to the Board of Directors. Mr. Kapor was nominated by the holders of
the Series B Preferred Stock, Mr. Breyer was nominated by the holders of the
Series C Preferred Stock, and the holder of the

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<PAGE> 55

Series E Preferred Stock currently has not nominated a director. The right to
nominate directors pursuant to the Investors' Rights Agreement will terminate on
closing of the offering.

Under a voting agreement (the "Voting Agreement") entered into in September
1997 among the Company, Accel IV L.P. ("Accel IV") and Messrs. Jacobsen, Kapor
and Glaser, each of Accel IV and Messrs. Jacobsen and Kapor have agreed,
effective on closing of the offering, to vote all shares of stock of the Company
owned by them to elect Mr. Glaser to the Board of Directors of the Company in
each election in which he is a nominee. The obligations under the Voting
Agreement terminate with respect to shares transferred by the parties thereto.
The Voting Agreement terminates on the death of Mr. Glaser.

Pursuant to the terms of the Strategic Transactions Agreement, the Company
granted Mr. Glaser a direct contractual right to require the Company to abide by
and perform all terms of the Articles with respect to the Strategic Transactions
Committee. The Strategic Transactions Agreement also provides that, so long as
Mr. Glaser owns a specified number of shares, the Company shall use its best
efforts to cause Mr. Glaser to be nominated to, elected to, and not removed
from, the Board of Directors.

COMPENSATION OF DIRECTORS

Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending Board of
Directors or Committee meetings. The Company has not made option grants to
outside directors, but intends to make such grants to outside directors in the
future.

BOARD COMMITTEES

The Company has established an Audit Committee, a Compensation Committee
and a Strategy Committee. In addition, the Articles provide that, following the
closing of the offering, the Company will establish a Strategic Transactions
Committee. Following the closing of the offering, the Company also intends to
establish a Nominating Committee.

The Audit Committee consists of Messrs. Breyer, Jacobsen and Kapor. The
functions of the Audit Committee are to make recommendations to the Board of
Directors regarding the selection of independent auditors, review the results
and scope of the audit and other services provided by the Company's independent
auditors and evaluate the Company's internal controls.

The Compensation Committee consists of Messrs. Breyer, Glaser and Kapor.
The functions of the Compensation Committee are to review and approve the
compensation and benefits for the Company's executive officers, administer the
Company's stock option and stock purchase plans and make recommendations to the
Board of Directors regarding such matters.

The Strategy Committee consists of Messrs. Breyer, Glaser, Jacobsen and
Kapor. The functions of the Strategy Committee are to make recommendations to
the Board of Directors regarding the overall strategic goals of the Company and
review significant business transactions that affect the future strategic
direction of the Company.

The Strategic Transactions Committee shall be comprised of three directors,
who initially will be Messrs. Glaser, Breyer and Kapor. Without the prior
approval of such Committee, and subject to certain limited exceptions, the Board
of Directors shall not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the Company's voluntary
dissolution or (iv) take any action that has the effect of clauses (i) through
(iii). Any vacancy on the Committee will be filled by the remaining members of
the Committee. If two members of the Committee remain and are unable to agree on
an individual to fill the vacancy, such vacancy may be filled by the member who
holds or controls, directly or indirectly, the larger percentage of the
outstanding shares of the Company's capital stock. The Committee, by vote of the
Chairman of the Committee and one additional member, may limit the powers of the
Committee or may terminate the Committee. The

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existence and powers of the Committee will terminate when the members in the
aggregate cease to hold or control, directly or indirectly, at least 10% of the
outstanding shares of the Company's capital stock. See "Risk Factors -- Control
by Mr. Glaser; Antitakeover Provisions" and "Description of Capital Stock."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

As of the end of the Company's last fiscal year, the Company did not have a
Compensation Committee, and all decisions regarding compensation of the
Company's executive officers were made by the Board of Directors. During fiscal
year 1996, Mr. Glaser participated in deliberations of the Board of Directors
concerning executive officer compensation. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee, which was established
during fiscal year 1997.

POLICY OMBUDSMAN

The Articles provide that Mr. Glaser will serve, or will appoint another
officer of the Company to serve, as the Company's Policy Ombudsman, with the
exclusive authority to adopt or change the editorial policies of the Company as
reflected on the Company's Web sites or in other communications or media in
which the Company has a significant editorial or media voice. On the death,
resignation or removal of Mr. Glaser as the Policy Ombudsman, the Chief
Executive Officer will serve or appoint another officer of the Company to serve
as Mr. Glaser's successor. See "Risk Factors -- Control by Mr. Glaser;
Antitakeover Provisions" and "Certain Transactions."

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
received by the Company's Chief Executive Officer and by the other three
executive officers of the Company whose salary and bonus exceeded $100,000 in
1996 (the "Named Executive Officers") for services rendered to the Company in
all capacities during the year ended December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#)
- ------------------------------------------------ ------------ -------- -------------
<S> <C> <C> <C>
Robert Glaser................................... $100,000 $ -- --
Chairman, Chief Executive Officer, Secretary
and Treasurer
Bruce Jacobsen.................................. 118,158 -- 1,176,367
President and Chief Operating Officer
James Wells..................................... 90,000 23,625 --
Vice President -- Sales
Andrew Sharpless................................ 102,295 -- 125,000(2)
Senior Vice President
</TABLE>

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

(1) The current annual salaries for Messrs. Glaser, Jacobsen and Wells are
$100,000, $135,000 and $90,000, respectively.

(2) Mr. Sharpless resigned as a Senior Vice President of the Company effective
August 2, 1996; however, he continued to serve as a Vice President of the
Company until February 1997, when he terminated his employment with the
Company. Mr. Sharpless exercised this option with respect to 12,500 shares
on April 8, 1997, after terminating his employment with the Company. The
remainder

56
<PAGE> 57

of the shares subject to this option were unvested as of his termination
date and therefore were canceled.

The following table sets forth information concerning stock options granted
to the Named Executive Officers in 1996 and reflects the conversion of Series B
Common Stock and Series C Common Stock underlying such options into an equal
number of shares of Common Stock on closing of the offering.

OPTION GRANTS IN 1996

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) IN 1996 ($/SHARE)(2) DATE 5%($) 10%($)
- -------------------- ------------- ---------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Glaser....... -- -- -- -- $ -- $ --
Bruce Jacobsen...... 1,176,367 31.2% $ 0.20 2/16/2016 388,977 1,347,528
James Wells......... -- -- -- -- -- --
Andrew Sharpless.... 125,000 3.3% $ 0.20 5/29/1997(4) 41,332 143,187
</TABLE>

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

(1) All options granted to the Named Executive Officers in 1996 were
nonqualified stock options that vest with respect to 20% of the shares on
the first anniversary of the date of grant and thereafter at a rate of 10%
for each six months of service rendered by the optionee to the Company,
except for one option granted to Mr. Jacobsen on February 16, 1996 for the
purchase of 470,544 shares of Common Stock, of which 50% vests one year from
date of grant and 25% vests every six months thereafter.

(2) The exercise price of each option is the estimated fair market value of the
underlying securities on the date of grant, as determined by the Company's
Board of Directors.

(3) Based on the estimated fair market value of the underlying securities on the
date of grant and assumed appreciation over the original 20-year option term
at the respective annual rates of stock appreciation shown. Potential gains
are net of the exercise price but before taxes associated with the exercise.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission (the
"Commission") and do not represent the Company's estimate of the future
price of the Common Stock. Actual gains, if any, on stock option exercises
depend on the future financial performance of the Company and overall market
conditions. The actual value realized may be greater or less than the
potential realizable value set forth in the table.

(4) Mr. Sharpless exercised this option with respect to 12,500 shares on April
8, 1997, after terminating his employment with the Company. The remainder of
the shares subject to this option were unvested as of his termination date
and therefore were canceled.

57
<PAGE> 58

The following table sets forth information regarding option exercises, and
the fiscal year-end values of stock options held, by each of the Named Executive
Officers during the year ended December 31, 1996. The table reflects the
conversion of Series B Common Stock and Series C Common Stock underlying such
options into an equal number of shares of Common Stock on closing of the
offering.

AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT DECEMBER 31,
SHARES VALUE REALIZED($) DECEMBER 31, 1996(#) 1996($)
ACQUIRED (MARKET PRICE AT ---------------------- --------------------
ON EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------- ----------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Robert Glaser............ -- $ -- --/-- $ --/--
Bruce Jacobsen........... -- -- --/1,176,367 --/941,094
James Wells.............. -- -- 82,500/192,500 76,725/179,025
Andrew Sharpless(2)...... 300,000 87,750 12,500/112,500(3) 10,000/90,000
</TABLE>

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

(1) The fair market value of the underlying securities at the close of business
on December 31, 1996 was estimated to be approximately $1.00 per share, as
determined by the Company's Board of Directors.

(2) The fair market value of the underlying securities at the close of business
on the dates of exercise of Mr. Sharpless' options to purchase 225,000
shares and 75,000 shares were estimated to be approximately $0.20 and $0.85
per share, respectively, as determined by the Company's Board of Directors.

(3) Mr. Sharpless exercised this option with respect to 12,500 shares on April
8, 1997, after terminating his employment with the Company. The remainder of
the shares subject to this option were unvested as of his termination date
and therefore were canceled.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Articles limit the liability of the Company's directors to the fullest
extent permitted by Washington law. The Washington Business Corporation Act (the
"Washington Act") provides that a corporation's articles of incorporation may
contain a provision eliminating or limiting the personal liability of directors
for monetary damages for breach of their fiduciary duty as directors, except for
liability for (i) acts or omissions that involve intentional misconduct or a
knowing violation of law, (ii) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 23B.08.310 of the Washington
Act or (iii) any transaction from which the director derived an improper
personal benefit. The Articles provide that the Company shall indemnify its
directors and officers, and may indemnify its employees and agents, to the
fullest extent permitted by law.

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

BENEFIT PLANS

1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors, and approved by the Company's
shareholders, in March 1995. The 1995 Plan

58
<PAGE> 59

provides for the grant of incentive and nonqualified options to purchase up to
an aggregate of 3,600,000 shares of Common Stock to employees, officers,
directors, consultants and independent contractors of the Company. As of
November 14, 1997, options to purchase 1,483,973 shares of Common Stock were
outstanding under the 1995 Plan, with exercise prices ranging from $0.07 to
$1.00 per share and options to purchase 1,206,191 shares had been exercised. The
Company has resolved not to grant any additional options under the 1995 Plan,
and has amended its Amended and Restated 1996 Stock Option Plan to provide for a
corresponding increase in the number of shares reserved for issuance thereunder.
See "-- Amended and Restated 1996 Stock Option Plan."

The provisions of the 1995 Plan with respect to the administration of the
1995 Plan and options granted thereunder, and the term and termination of
options granted, including any provision regarding the acceleration of
exercisability thereof, are as set forth below with respect to the Amended and
Restated 1996 Stock Option Plan.

AMENDED AND RESTATED 1996 STOCK OPTION PLAN. The Company's Amended and
Restated 1996 Stock Option Plan (the "1996 Plan") was originally adopted by the
Board of Directors in February 1996, and was approved by the Company's
shareholders in September 1997. The 1996 Plan provides for the grant of
incentive and nonqualified options to purchase up to an aggregate of 9,709,836
shares of Common Stock to employees, officers, directors, consultants and
independent contractors of the Company or any of its affiliates (the "Initial
Option Amount"). The Initial Option Amount can be increased to up to 11,193,809
shares after taking into account 1,483,973 shares of Common Stock subject to
options outstanding under the 1995 Plan on November 14, 1997, to the extent that
such options terminate without having been exercised in full. As of November 14,
1997, options to purchase 5,356,741 shares of Common Stock were outstanding
under the 1996 Plan, with exercise prices ranging from $0.20 to $9.00 per share,
options to purchase 3,949,842 shares of Common Stock were available for grant,
and options to purchase 403,253 shares of Common Stock had been exercised.

The 1996 Plan is administered by the Board of Directors, which has the
authority to grant options and to specify the terms and conditions of each
option so granted, including the number of shares covered by the option, the
type of option, the exercise price and the vesting provisions.

Options granted under the 1996 Plan must be exercised within three months
following termination of the optionee's employment with, or service to, the
Company, or within one year after the optionee's termination due to death or
disability, but in no event later than the expiration of the option term.
Options granted under the 1996 Plan are not transferable by the optionee except
by will or the laws of descent and distribution and generally are exercisable
during the optionee's lifetime only by the optionee.

In the event of a sale of all or substantially all of the Company's assets,
a merger or reorganization in which the Company is not the surviving
corporation, or the sale or other transfer of shares representing more than 50%
of the combined voting power of the then outstanding securities of the Company
(each, a "Terminating Event"), the Board may determine whether provision will be
made for assumption of, or substitution for, the stock options granted under the
1996 Plan by the successor corporation. If, with respect to a Terminating Event
that has been approved by the Board, the Board determines that no such
assumption or substitution will be made, then all options will become fully
vested, and each optionee will have the right to exercise any unexercised
options prior to closing of the Terminating Event. All options not so exercised
will expire upon closing of the Terminating Event.

1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "ESPP"), which was adopted by the Board of Directors and
approved by the Company's shareholders in September 1997, will become effective
on January 1, 1998. The Company has reserved 1,000,000 shares of Common Stock
for issuance under the ESPP. The ESPP is intended to qualify for favorable tax
treatment under Section 423 of the Internal Revenue Code of 1986, as amended.
The ESPP will be implemented through a series of offering periods of six months'
duration, with new offering periods commencing on January 1 and July 1 of each
year. The ESPP will be administered by the Compensation Committee of the Board
of Directors of the Company. Each employee of the Company or of any majority-
owned subsidiary of the Company who has been employed by the Company or such
majority-owned

59
<PAGE> 60

subsidiary of the Company for at least 90 days and for more than 20 hours per
week and more than five months per year will be eligible to participate in the
ESPP. The ESPP permits an eligible employee to purchase Common Stock through
payroll deductions, which may not exceed 10% of his or her compensation, at a
price equal to 85% of the lower of the fair market value of the Common Stock at
the beginning or end of the offering period. Employees may terminate their
participation in the ESPP any time during the offering period; provided,
however, that employees may not change their level of participation in the ESPP
at any time during the offering period. Participation in the ESPP terminates
automatically on the participant's termination of employment with the Company.

401(K) PLAN. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit-sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors. The Company has not made any
such contribution to date and currently has no plans to do so. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 20% of their compensation, subject to maximum limits on contributions
prescribed by law.

60
<PAGE> 61

CERTAIN TRANSACTIONS

SALES OF PREFERRED STOCK

Since the Company's inception in February 1994, the Company has issued, in
private placement transactions, shares of Preferred Stock as follows: (i) in
April 1995, an aggregate of 2,686,567 shares of Series B Preferred Stock at
$0.67 per share, (ii) in October 1995, an aggregate of 2,904,305 shares of
Series C Preferred Stock at approximately $1.96 per share, (iii) in November
1996, an aggregate of 2,381,010 shares of Series D Preferred Stock at $7.53 per
share and (iv) in July 1997, an aggregate of 3,338,374 shares of Series E
Preferred Stock at $8.99 per share. In addition, in connection with these
private placements, the Company issued warrants as follows: (i) in April 1995, a
warrant to purchase up to 373,134 shares of Series B Preferred Stock at an
exercise price of $0.67 per share, which warrant was exercised in October 1995,
(ii) in October 1995, warrants to purchase up to 100,000 shares of Series C
Preferred Stock at an exercise price of approximately $1.96 per share and
warrants to purchase up to 183,755 shares of Series B Common Stock at an
exercise price of approximately $0.20 per share, (iii) in November 1996,
warrants to purchase up to 714,303 shares of Series D Preferred Stock at an
exercise price of approximately $9.41 per share and (iv) in July 1997, the
Series E Warrant to purchase up to 3,709,305 shares of Series E Preferred Stock
at an exercise price of $13.48 per share. In April 1995, in connection with the
Company's Series B Preferred Stock financing, Mr. Glaser exchanged 10,000 shares
of the capital stock of the Company for one share of Series A Common Stock and
13,713,439 shares of Series A Preferred Stock to reflect capital contributions
made by Mr. Glaser of approximately $0.07 per share. The purchasers of record of
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock and the accompanying warrants to purchase Series B
Common Stock and Series C, Series D and Series E Preferred Stock included, among
others, the following 5% shareholders, executive officers, directors and
entities associated with directors:

<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------------------------
NAME SERIES B SERIES C SERIES D SERIES E
- ---------------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Robert Glaser......... 287,313 50,825 39,841
Mitchell Kapor........ 1,492,537 656,172 66,401
Accel Entities(1)..... 2,037,282 66,401
Microsoft
Corporation......... 3,338,374
Phillip Barrett....... 373,134
</TABLE>

<TABLE>
<CAPTION>
WARRANTS
---------------------------------------------------------------------------------
SERIES B SERIES C SERIES D SERIES E
NAME COMMON STOCK(2) PREFERRED STOCK(2) PREFERRED STOCK PREFERRED STOCK(2)
- ---------------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Robert Glaser......... 11,952
Mitchell Kapor........ 33,755 19,920
Accel Entities(1)..... 150,000 100,000 19,921
Microsoft
Corporation......... 3,709,305
</TABLE>

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

(1) The "Accel Entities" include Accel IV, Accel Investors '95 L.P., Accel
Keiretsu L.P. and Ellmore C. Patterson Partners. James Breyer, a director of
the Company, is affiliated with the Accel Entities. See "Principal
Shareholders."

(2) These warrants terminate automatically on closing of the offering.

In addition, members of Mr. Glaser's immediate family purchased an
aggregate of 223,881 shares of Series B Preferred Stock in April 1995, and an
aggregate of 39,498 shares of Series C Preferred Stock in October 1995, in each
case on the same terms as the other investors.

In addition, Trans Cosmos and Encompass Group, Inc. ("Encompass"), an
affiliate of Trans Cosmos, purchased 796,813 and 265,604 shares of Series D
Preferred Stock, respectively, in November 1996 on the same terms as the other
investors. In connection with those purchases, Trans Cosmos and

61
<PAGE> 62

Encompass received warrants to acquire 239,043 and 79,682 shares of Series D
Preferred Stock, respectively.

Pursuant to the terms of the Investors' Rights Agreement, the holders of
Series B Preferred Stock are entitled to nominate one member to the Board of
Directors, the holders of Series C Preferred Stock are entitled to nominate one
member to the Board of Directors and the holders of Series E Preferred Stock are
entitled to nominate one member to the Board of Directors. In addition, all
holders of preferred stock hold preemptive rights to purchase their pro rata
share of new securities issued by the Company. The rights to nominate directors
and the preemptive rights will terminate on closing of the offering. In
addition, the Investors' Rights Agreement grants to the investors certain
registration rights that obligate the Company, under certain circumstances, to
effect a registration under the Securities Act of any common stock issued upon
conversion of the Preferred Stock, and any Common Stock issued pursuant to the
exercise of the Series B Common Stock warrants. See "Shares Eligible for Future
Sale -- Registration Rights." All shares of Preferred Stock will be converted
into an equivalent number of shares of Common Stock or Special Common Stock, as
applicable, on closing of the offering.

The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."

MICROSOFT CORPORATION

The Company and Microsoft entered into an agreement in June 1997 pursuant
to which the Company granted Microsoft a nonexclusive license to its Standard
Code, which is comprised of certain substantial elements of the source code of
the Company's RealAudio/RealVideo Version 4.0 technology included in its basic
RealPlayer and substantial elements of its EasyStart Server (currently known as
the Basic Server), and related Company trademarks. Under the agreement,
Microsoft may sublicense its rights to the Standard Code to third parties under
certain circumstances. On two occasions during the first two years following
delivery under the agreement, Microsoft may acquire for $25 million and $35
million, respectively, a nonexclusive license to subsequently developed versions
of the Standard Code, products based on which are currently distributed to end
users by the Company at no charge. If the Company elects in its sole discretion
to grant an Event License, the agreement provides for a full refund of each
license fee during the first year, declining to 0% over the following two years.
The Company may not assign its obligations under the agreement without
Microsoft's consent, and a merger, the sale of substantially all of the
Company's assets and certain other events will be deemed to be an assignment
under the agreement. Microsoft is obligated to distribute the Company's
RealPlayer Version 4.0 for a defined term as long as the Company's player
supports certain Microsoft architectures. The Company also agreed to work with
Microsoft and several other companies to author and promote ASF as a standard
file format for streaming media. The agreement also requires the Company to
provide Microsoft with engineering consultation services, certain error
corrections and certain technical support over a defined term. In connection
with the agreement, Microsoft purchased 3,338,374 shares of nonvoting Series E
Preferred Stock at $8.99 per share for approximately $30,000,000. Pursuant to
the Articles, each share of Series E Preferred Stock is convertible at the
option of Microsoft into either one share of Common Stock or one share of
Special Common Stock. Microsoft also received a warrant to purchase 3,709,305
shares of Series E Preferred Stock at an exercise price of $13.48 per share. If
exercised, each share of Series E Preferred Stock acquired upon exercise will be
automatically converted, at the election of the holder, into either one share of
Common Stock or one share of Special Common Stock. This warrant terminates on
closing of the offering. Subsequent to the investment, at Microsoft's request,
the Board of Directors agreed to adopt, and recommend to the shareholders, an
amendment to the Articles providing for the automatic conversion of shares of
Special Common Stock into shares of Common Stock on a bona fide sale to a
purchaser who is not an affiliate of the holder. In consideration of the
foregoing, Microsoft gave notice to the Company of its election to receive only
Special Common Stock in connection with any conversion of shares of Series E
Preferred Stock. In connection with its equity investment, Microsoft also
granted a limited proxy to the Company. See "Risk Factors -- Competition;
Relationship With Microsoft" and "-- Department of Justice Subpoena,"
"Business -- Microsoft Relationship" and "Description of Capital
Stock -- Certain Voting and Other Matters."

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<PAGE> 63

JAPANESE JOINT VENTURE

Trans Cosmos is the beneficial owner of 1,381,142 shares of Common Stock of
the Company. In May 1997, Trans Cosmos, the Company, NTT and KDD entered into a
joint venture agreement with respect to the establishment and management of
J-Stream to operate an Internet streaming business in Japan. Trans Cosmos owns
28% of J-Stream, and each of the Company and the other two parties own 24%.
Trans Cosmos is responsible for managing J-Stream, and the Company supplies
J-Stream with software and technology for streaming on Internet networks. Trans
Cosmos contributed approximately $1,165,000 for its 28% interest, and the
Company contributed approximately $998,000 for its 24% interest in J-Stream.
Trans Cosmos loaned the Company the amount of the Company's contribution. The
note is denominated in Japanese yen and bears interest at a rate not to exceed
the Japanese Short Term Prime Rate (1.63% at September 30, 1997). Interest on
the note is payable monthly, and the principal is due in May 2000. The terms of
the note contain no restrictions or covenants. The note is secured by the
Company's shares in J-Stream, and the Company may, under certain circumstances,
tender its 24% interest to Trans Cosmos as repayment of the loan. See "Principal
Shareholders."

TRANS COSMOS RELATIONSHIP

The Company and Trans Cosmos are parties to a Master Distribution Agreement
pursuant to which the Company granted Trans Cosmos a nonexclusive,
nontransferable license to reproduce and distribute RealPlayer and RealPlayer
Plus, and to distribute the Company's server products, in Japan. Under the
distribution agreement, Trans Cosmos must comply with certain marketing
requirements, personnel commitments and specified minimum distribution
requirements. Trans Cosmos paid the Company $820,000 in 1996, and approximately
$469,000 from January 1, 1997 through September 30, 1997 pursuant to the
distribution agreement. The distribution agreement became effective on July 22,
1996 and terminated in accordance with its terms on July 22, 1997. The Company
and Trans Cosmos have continued to adhere to the terms of the agreement and are
currently renegotiating the agreement.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.

CHANGES TO CAPITAL STRUCTURE

In connection with the offering, the Board recommended, and the Company's
shareholders approved, amendments to the Articles that, among other things, will
reduce the number of series of authorized Common Stock from five to two (Common
Stock and Special Common Stock), establish the Strategic Transactions Committee
and provide for a Policy Ombudsman with authority to determine certain matters
related to editorial policies of the Company. These amendments will become
effective on closing of the offering. See "Management -- Policy Ombudsman" and
"Description of Capital Stock -- Certain Voting and Other Matters."

VOTING AGREEMENT

Under the Voting Agreement, each of Accel IV and Messrs. Jacobsen and Kapor
have agreed, effective on closing of the offering, to vote all shares of stock
of the Company owned by them to elect Mr. Glaser to the Board of Directors of
the Company in each election in which he is a nominee. The obligations under the
Voting Agreement terminate with respect to shares transferred by the parties
thereto. The Voting Agreement terminates on the death of Mr. Glaser.

STRATEGIC TRANSACTIONS AGREEMENT

Pursuant to the terms of the Strategic Transactions Agreement, the Company
granted Mr. Glaser a direct contractual right to require the Company to abide by
and perform all terms of the Articles with respect to the Strategic Transactions
Committee. The Strategic Transactions Agreement also provides that so long as
Mr. Glaser owns a specified number of shares, the Company shall use its best
efforts to cause Mr. Glaser to be nominated to, elected to, and not removed
from, the Board of Directors. See "Management -- Contractual Arrangements."

63
<PAGE> 64

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 14, 1997, assuming the conversion
of all shares of Series A Common Stock, Series B Common Stock, Series C Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock into Common Stock and Series E Preferred
Stock into Special Common Stock, and as adjusted to reflect the sale of
3,000,000 shares of Common Stock in the offering for (i) each person known to
the Company to own beneficially more than 5% of the Common Stock, (ii) each of
the Company's directors, (iii) each of the Named Executive Officers and (iv) all
executive officers and directors as a group. See footnote (1) below regarding
share ownership by Microsoft.

<TABLE>
<CAPTION>
COMMON STOCK(1)
-------------------------------------------
NUMBER
OF PERCENT OWNERSHIP
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(2) OFFERING OFFERING(3)
- ------------------------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
Robert Glaser......................................... 14,095,371(4) 59.4% 52.7%
c/o RealNetworks, Inc.
1111 Third Avenue
Suite 2900
Seattle, WA 98101
Accel IV L.P.......................................... 2,373,604(5) 9.9 8.8
c/o Accel Partners L.P.
428 University Ave.
Palo Alto, CA 94301
James W. Breyer....................................... 2,373,604(6) 9.9 8.8
Mitchell Kapor........................................ 2,258,785(7) 9.5 8.4
Kapor Enterprises, Inc.
238 Main Street
Cambridge, MA 02142
Trans Cosmos USA, Inc................................. 1,381,142(8) 5.7 5.1
4040 Lake Washington Blvd. N.E.
Suite 205
Kirkland, WA 98033
Bruce Jacobsen........................................ 562,655(9) 2.3 2.1
Andrew Sharpless...................................... 312,500 1.3 1.2
James Wells........................................... 137,500(10) * *
All directors and executive officers as a group (15
persons)(11)........................................ 20,485,704 83.1% 74.1%
</TABLE>

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

* Less than 1%.

(1) Excludes (i) 3,338,374 shares of Special Common Stock to be issued to
Microsoft on closing of the offering upon conversion of an equal number of
shares of Series E Preferred Stock and (ii) up to 3,709,305 shares of
Special Common Stock issuable upon exercise of the Series E Warrant. If not
exercised, the Series E Warrant will terminate on closing of the offering.
Pursuant to the Articles, the holder of Series E Preferred Stock may elect
to convert such shares into Common Stock or Special Common Stock. Microsoft
has given notice of its intention and has agreed to receive only Special
Common Stock in connection with any conversion of shares of Series E
Preferred Stock (including those shares issuable upon exercise of the
Series E Warrant). Upon such conversion, Microsoft will own 100% of the
outstanding Special Common Stock. Shares of Special Common Stock have
rights identical to the Common Stock, except that shares of Special Common
Stock do not have the right to vote, unless required by applicable law. The
Special Common Stock converts automatically into Common Stock on a bona
fide sale to a purchaser who is not an affiliate of the holder. See
"Description of Capital Stock."

64
<PAGE> 65

(2) Beneficial ownership is determined in accordance with rules of the
Commission and includes shares over which the beneficial owner exercises
voting or investment power. Shares of Common Stock subject to options or
warrants currently exercisable or exercisable within 60 days of November
14, 1997 are deemed outstanding for the purpose of computing the percentage
ownership of the person holding the options or warrants, but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated, and subject to community property laws
where applicable, the Company believes, based on information provided by
such persons, that the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.

(3) Microsoft has entered into a Lock-Up Agreement with the Underwriters
pursuant to which Microsoft has agreed not to sell, offer to sell or
otherwise dispose of any shares of capital stock owned of record or
beneficially as of the date of this Prospectus for a period of 180 days
after the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. on behalf of the Underwriters. After the expiration of
such period, Microsoft may sell shares of Special Common Stock, which
shares will convert automatically into Common Stock as noted in footnote
(1) above. Assuming the exercise in full of the Series E Warrant and the
resale of all shares of Special Common Stock (and no changes in beneficial
ownership of the persons listed below), the resulting ownership percentages
for the other shareholders listed in the table would be as follows: Mr.
Glaser -- 41.7%; Accel IV -- 7.0%; Mr. Breyer -- 7.0%; Mr. Kapor -- 6.7%;
Trans Cosmos -- 4.1%; Mr. Jacobsen -- 1.6%; Mr. Sharpless -- .9%; Mr.
Wells -- .4%; and all directors and executive officers as a group -- 59.0%.

(4) Includes 11,952 shares of Common Stock issuable on exercise of a warrant.
Following closing of the offering, Mr. Glaser intends to donate
approximately 700,000 shares of Common Stock to various charitable
organizations. These gifts will reduce the percentage of Common Stock that
he owns following closing of the offering to approximately 50.1%.

(5) Includes 1,926,973 shares owned by Accel IV, 39,970 shares owned by Accel
Keiretsu L.P., 90,459 shares owned by Accel Investors '95 L.P. and 46,281
shares owned by Ellmore C. Patterson Partners. Also includes 247,247
shares, 5,129 shares, 11,607 shares, and 5,938 shares of Common Stock
issuable on exercise of warrants owned by Accel IV, Accel Keiretsu L.P.,
Accel Investors '95 L.P. and Ellmore C. Patterson Partners, respectively.

(6) Mr. Breyer may be deemed to be the beneficial owner of the 2,373,604 shares
of Common Stock beneficially owned by the Accel Entities because he is a
general partner of Accel Partners L.P., which is the general partner of
Accel IV. Mr. Breyer disclaims beneficial ownership of these shares except
to the extent of his pecuniary interest therein. See footnote (5) above.

(7) Includes 19,920 shares of Common Stock issuable on exercise of warrants.

(8) Includes 796,813 shares of Common Stock owned by Trans Cosmos and 265,604
shares of Common Stock owned by Encompass, an affiliate of Trans Cosmos.
Also includes 239,043 and 79,682 shares of Common Stock issuable on
exercise of warrants owned by Trans Cosmos and Encompass, respectively.

(9) Includes 362,655 shares of Common Stock issuable on exercise of options.
Following closing of the offering, Mr. Jacobsen intends to donate
approximately 60,000 shares of Common Stock to various charitable
organizations.

(10) Includes 27,500 shares of Common Stock issuable on exercise of options.

(11) Does not include shares owned by Mr. Sharpless, who terminated his
employment with the Company in February 1997. Includes an aggregate of
631,810 shares and 301,793 shares of Common Stock issuable upon exercise of
options and warrants, respectively.

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<PAGE> 66

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Articles and the Bylaws is a summary and is qualified by
reference to the Articles and the Bylaws, copies of which have been filed with
the Commission as exhibits to the Company's Registration Statement, of which
this Prospectus forms a part. The descriptions of the common stock and preferred
stock reflect changes to the Company's capital structure that will occur on
closing of the offering in accordance with the terms of the Articles.

The authorized capital stock of the Company consists of 300,000,000 shares
of common stock, par value $0.001 per share, which is divided into Common Stock
and Special Common Stock, and 60,000,000 shares of preferred stock, par value
$0.001 per share.

COMMON STOCK

As of November 14, 1997, 23,723,852 shares of Common Stock were outstanding
and held of record by 187 shareholders, assuming no exercise after November 14,
1997 of outstanding options or warrants. Each holder of Common Stock is entitled
to one vote per share. Subject to the rights of the holders of any preferred
stock that may be outstanding, holders of Common Stock on the applicable record
date are entitled to receive such dividends as may be declared by the Board of
Directors out of funds legally available therefor and, in the event of
liquidation, to share pro rata in any distribution of the Company's assets after
payment or providing for the payment of liabilities and the liquidation
preference of any outstanding preferred stock. Holders of Common Stock have no
cumulative voting rights or preemptive rights to purchase or subscribe for any
shares of Common Stock or other securities of the Company.

SPECIAL COMMON STOCK

The Company has 7,047,679 authorized shares of Special Common Stock that
have rights identical to the Common Stock, except that they do not have the
right to vote unless required by applicable law. The Special Common Stock
converts automatically into Common Stock on a bona fide sale to a purchaser who
is not an affiliate of the holder. As of November 14, 1997, 3,338,374 shares of
Special Common Stock were outstanding and held of record by one holder.

PREFERRED STOCK

The Company's Board of Directors has the authority to issue shares of
preferred stock in one or more series and to fix and determine the relative
rights and preferences of the shares constituting any series to be established
without any further vote or action by the shareholders. Any shares of preferred
stock so issued may have priority over the common stock with respect to dividend
or liquidation rights or both. On closing of the offering, no shares of
preferred stock will be outstanding. The Company has no current intention to
issue any shares of preferred stock, except with respect to the proposed
Shareholder Rights Plan. See " -- Shareholder Rights Plan."

WARRANTS TO PURCHASE PREFERRED STOCK AND COMMON STOCK

As of November 14, 1997 the Company had outstanding warrants to purchase
150,000 shares of Series B Common Stock at an exercise price of approximately
$0.20 per share, warrants to purchase 100,000 shares of Series C Preferred Stock
at an exercise price of approximately $1.96 per share, warrants to purchase
714,303 shares of Series D Preferred Stock at an exercise price of approximately
$9.41 per share and a warrant to purchase 3,709,305 shares of Series E Preferred
Stock at an exercise price of $13.48 per share. The warrants to purchase shares
of Series B Common Stock, Series C Preferred Stock and Series E Preferred Stock
will terminate on closing of the offering. The warrants to purchase shares of
Series D Preferred Stock expire on November 27, 1998 and, following the
offering, will be exercisable for an equivalent number of shares of Common
Stock. All of the Company's outstanding warrants currently are exercisable.

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<PAGE> 67

CERTAIN VOTING AND OTHER MATTERS

Holders of preferred stock or other capital stock hereafter issued by the
Company may be entitled to vote in connection with certain mergers and share
exchanges, certain proposals to sell substantially all of the Company's assets
or certain other actions, and separate approval of each class of the Company's
capital stock may be required to the extent class voting rights are accorded to
the holders of other capital stock of the Company. Amendments to the Articles
must be approved by the Board of Directors and the holders of at least a
majority of the outstanding shares of Common Stock in most instances.

ARTICLES AND BYLAWS

The Articles provide that Mr. Glaser will serve, or will appoint another
officer of the Company to serve, as the Company's Policy Ombudsman, with the
exclusive authority to adopt or change the editorial policies of the Company as
reflected on the Company's Web sites or in other communications or media in
which the Company has a significant editorial or media voice. On the death,
resignation or removal of Mr. Glaser as the Policy Ombudsman, the Chief
Executive Officer will serve or appoint another officer of the Company to serve
as Mr. Glaser's successor. The provisions delineating the authority of the
Policy Ombudsman may be amended only with the approval of 90% of the shares
entitled to vote on an amendment to the Articles.

In addition, the Articles provide for a Strategic Transactions Committee
comprised of three directors, who initially will be Messrs. Glaser, Breyer and
Kapor. Without the prior approval of such Committee, and subject to certain
limited exceptions, the Board of Directors will not have the authority to (i)
adopt a plan of merger, (ii) authorize the sale, lease, exchange or mortgage of
(A) assets representing more than 50% of the book value of the Company's assets
prior to the transaction or (B) any other asset or assets on which the long-term
business strategy of the Company is substantially dependent, (iii) authorize the
Company's voluntary dissolution or (iv) take any action that has the effect of
clauses (i) through (iii). Any vacancy on the Committee will be filled by the
remaining members of the Committee. If two members of the Committee remain and
are unable to agree on an individual to fill the vacancy, such vacancy may be
filled by the member who holds or controls, directly or indirectly, the larger
percentage of the outstanding shares of the Company's capital stock. The
Committee, by vote of the Chairman of the Committee and one additional member,
may limit the powers of the Committee or may terminate the Committee. The
existence and powers of the Committee will terminate when the members in the
aggregate cease to hold or control, directly or indirectly, at least 10% of the
outstanding shares of the Company's capital stock. The provisions with respect
to the authority of the Strategic Transactions Committee may be amended only
with the approval of 90% of the shares entitled to vote on an amendment to the
Articles.

Special meetings of the shareholders may be called only by the Board of
Directors, the Chairman of the Board, the President or the holders of at least
25% of all votes entitled to be cast on any issue proposed to be considered at
such special meeting. The Company's Bylaws provide that shareholders seeking to
bring business before, or to nominate directors at, any meeting of shareholders
must provide timely notice thereof in writing. To be timely, a shareholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than 70 days prior to the date of the meeting,
or the tenth day after notice of the meeting is first given to shareholders,
whichever is later, if the meeting is an annual meeting or a special meeting at
which directors are to be elected. The Bylaws also contain specific requirements
for the form of a shareholder's notice. These provisions may preclude or deter
some shareholders from bringing matters before the shareholders or from making
nominations of directors.

CONTRACTUAL AGREEMENTS

On July 21, 1997, the Company and Microsoft entered into a Limited Proxy
and Voting Agreement (the "Proxy Agreement") that gives Mr. Glaser, or Mr.
Jacobsen if Mr. Glaser is unable to act, an irrevocable proxy with respect to
the limited voting rights of Microsoft's shares of Special Common Stock.

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<PAGE> 68

The Proxy Agreement does not apply to voting with respect to certain matters,
such as any amendment to the Articles in which the class of shares held by
Microsoft is treated adversely or disproportionately relative to other classes.
The Proxy Agreement terminates upon the earliest of (i) the date on which
Microsoft no longer holds any nonvoting shares, (ii) the conversion of the
Series E Preferred Stock into Common Stock and (iii) July 21, 2007.

Under the Voting Agreement entered into in September 1997 among the
Company, Accel IV and Messrs. Jacobsen, Kapor and Glaser, each of Accel IV and
Messrs. Jacobsen and Kapor have agreed, effective on closing of the offering, to
vote all shares of stock of the Company owned by such shareholders to elect Mr.
Glaser to the Board of Directors of the Company in each election in which he is
a nominee. The obligations under the Voting Agreement terminate with respect to
shares transferred by the parties thereto. The Voting Agreement terminates on
the death of Mr. Glaser.

WASHINGTON ANTITAKEOVER STATUTE

Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Act prohibits the Company, with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. After the five-year period, the Company may engage in otherwise
proscribed transactions, so long as the transaction complies with certain fair
price provisions of the statute or is approved by a majority of disinterested
shareholders within each voting group entitled to vote separately. The Company
may not exempt itself from coverage of this statute. These statutory provisions
may have the effect of delaying, deterring or preventing a change in control of
the Company.

SHAREHOLDER RIGHTS PLAN

The Company plans to enter into a Shareholder Rights Plan (the "Rights
Plan") by and between the Company and a rights agent to be selected by the
Company following closing of the offering. Under the proposed Rights Plan, the
Board would declare and distribute to the shareholders of record of the Company
as of the date selected by the Board a dividend of one right ("Right") for each
outstanding share of Common Stock. Shares of Common Stock issued in the offering
(assuming no triggering event) automatically would receive the Rights. The
Rights would not be exercisable or transferable separately from shares of Common
Stock and Special Common Stock, if any, until the earlier of: (i) 10 days
following a public announcement that a person or group has acquired, or obtained
the right to acquire, beneficial ownership of a designated percentage of the
outstanding shares of the Common Stock and (ii) 10 days following the
commencement or announcement of an intention to make a tender or exchange offer
that would result in an acquiring person or group beneficially owning a
designated percentage of outstanding shares of Common Stock, unless the Board
sets a later date (the earlier of such dates, the "Distribution Date"). The
Board would have the option to redeem the Rights at a nominal cost or prevent
the Rights from being triggered by designating offers for all outstanding Common
Stock as a permitted offer. Prior to the Distribution Date, the Company would be
able to amend or supplement the Rights Plan without the consent of any of the
holders of the Rights. Following the Distribution Date, the Rights Plan could be
amended to cure any ambiguity, to correct or supplement any inconsistent
provision or any other provision so long as such amendment or supplement would
not adversely affect the holders of the Rights (other than an acquiring person
or group). The Rights would expire 10 years after the date of adoption of the
Rights Plan by the Board unless earlier redeemed by the Company.

The Rights (other than those Rights held by an acquiring person or group),
when exercisable, would entitle their holders to purchase a specified fraction
of a share of preferred stock (subject to adjustment) or, in certain instances,
other securities of the Company. In certain circumstances, if the Company, in a
merger or consolidation, is not the surviving entity or disposes of more than
50% of the Company's assets

68
<PAGE> 69

or earnings power, the Rights would entitle their holders (other than an
acquiring person or group) to purchase the highest priority voting shares in the
surviving entity or its affiliates having a market value of two times the
exercise price of the Rights.

The Rights Plan, which is intended to encourage a potential acquiring
person or group to negotiate directly with the Board, may have certain
antitakeover effects. The Rights Plan, if adopted, could significantly dilute
the interests in the Company of an acquiring person or group. The Rights Plan
could therefore have the effect of delaying, deterring or preventing a change in
control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, Ridgefield Park, New Jersey.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering, there has been no public market for the Common
Stock, and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the offering. Sales of
substantial amounts of Common Stock in the public market after the offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.

Pursuant to the Lock-Up Agreements, certain holders of Restricted Shares,
including all officers and directors of the Company, have agreed with the
representatives of the Underwriters that, for a period of 180 days following the
date of this Prospectus, they will not sell, offer to sell or otherwise dispose
of any shares of Common Stock owned of record or beneficially by such persons as
of the date of this Prospectus, including securities convertible into or
exercisable or exchangeable for shares of Common Stock as of such date, as well
as any shares of Common Stock later acquired by reason of the conversion,
exercise or exchange of such securities, except that persons other than
officers, directors and holders of 1% or more of the capital stock of the
Company each will be free to sell or otherwise dispose of up to 5,000 shares of
Common Stock to the extent permissible under Rule 144 or Rule 701. On closing of
the offering, 27,692,639 of the Restricted Shares will be subject to restriction
pursuant to Lock-Up Agreements. The Lock-Up Agreements may be released at any
time as to all or any portion of the shares subject to such agreements at the
sole discretion of Goldman, Sachs & Co. on behalf of the Underwriters.

69
<PAGE> 70

Based on the provisions of the Lock-Up Agreements and the provisions of
Rules 144 and 701 of the Securities Act, additional shares will be available for
sale in the public market as follows: (i) 11,947 shares will be eligible for
immediate sale in the public market on the date of this Prospectus pursuant to
Rule 144(k) under the Securities Act, (ii) 320,943 shares issued upon exercise
of options prior to November 14, 1997 not subject to Lock-Up Agreements will be
eligible for sale in the public market in accordance with Rule 701 as soon as 90
days after the date of this Prospectus, (iii) 1,000 shares will be eligible for
public sale subject to compliance with the holding period and volume and manner
of sale restrictions of Rule 144, (iv) 4,673,608 shares issuable upon the
exercise of warrants (assuming all outstanding warrants are exercised) will not
be available for sale until expiration of the applicable holding period under
Rule 144 and (v) 27,692,639 Restricted Shares will be eligible for sale upon
expiration of Lock-Up Agreements. At November 14, 1997, options for 6,840,714
shares of Common Stock were outstanding, of which options for 1,700,286 shares
may be exercised during the 180 days following the date of this Prospectus,
which shares potentially will be eligible for public sale 90 days after the date
of this Prospectus pursuant to Rule 701 under the Securities Act; of the shares
exercisable within 180 days, 1,335,194 will be subject to Lock-Up Agreements.
See "Risk Factors -- Competition; Relationship With Microsoft."

In general, Rule 144 provides that any person who has beneficially owned
shares for at least one year, including an Affiliate, is generally entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the shares of Common Stock then outstanding (approximately
276,882 shares immediately after the offering) or the reported average weekly
trading volume of the Common Stock during the four calendar weeks immediately
preceding the date on which notice of the sale is sent to the Commission. Sales
under Rule 144 are subject to certain manner of sale restrictions, notice
requirements and availability of current public information concerning the
Company. A person who is not an Affiliate of the Company, and who has not been
an Affiliate within three months prior to the sale, generally may sell shares
without regard to the limitations of Rule 144 provided that the person has held
such shares for at least two years.

Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit Affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case beginning 90 days after the date of this Prospectus.

REGISTRATION RIGHTS

Pursuant to the Investors' Rights Agreement, which provides registration
rights to certain holders of shares of the Company's capital stock, holders of
16,390,753 shares of common stock or their permitted transferees (collectively,
the "Registrable Shares") (assuming exercise of all outstanding warrants) have
certain rights with respect to the registration of the Registrable Shares under
the Securities Act. Under the terms of the Investors' Rights Agreement, if the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of others (including pursuant to this
offering), Registrable Shares may be included, subject to any limitation set by
the underwriters on the number of shares included in such registration. The
Company and the holders of the requisite number of shares have waived the rights
of the holders of Registrable Securities to have their shares registered in
connection with this offering. Holders of not less than 30% of the Registrable
Shares may also require the Company, not more than twice, to file a registration
statement under the Securities Act, at the Company's expense, with respect to
any Registrable Shares holders desire to include. In addition, holders of
Registrable Shares may require the Company to file up to three registration
statements on Form S-3, at the expense of the holders, for public offerings of
Registrable Shares, provided that the aggregate offering price for such
registration is not less than $250,000. The Company is required to use its best
efforts to effect all such registrations, subject to certain conditions and
limitations.

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<PAGE> 71

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP/Riddell Williams P.S., Seattle,
Washington. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Perkins Coie, Seattle, Washington.

EXPERTS

The consolidated balance sheets at December 31, 1995 and 1996 and September
30, 1997, and the consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the period from February 9, 1994 (inception) to
December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1997 included in this Prospectus and in the
Registration Statement of which this Prospectus forms a part have been included
herein in reliance on the report of KPMG Peat Marwick LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement or the exhibits thereto in accordance with the rules
and regulations of the Commission, and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or documents
and are not necessarily complete. Reference is made to each such exhibit for a
more complete description of the matters involved, and such statements shall be
deemed qualified by such reference. The Registration Statement and the exhibits
thereto filed with the Commission may be inspected, without charge, and copies
may be obtained at prescribed rates, at the public reference facility maintained
by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Registration
Statement and other information filed by the Company with the Commission also
are available at the Web site maintained by the Commission on the World Wide Web
at http://www.sec.gov. For further information pertaining to the Company and the
Common Stock offered by this Prospectus, reference is hereby made to the
Registration Statement.

The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial statements.

71
<PAGE> 72

REALNETWORKS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Accountants.............................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997... F-3
Consolidated Statements of Operations for the period from February 9, 1994 (inception)
to December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 (unaudited) and 1997................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period from February
9, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and
1996, and the nine months ended September 30, 1997.................................. F-5
Consolidated Statements of Cash Flows for the period from February 9, 1994 (inception)
to December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 (unaudited) and 1997................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 73

INDEPENDENT AUDITORS' REPORT

The Board of Directors
RealNetworks, Inc.:

We have audited the accompanying consolidated balance sheets of RealNetworks,
Inc. (formerly Progressive Networks, Inc.) and subsidiaries as of December 31,
1995 and 1996 and September 30, 1997, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the period from
February 9, 1994 (inception) to December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RealNetworks, Inc.
and subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and
the results of their operations and their cash flows for the period from
February 9, 1994 (inception) to December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

October 10, 1997, except as to Note 9,
which is as of October 30, 1997

Seattle, Washington

F-2
<PAGE> 74

REALNETWORKS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 3,129,394 $14,737,806 $ 44,751,298
Short-term investments..................................... 2,986,493 4,857,163 22,897,196
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $129,869 in 1995, $383,350
in 1996 and $688,572 in 1997............................. 667,847 3,275,518 4,350,464
Other receivables.......................................... 48,568 105,888 474,691
Inventory.................................................. 3,218 60,543 66,029
Prepaid expenses and other current assets.................. 143,328 491,348 319,188
Deferred income taxes...................................... -- -- 2,210,000
----------- ----------- -------------
Total current assets................................. 6,978,848 23,528,266 75,068,866
Property and equipment, net................................. 594,042 2,678,798 4,773,480
Investment in joint venture................................. -- -- 924,917
Deferred income taxes....................................... -- -- 2,990,000
Other assets................................................ 836 261,094 614,371
----------- ----------- -------------
$ 7,573,726 $26,468,158 $ 84,371,634
=========== =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................... $ 185,368 $ 2,405,490 $ 1,193,543
Accrued compensation....................................... 49,981 346,011 769,215
Other accrued expenses..................................... 149,909 971,499 2,745,782
Accrued income taxes....................................... -- -- 5,200,000
Deferred revenue........................................... 645,416 2,911,922 14,398,509
----------- ----------- -------------
Total current liabilities............................ 1,030,674 6,634,922 24,307,049
----------- ----------- -------------
Deferred revenue........................................... -- -- 17,916,660
Note payable............................................... -- -- 959,380
Redeemable, convertible preferred stock, $0.001 par value.
Authorized 16,206,998 shares; issued and outstanding
5,964,006 shares at December 31, 1995, 8,345,016 shares
at December 31, 1996 and 11,683,390 shares at September
30, 1997 (none pro forma) (aggregate liquidation
preference of $7,752,312 at December 31, 1995,
$34,645,820 at December 31, 1996 and $64,657,802 at
September 30, 1997 and aggregate redemption value of
$7,752,312 at December 31, 1995, $25,681,317 at
December 31, 1996 and $55,693,300 at September 30,
1997).................................................. 7,654,528 23,153,494 49,277,652 $ --
SHAREHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $0.001 par value.
Authorized, issued and outstanding; 13,713,439 shares at
December 31, 1995 and 1996, and September 30, 1997
(none pro forma) (aggregate liquidation preference of
$999,710 at December 31, 1995 and 1996, and September
30, 1997).............................................. 13,713 13,713 13,713 --
Preferred stock, undesignated series, $0.001 par value.
Authorized 30,079,563 shares; no shares issued and
outstanding............................................ -- -- -- --
Common stock, $0.001 par value.
Authorized 300,000,000 shares; issued and outstanding;
36,948 shares at December 31, 1995, 535,491 shares
at December 31, 1996 and 1,543,292 shares at September
30, 1997 (23,601,747 pro forma)........................ 37 535 1,543 23,602
Special common stock, $0.001 par value
Authorized, issued and outstanding; no shares
(3,338,374 pro forma).................................. -- -- -- 3,338
Additional paid-in capital................................. 921,315 2,543,587 6,755,080 56,021,048
Cumulative translation adjustment.......................... -- (11,307) (72,041) (72,041)
Accumulated deficit........................................ (2,046,541) (5,866,786) (14,787,402) (14,787,402)
----------- ----------- ------------- -------------
Total shareholders' equity (deficit)................. (1,111,476) (3,320,258) (8,089,107) $ 41,188,545
=============
Commitments and contingencies
----------- ----------- -------------
$ 7,573,726 $26,468,158 $ 84,371,634
=========== =========== =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 75

REALNETWORKS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9,
1994 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------- ---------------------------
1994 1995 1996 1996 1997
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Software license fees............ $ -- $ 1,781,763 $11,875,945 $ 7,213,357 $17,550,387
Advertising...................... -- -- 1,015,964 426,035 1,556,540
Service revenues................. -- 29,835 1,120,479 634,787 3,309,877
--------- ---------- ---------- ---------- ----------
Total net revenues........ -- 1,811,598 14,012,388 8,274,179 22,416,804
COST OF REVENUES:
Software license fees............ -- 29,194 1,342,942 470,440 2,080,167
Advertising...................... -- -- 288,024 186,909 571,595
Service revenues................. -- 32,940 554,558 311,916 1,956,899
--------- ---------- ---------- ---------- ----------
Total cost of revenues.... -- 62,134 2,185,524 969,265 4,608,661
--------- ---------- ---------- ---------- ----------
Gross profit................... -- 1,749,464 11,826,864 7,304,914 17,808,143
OPERATING EXPENSES:
Research and development......... 201,847 1,379,727 4,812,188 3,073,031 9,129,668
Selling and marketing............ 47,181 1,217,900 7,539,924 4,389,030 14,024,617
General and administrative....... 296,211 746,645 3,491,296 2,318,173 4,412,831
--------- ---------- ---------- ---------- ----------
Total operating
expenses................ 545,239 3,344,272 15,843,408 9,780,234 27,567,116
--------- ---------- ---------- ---------- ----------
Operating loss................. (545,239) (1,594,808) (4,016,544) (2,475,320) (9,758,973)
OTHER INCOME (EXPENSE):
Interest income, net............. -- 93,506 296,427 189,320 1,220,374
Other income (expense)........... -- -- (69,128) (28,977) 37,174
Equity in net losses of joint
venture........................ -- -- -- -- (73,291)
--------- ---------- ---------- ---------- ----------
Net other income............... -- 93,506 227,299 160,343 1,184,257
--------- ---------- ---------- ---------- ----------
Net loss....................... $(545,239) $(1,501,302) $(3,789,245) $(2,314,977) $(8,574,716)
========= ========== ========== ========== ==========
Pro forma net loss per share..... $ (0.14) $ (0.32)
Shares used to compute pro forma
net loss per share............. 27,779,321 28,315,053
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 76

REALNETWORKS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE SHAREHOLDERS'
-------------------- ------------------ PAID-IN TRANSLATION ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT (DEFICIT)
---------- ------- --------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock....... -- $ -- 10,000 $ 10 $ 72,828 $ -- $ -- $ 72,838
Contribution of capital by
founder.................. -- -- -- -- 487,357 -- -- 487,357
Net loss................. -- -- -- -- -- -- (545,239) (545,239)
---------- ------- --------- ------ ---------- -------- ------------ -----------
Balances at December 31,
1994..................... -- -- 10,000 10 560,185 -- (545,239) 14,956
Contribution of capital by
founder.................. -- -- -- -- 372,283 -- -- 372,283
Exchange of common stock
for Series A preferred
stock.................... 13,713,439 13,713 (9,999) (10) (13,703) -- -- --
Exercise of common stock
options.................. -- -- 30,750 31 2,122 -- -- 2,153
Issuance of common stock in
exchange for services.... -- -- 6,197 6 428 -- -- 434
Net loss................. -- -- -- -- -- -- (1,501,302) (1,501,302)
---------- ------- --------- ------ ---------- -------- ------------ -----------
Balances at December 31,
1995..................... 13,713,439 13,713 36,948 37 921,315 -- (2,046,541) (1,111,476)
Exercise of common stock
options.................. -- -- 498,543 498 43,272 -- -- 43,770
Issuance of preferred stock
warrants................. -- -- -- -- 1,579,000 -- -- 1,579,000
Translation adjustment..... -- -- -- -- -- (11,307) -- (11,307)
Accretion of redemption
value of redeemable,
convertible preferred
stock.................... -- -- -- -- -- -- (31,000) (31,000)
Net loss................. -- -- -- -- -- -- (3,789,245) (3,789,245)
---------- ------- --------- ------ ---------- -------- ------------ -----------
Balances at December 31,
1996..................... 13,713,439 13,713 535,491 535 2,543,587 (11,307) (5,866,786) (3,320,258)
Exercise of common stock
options.................. -- -- 1,006,801 1,007 141,494 -- -- 142,501
Issuance of common stock in
exchange for services.... -- -- 1,000 1 1,999 -- -- 2,000
Issuance of preferred stock
warrants................. -- -- -- -- 4,068,000 -- -- 4,068,000
Translation adjustment..... -- -- -- -- -- (60,734) -- (60,734)
Accretion of redemption
value of redeemable,
convertible preferred
stock.................... -- -- -- -- -- -- (345,900) (345,900)
Net loss................. -- -- -- -- -- -- (8,574,716) (8,574,716)
---------- ------- --------- ------ ---------- -------- ------------ -----------
Balances at September 30,
1997..................... 13,713,439 $13,713 1,543,292 $1,543 $6,755,080 $ (72,041) $ (14,787,402) $(8,089,107)
========== ======= ========= ====== ========== ======== ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 77

REALNETWORKS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------- ----------------------------
1994 1995 1996 1996 1997
---------------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (545,239) $(1,501,302) $ (3,789,245) $ (2,314,977) $ (8,574,716)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............. 5,295 93,265 699,087 333,242 1,397,108
Common stock issued in exchange for
services................................. -- 434 -- -- 2,000
Equity in net losses of joint venture...... -- -- -- -- 73,291
Foreign currency transaction gain.......... -- -- -- -- (31,888)
Deferred income tax benefit................ -- -- -- -- (5,200,000)
Change in certain assets and liabilities:
Trade accounts receivable................ -- (667,847) (2,607,671) (1,536,816) (1,079,435)
Other receivables........................ -- -- (57,320) (246,591) (368,803)
Inventory................................ -- (3,218) (57,325) (65,875) (5,486)
Prepaid expenses and other current
assets................................. -- (143,328) (348,723) (342,262) 168,876
Other assets............................. -- -- (78,298) 355 (104,858)
Accounts payable......................... -- 185,368 2,220,292 842,186 (1,210,809)
Accrued compensation..................... 15,817 34,164 296,030 217,119 423,951
Other accrued expenses................... 33,217 116,692 821,590 333,622 1,774,984
Accrued income taxes..................... -- -- -- -- 5,200,000
Deferred revenue......................... -- 645,416 2,266,506 1,338,432 29,405,712
-------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities................. (490,910) (1,240,356) (635,077) (1,441,565) 21,869,927
-------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment.......... (67,542) (624,503) (2,783,994) (1,705,783) (3,496,171)
Purchases of short-term investments.......... -- (3,035,061) (30,514,885) (11,836,281) (189,419,284)
Proceeds from sales and maturities of
short-term investments..................... -- -- 28,644,215 13,279,604 171,379,251
Investment in joint venture.................. -- -- -- -- (998,208)
Increase in other assets..................... (1,393) -- (181,960) (237,708) (250,575)
-------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................... (68,935) (3,659,564) (4,836,624) (500,168) (22,784,987)
-------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable....... -- -- -- -- 991,268
Proceeds from sale of preferred stock and
stock warrants, net........................ -- 7,404,528 17,046,966 -- 29,846,258
Proceeds from exercise of preferred stock
warrant.................................... -- 250,000 -- -- --
Proceeds from exercise of common stock
options.................................... -- 2,153 43,770 42,749 142,501
Proceeds from sale of common stock........... 72,838 -- -- -- --
Contribution of capital by founder........... 487,357 372,283 -- -- --
-------- ---------- ---------- ---------- ----------
Net cash provided by financing
activities........................... 560,195 8,028,964 17,090,736 42,749 30,980,027
-------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash........ -- -- (10,623) -- (51,475)
-------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents..................... 350 3,129,044 11,608,412 (1,898,984) 30,013,492
Cash and cash equivalents at beginning of
period....................................... -- 350 3,129,394 3,129,394 14,737,806
-------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period..... $ 350 $ 3,129,394 $ 14,737,806 $ 1,230,410 $ 44,751,298
======== ========== ========== ========== ==========
Supplemental disclosure of cash flow
information -- cash paid during the period
for interest................................. $ -- $ 1,853 $ 4,430 $ -- $ 26,633
Supplemental disclosure of noncash financing
and investing activities:
Exchange of common stock for Series A
preferred stock............................ $ -- $ 932,385 $ -- $ -- $ --
Accretion of redemption value of redeemable,
convertible preferred stock................ $ -- $ -- $ 31,000 $ -- $ 345,900
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 78

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996, AND SEPTEMBER 30, 1996 AND 1997

(INFORMATION FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Business

RealNetworks, Inc. (formerly Progressive Networks, Inc.) and subsidiaries
(Company) is a leading provider of branded software products and services that
enable the delivery of streaming media content over the Internet and intranets.
Streaming technology enables the transmission and playback of continuous
"streams" of multimedia content, such as audio and video, over the Internet and
intranets. The Company's products and services include its RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites.

Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. The Company's success may depend in part upon the emergence of the
Internet as a communications medium, the acceptance of the Company's technology
by the marketplace and the Company's ability to generate license and advertising
revenues from the use of its technology on the Internet.

(b) Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

The Company considers all short-term investments with a remaining
contractual maturity at date of purchase of three months or less to be cash
equivalents.

The Company classifies its short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximated cost, and there were no unrealized holding gains or
losses at December 31, 1995 and 1996, and September 30, 1997. At September 30,
1997, all short-term investments had contractual maturities of two years or
less.

F-7
<PAGE> 79

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's cash and cash equivalents and short-term investments as of
December 31, 1995 and 1996 and September 30, 1997 consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ----------- -------------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash........................................ $1,104,358 $ 1,016,728 $ 1,538,598
Commercial paper............................ 2,025,036 13,721,078 35,648,430
U.S. Government agency securities........... -- -- 7,564,270
--------- ---------- ----------
Total cash and cash equivalents..... 3,129,394 14,737,806 44,751,298
Short-term investments:
Corporate notes............................. 2,986,493 4,857,163 10,416,565
U.S. Government agency securities........... -- -- 9,980,935
Certificates of deposit..................... -- -- 2,499,696
--------- ---------- ----------
Total short-term investments........ 2,986,493 4,857,163 22,897,196
--------- ---------- ----------
Total cash and cash equivalents and
short-term investments............ $6,115,887 $19,594,969 $67,648,494
========= ========== ==========
</TABLE>

(d) Inventory

Inventory is stated at the lower of cost or market, with cost determined on
the first-in, first-out basis.

(e) Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the asset.

(f) Investment in Joint Venture

The Company has a 24% interest in a Japanese limited liability company and
accounts for this investment using the equity method. Accordingly, the initial
investment is recorded at cost. Subsequently, the carrying amount of the
investment is increased or decreased to reflect the Company's share of income or
losses of the joint venture and is reduced to reflect dividends received from
the joint venture. The Company's share of income or losses of the joint venture
is included in the Company's consolidated statements of operations.

The Company's investment in the joint venture was funded with proceeds from
a loan from Trans Cosmos, Inc., one of the joint venture's partners (see note
6). The Company and Trans Cosmos, Inc. are parties to a Master Distribution
Agreement pursuant to which the Company granted Trans Cosmos, Inc. a
nonexclusive, nontransferable license to reproduce and distribute the Company's
products in Japan.

(g) Research and Development

Research and development costs are charged to operations as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.

F-8
<PAGE> 80

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.

(h) Revenue Recognition

The Company recognizes revenue from software license fees upon delivery,
net of an allowance for estimated returns, provided that no significant
obligations of the Company remain and collection of the resulting receivable is
deemed probable.

Revenue from software license agreements with original equipment
manufacturers (OEM) is recognized when the OEM delivers its product
incorporating the Company's software to the end user. In the case of prepayments
received from an OEM, the Company generally recognizes revenue based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue generally is recognized on the
straight-line method over the term of the contract.

The Company recognizes revenue from software license agreements with
value-added resellers (VAR), provided the following conditions are met: the
software product has been delivered to the VAR, the fee to the Company is fixed
or determinable, and collectibility is probable.

Revenues from advertising appearing on the Company's World Wide Web (Web)
sites are recognized on the straight-line method over the terms of the
advertising contracts. The Company guarantees to certain advertising customers a
minimum number of page impressions to be delivered to users of its Web sites for
a specified period. To the extent minimum guaranteed page impression deliveries
are not met, the Company defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of December 31, 1996
and September 30, 1997, no revenues had been deferred as a result of these
guarantees.

Service revenues include payments under support and upgrade contracts,
commissions from sales of third-party products and fees from consulting, content
hosting, and user conferences. Support and upgrade revenues are recognized
ratably over the term of the contract, which typically is 12 months. Other
service revenues are recognized when the service is performed.

(i) Financial Instruments and Concentrations of Risk

The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts receivable, accounts payable, accrued
expenses, and note payable. The fair value of these instruments approximates
their financial statement carrying amount. Credit is extended to customers based
on an evaluation of their financial condition, and collateral is not required.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses. Substantially all of the Company's
accounts receivable are derived from domestic sales.

The Company is subject to concentrations of credit and interest rate risk
related to its short-term investments. The Company's credit risk is managed by
limiting the amount of investments placed with any one issuer, investing in
high-quality investment securities and securities of the U.S. government, and
limiting the average maturity of the overall portfolio.

F-9
<PAGE> 81

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's customers consist primarily of resellers and end users
located in the United States and various foreign countries. Revenues in the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1996 and 1997 by geographic region, as a percent of total net revenues, are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States.................................. 83% 78% 79% 73%
Asia........................................... 8% 7% 8% 11%
Europe......................................... 5% 7% 7% 10%
Canada......................................... 2% 3% 3% 3%
Other.......................................... 2% 5% 3% 3%
</TABLE>

One customer accounted for approximately 14% of total net revenues in 1995.
No single customer accounted for more than 10% of total net revenues in 1996 or
in the nine months ended September 30, 1996. Software license fees under a
license agreement with Microsoft Corporation (Microsoft) (see note 8) accounted
for approximately 11% of total net revenues for the nine months ended September
30, 1997.

(j) Advertising Expenses

The Company expenses the cost of advertising and promoting its products as
incurred. Such costs are included in selling and marketing expense and totaled
approximately $68,000 and $665,000 during the years ended December 31, 1995 and
1996, respectively, and $365,000 and $751,000 during the nine months ended
September 30, 1996 and 1997, respectively.

(k) Income Taxes

The Company was an S corporation for federal income tax purposes from its
inception through April 8, 1995. Consequently, taxable income or loss of the
Company through April 8, 1995 was attributed to the Company's shareholders.
Effective April 8, 1995, the Company changed its election to utilize the
provisions of subchapter S of the Internal Revenue Code of 1986, as amended, and
elected to be taxed as a subchapter C corporation.

The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and to operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that includes the enactment date.

Pro forma income tax information has not been provided for the period from
inception to April 8, 1995. As a result of the operating losses recognized prior
to April 8, 1995, any income tax benefit would have been fully offset by the
establishment of a valuation allowance for deferred tax assets had the Company
been taxed as a subchapter C corporation.

F-10
<PAGE> 82

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(l) Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is incorporated. Assets and
liabilities of foreign operations are translated into U.S. dollars using rates
of exchange in effect at the end of the reporting period. Income and expense
accounts are translated into U.S. dollars using average rates of exchange. The
net gain or loss resulting from translation is shown as a cumulative translation
adjustment in shareholders' equity. Gains and losses from foreign currency
transactions are included in the consolidated statement of operations.

(m) Use of Estimates

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

(n) Stock-Based Compensation

The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted the disclosure-only requirements
of SFAS No. 123, Accounting for Stock-Based Compensation, which allows entities
to continue to apply the provisions of APB Opinion No. 25 for transactions with
employees and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method of accounting in SFAS No. 123 had been applied to
these transactions.

(o) Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

(p) Reclassifications

Certain reclassifications have been made to the 1994, 1995 and 1996
consolidated financial statements to conform with the 1997 presentation.

(q) Unaudited Interim Financial Statements

In the opinion of the Company's management, the September 30, 1996
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation.

F-11
<PAGE> 83

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(r) Pro Forma Net Loss Per Share

Pro forma net loss per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable, convertible preferred stock by
the weighted average number of shares of common stock and common stock
equivalents outstanding during each period and the shares resulting from the
conversion of all outstanding shares of preferred stock. Common stock
equivalents include all warrants and stock options that would have a dilutive
effect, applying the treasury stock method. Additionally, common and common
equivalent shares issued during the twelve months immediately preceding the
initial filing of a registration statement for the Company's initial public
offering (IPO) have been included in the calculation of common and common
equivalent shares as if they were outstanding for all periods presented,
including loss years where the impact of the incremental shares is antidilutive,
using the treasury stock method and an assumed initial public offering price of
$10.00 per share. Due to the significant impact of the assumed conversion of the
preferred stock upon closing of the IPO, historical net loss per share is not
meaningful and, therefore, is not presented.

(s) New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share (Statement 128). Statement 128 establishes
standards for the computation, presentation and disclosure of earnings per share
(EPS), replacing the presentation of the currently required Primary EPS with a
presentation of Basic EPS. It also requires dual presentation of Basic EPS and
Diluted EPS on the face of the income statement for entities with complex
capital structures. Basic EPS is based on the weighted average number of common
shares outstanding during the period. Diluted EPS is based on the potential
dilution that would occur on exercise or conversion of securities into common
stock using the treasury stock method. Statement 128 is effective for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. When adopted, the Company will be required to restate its EPS
data for all prior periods presented. The Company does not expect the impact of
the adoption of Statement 128 to be material to its reported EPS amounts.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement
130, which is effective for fiscal years beginning after December 15, 1997,
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company anticipates that implementing the
provisions of Statement 130 will not have a significant impact on the Company's
existing disclosures. The Company has not determined the manner in which it will
present the information required by Statement 130.

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company anticipates that implementing the provisions of Statement 131 will
not have a significant impact on the Company's existing disclosures. The Company
has not determined the manner in which it will present the information required
by Statement 131.

F-12
<PAGE> 84

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
--------- ----------- -------------
<S> <C> <C> <C>
Computer equipment and software... $ 529,705 $ 2,210,799 $ 4,255,153
Furniture, fixtures and leasehold
improvements.................... 162,340 1,251,354 2,698,345
-------- ---------- ----------
692,045 3,462,153 6,953,498
Less accumulated depreciation and
amortization.................... 98,003 783,355 2,180,018
-------- ---------- ----------
$ 594,042 $ 2,678,798 $ 4,773,480
======== ========== ==========
</TABLE>

(3) COMMITMENTS

(a) Leases

The Company leases facilities under operating lease agreements expiring
through April 2001. Future minimum lease payments under these leases are:

<TABLE>
<CAPTION>
NET
MINIMUM MINIMUM
LEASE SUBLEASE LEASE
PAYMENTS RECEIPTS PAYMENTS
---------- --------- ----------
<S> <C> <C> <C>
YEARS ENDING SEPTEMBER 30:
1998....................................... $1,906,415 $(191,100) $1,715,315
1999....................................... 1,828,750 (95,500) 1,733,250
2000....................................... 1,646,251 -- 1,646,251
2001....................................... 946,933 -- 946,933
---------- --------- ----------
Total minimum lease payments..... $6,328,349 $(286,600) $6,041,749
========== ========= ==========
</TABLE>

Rent expense totaled approximately $76,000 and $610,000 for the years ended
December 31, 1995 and 1996, respectively, and $418,000 and $1,260,000 for the
nine months ended September 30, 1996 and 1997, respectively.

In April 1996, the Company entered into operating lease agreements for
additional corporate office space, with the lease term extending through April
2001. These leases can be terminated beginning October 1998 with nine months'
advance written notice and contain options for two five-year renewals.

(b) Royalties

The Company has arrangements with several Internet content providers
pursuant to which it is committed to pay a percentage of certain advertising
revenues generated from its Web sites. As of December 31, 1996 and September 30,
1997, royalties under these arrangements have not been significant.

F-13
<PAGE> 85

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) INCOME TAXES

The components of income tax expense (benefit) are:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Current............................. $ -- $ -- $ 5,200,000
Deferred............................ -- -- (5,200,000)
-------- -------- -----------
$ -- $ -- $ --
======== ======== ===========
</TABLE>

The expected U.S. federal income tax benefit determined by applying the
statutory U.S. federal income tax rate of 34% to pretax loss for the period from
February 9, 1994 (inception) to December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 differs from the U.S.
federal income tax benefit in the consolidated financial statements due
primarily to the increase in the valuation allowance for deferred tax assets.

The tax effects of temporary differences and tax loss and credit
carryforwards that give rise to significant portions of federal deferred tax
assets are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
--------- ----------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 216,000 $ 918,000 $ --
Deferred revenue.......................... 112,000 530,000 10,154,000
Allowances for doubtful accounts and
sales returns.......................... 44,000 130,000 232,000
Start-up costs capitalized for tax
purposes............................... 84,000 70,000 48,000
Research and experimentation credit
carryforwards.......................... 7,000 102,000 --
Other..................................... 30,000 78,000 276,000
-------- ---------- ----------
Gross deferred tax assets................... 493,000 1,828,000 10,710,000
Less valuation allowance.................. 493,000 1,828,000 5,510,000
-------- ---------- ----------
Net deferred tax assets..................... $ -- $ -- $ 5,200,000
======== ========== ==========
</TABLE>

The valuation allowance for deferred tax assets increased by $493,000,
$1,335,000, and $3,682,000 for the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997, respectively.

At December 31, 1996, the Company had net operating loss and other credit
carryforwards of $2,802,000. As of September 30, 1997, the Company anticipates
fully utilizing its net operating loss and other credit carryforwards by
December 31, 1997 as a result of taxable income generated from a license
agreement with Microsoft (see note 8). For financial reporting purposes, those
license fees are recognized over the three-year term of the Company's ongoing
obligations. As a result, the Company has recognized deferred tax assets to the
extent of its accrued taxes. The Company believes it is more likely than not
that its net deferred tax assets as of September 30, 1997 will be realized
through the reversal of temporary differences in 1998 and 1999.

F-14
<PAGE> 86

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) 401(k) RETIREMENT SAVINGS PLAN

The Company has a 401(k) Retirement Savings Plan that covers all employees
who have met certain employment requirements. Employees can contribute a portion
of their salary to the maximum allowed by the federal tax guidelines.

(6) BANK LINE OF CREDIT AND TERM LOAN AND NOTE PAYABLE

At December 31, 1996, the Company had available a $1,000,000 domestic bank
line of credit and a $1,500,000 bank term loan. There were no borrowings
outstanding under the line of credit or the term loan as of December 31, 1996,
and the Company terminated the line of credit and term loan in September 1997.

At September 30, 1997, the Company had outstanding a note payable to one of
its joint venture partners. The note is denominated in Japanese yen, bears
interest at a rate not to exceed the Japanese Short Term Prime Rate (1.63% at
September 30, 1997) and is secured by the Company's shares in the joint venture.
Interest on the note is payable monthly and the principal is due in May 2000.
The principal amount of the note is 115,200,000 Japanese yen ($959,380 at
September 30, 1997), and the Company may, under certain circumstances, tender
its shares in the joint venture as repayment of the note.

(7) SHAREHOLDERS' EQUITY

(a) Authorized Capital

In September 1997, the Company increased its authorized capital to
300,000,000 shares of common stock and 60,000,000 shares of preferred stock and
established a par value of $0.001 for both common and preferred stock. The
accompanying consolidated financial statements have been restated in all periods
presented to reflect this action.

(b) Preferred Stock

The Company has authorized and issued convertible preferred stock and
redeemable, convertible preferred stock as follows:

<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING SHARES
-------------------------------------------
DECEMBER 31,
AUTHORIZED -------------------------- SEPTEMBER 30,
SERIES SHARES 1995 1996 1997
------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Convertible preferred...... A 13,713,439 13,713,439 13,713,439 13,713,439
Redeemable, convertible
preferred................ B 3,059,701 3,059,701 3,059,701 3,059,701
Redeemable, convertible
preferred................ C 3,004,305 2,904,305 2,904,305 2,904,305
Redeemable, convertible
preferred................ D 3,095,313 -- 2,381,010 2,381,010
Redeemable, convertible
preferred................ E 7,047,679 -- -- 3,338,374
</TABLE>

F-15
<PAGE> 87

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes activity of the Company's redeemable,
convertible preferred stock for the years ended December 31, 1995 and 1996, and
the nine months ended September 30, 1997:

<TABLE>
<CAPTION>
PRICE
DESCRIPTION PER SHARE SHARES AMOUNT
- ----------------------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994........................ -- $ --
Sale of Series B preferred stock, net of issuance
costs of $40,000................................... $0.67 2,686,567 1,760,000
Sale of Series C preferred stock, net of issuance
costs of $57,784................................... 1.9634 2,904,305 5,644,528
Exercise of warrants for Series B preferred stock.... 0.67 373,134 250,000
--------- -----------
Balances at December 31, 1995........................ 5,964,006 7,654,528
Sale of Series D preferred stock, net of issuance
costs and warrant value of $889,186 and $1,579,000,
respectively....................................... 7.53 2,381,010 15,467,966
Accretion of redemption value........................ -- 31,000
--------- -----------
Balances at December 31, 1996........................ 8,345,016 23,153,494
Issuance costs related to sale of Series D preferred
stock.............................................. -- (22,807)
Sale of Series E preferred stock, net of issuance
costs and warrant value of $130,935 and $4,068,000,
respectively....................................... 8.99 3,338,374 25,801,065
Accretion of redemption value........................ -- 345,900
--------- -----------
Balances at September 30, 1997....................... 11,683,390 $49,277,652
========= ===========
</TABLE>

The rights, preferences and restrictions of the Series A, B, C, D and E
Preferred Stock are as follows:

- Each of the Series B, C, D and E Preferred Stock are redeemable by the
holder on, or at any time after, December 31, 2002 with the written
consent of at least two-thirds of the respective outstanding Series B, C,
D and E shareholders. The stated redemption prices at date of issuance
were $0.67, $1.9634, $7.53 and $8.99 per share for the Series B, C, D and
E Preferred Stock, respectively, and are to be adjusted for inflation
from the issuance date to the redemption date. Redemption payments would
be made in three equal installments commencing on the initial redemption
request date, and each year thereafter, for a period of two years. The
Company accounts for the difference between the carrying amount of
redeemable preferred stock and the redemption amount by increasing the
carrying amount for periodic accretion against accumulated deficit using
the interest method, so that the carrying amount will equal the
redemption amount at the redemption date.

- Each share of Series A, B, C and D Preferred Stock is convertible at the
option of the holder at any time into one share of Series A Common Stock,
subject to certain antidilution provisions. The holders of Series A
Preferred Stock have the right, under certain circumstances, to convert
one share of Series A Preferred Stock into one share of Series D Common
Stock.

- Each share of Series E Preferred Stock is convertible at the option of
the holder at any time into one share of either Series A Common Stock or
Series E Common Stock.

- Conversion of all Series A, B, C, D and E Preferred Stock is automatic
upon the closing of a public offering of the Company's common stock if
either (a) the price to the public in the offering is at least $13.554
per share and the aggregate proceeds of the offering are not less than
$20,000,000, or (b) the holders of not less than two-thirds of the then
outstanding shares of Series D Preferred Stock, by affirmative vote or
written consent, have consented to the automatic conversion.

F-16
<PAGE> 88

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- Series A, B, C, D and E Preferred Stock have a liquidation preference of
$0.0729, $0.67, $1.9634, $11.295 and $8.99 per share, respectively, plus
all declared but unpaid dividends, if any. No dividends have been
declared through December 31, 1996 and September 30, 1997.

- Series A, B, C and D Preferred Stock have the same voting rights as
Series A Common Stock based upon the number of shares of Series A Common
Stock into which they are convertible. Series E Preferred Stock is
nonvoting except as otherwise required by law, in which case the holders
of each share of Series E Preferred Stock shall be entitled to one vote
per share. Series A, B, C, D and E Preferred Stock have preferential
treatment over all Common Stock with respect to any payment of dividends
when and if declared by the board of directors and any distributions of
assets upon liquidation.

Pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC), the Company has classified redeemable, convertible preferred
stock outside of shareholders' deficit.

In September 1997, the Board of Directors authorized the filing of a
registration statement with the SEC to permit the Company to sell shares of
Common Stock to the public. In connection therewith, the Company received the
approval of the holders of two-thirds of the Series D Preferred Stock to convert
the Series A, B, C, D and E Preferred Stock into Common Stock on closing of the
IPO.

Unaudited pro forma shareholders' equity included on the face of the
balance sheet reflects the assumed conversion of redeemable, convertible
preferred stock and convertible preferred stock into Common Stock and Special
Common Stock (see note 9(b)) as of September 30, 1997.

Common stock at December 31, 1995 and 1996, and September 30, 1997,
consisted of the following:

<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING SHARES
------------------------------------
DECEMBER 31,
------------------ SEPTEMBER 30,
AUTHORIZED SHARES 1995 1996 1997
----------------- ------ ------- -------------
<S> <C> <C> <C> <C>
Series A............................... 207,047,679 1 1 1
Series B............................... 30,000,000 2,400 463,018 1,044,649
Series C............................... 30,000,000 34,547 72,472 498,642
Series D............................... 1 -- -- --
Series E............................... 7,047,679 -- -- --
</TABLE>

At January 1, 1995, 10,000 shares of common stock were issued and
outstanding. In April 1995, these 10,000 shares of common stock were exchanged
for 13,713,439 shares of Series A Preferred Stock and one share of Series A
Common Stock.

Series A, B and D Common Stock entitle the holder to fifteen votes for each
share held. Each share of Series E Common Stock shall not be entitled to vote,
except as required by law, in which case it shall entitle the holder to one
vote. Series C Common Stock entitles the holder to one vote for each share held.
Series B Common Stock is reserved for issuance to employees, directors or
affiliates of directors. Each share of Series B Common Stock automatically
converts to one share of Series C Common Stock upon termination of the holder's
employment, or his or her status as a director or an affiliate of a director.

On the closing of a Qualified Offering of the Company's stock, as defined
in the Company's Amended and Restated Articles of Incorporation, the
designations of Series A through D Common Stock terminate and Series A through D
Common Stock convert into one class of common stock, with each share entitled to
one vote; and the designation of Series E Common Stock terminates and Series E
Common Stock converts at the option of the holder into either Common Stock, with
each share entitled to

F-17
<PAGE> 89

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

one vote, or Special Common Stock, with no voting rights except as required by
applicable law. The Special Common Stock has all other rights and privileges of
the Common Stock.

(d) Stock Warrants

In connection with the sale of Series B Preferred Stock, the Company issued
a warrant to purchase 373,134 additional shares of Series B Preferred Stock at
an exercise price of $0.67 per share. No separate value was assigned to the
warrant as the value was not significant at the date of issuance. This warrant
was exercised in 1995.

In connection with the sale of Series C Preferred Stock, the Company issued
warrants to purchase up to 100,000 additional shares of Series C Preferred Stock
at an exercise price of $1.9634 per share, and warrants to purchase up to
183,755 shares of Series B Common Stock at an exercise price of approximately
$0.20 per share. No separate value has been assigned to the warrants as the
values were not significant at the date of issuance. These warrants vest on the
earlier of January 26, 1997 or, if certain conditions are met, upon the closing
of an IPO of the Company's common stock. These warrants expire on the earlier of
the closing of an IPO by the Company with aggregate proceeds of not less than
$10,000,000 and at not less than $4.00 per share or October 26, 2000. No
warrants to purchase Series C Preferred Stock or Series B Common Stock have been
exercised as of December 31, 1996 and September 30, 1997.

In connection with the sale of Series D Preferred Stock, the Company issued
warrants to purchase up to 714,303 additional shares of Series D Preferred Stock
at an exercise price of $9.4125 per share. The value of the warrants,
$1,579,000, was recorded as additional paid-in capital. These warrants are
exercisable at December 31, 1996, and expire on November 27, 1998. The value of
these warrants was determined using a Black-Scholes valuation model with the
following assumptions: expected life of two years, expected dividend yield of
0%, expected volatility of 60% and a risk-free interest rate of 6%. Upon a
merger or consolidation in which the Company is not the survivor, the warrants
are canceled and all rights granted shall terminate. If an event causing
conversion of the Company's Series D Preferred Stock shall have occurred prior
to the exercise of the warrants, then all warrants shall be exercisable for the
number of shares of common stock of the Company into which the Series D
Preferred Stock not purchased upon any prior exercise of the warrants would have
been so converted.

In connection with the sale of Series E Preferred Stock, the Company issued
a warrant to purchase up to 3,709,305 additional shares of Series E Preferred
Stock at an exercise price of $13.48 per share. The value of the warrant,
$4,068,000, was recorded as additional paid-in capital. This warrant is
exercisable at any time through January 21, 2000 and will terminate
automatically upon either closing of an IPO by the Company, or completion of a
merger or consolidation in which the Company is not a survivor. The value of the
warrant was determined using a Black-Scholes valuation model with the following
assumptions: expected life of one year, expected dividend yield of 0%, expected
volatility of 60% and a risk-free interest rate of 6%. If an event causing
conversion of the Company's Series E Preferred Stock shall have occurred prior
to the exercise of the warrant, in whole or in part, then the warrant shall be
exercisable for the number of shares of common stock of the Company into which
the Series E Preferred Stock not purchased upon any prior exercise of the
warrant would have been so converted.

(e) Stock Option Plans

Under the Company's 1995 Stock Option Plan (1995 Plan), 3,600,000 shares of
Common Stock were reserved for the issuance of stock options. Under the
Company's Amended and Restated 1996 Stock Option Plan (1996 Plan), 8,800,000
shares of Common Stock are reserved for the issuance of

F-18
<PAGE> 90

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

stock options. In September 1997, the Company discontinued granting stock
options under the 1995 Plan. In accordance with the provisions of the 1996 Plan,
in addition to the 8,800,000 shares of Common Stock reserved, shares of Common
Stock previously available for grant under the 1995 Plan are available for grant
under the 1996 Plan, and to the extent options outstanding under the 1995 Plan
terminate without having been exercised in full, the terminated options become
available under the 1996 Plan.

Options granted under the 1996 Plan may be designated as qualified or
nonqualified at the discretion of the Board of Directors, generally vest over a
period of one to five years from the date of grant, expire 20 years from the
date of grant and terminate, to the extent not exercised, three months after the
termination of employment.

A summary of stock option activity under the 1995 Plan and the 1996 Plan is
as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------- ---------- --------------
<S> <C> <C> <C>
Balances at December 31, 1994...... -- -- $ --
Plan introduction.................. 3,600,000 -- --
Options granted.................... (3,313,214) 3,313,214 0.07
Options exercised.................. -- (30,750) 0.07
Options canceled................... 450,000 (450,000) 0.07
---------- ---------

Balances at December 31, 1995...... 736,786 2,832,464 0.07
Plan introduction.................. 3,000,000 -- --
Options granted.................... (3,766,364) 3,766,364 0.34
Options exercised.................. -- (498,543) 0.09
Options canceled................... 765,250 (765,250) 0.10
---------- ---------

Balances at December 31, 1996...... 735,672 5,335,035 0.27
Plan amendment..................... 5,800,000 -- --
Options granted.................... (2,739,930) 2,739,930 3.94
Options exercised.................. -- (1,006,801) 0.14
Options canceled................... 625,450 (625,450) 0.71
---------- ---------
Balances at September 30, 1997..... 4,421,192 6,442,714 $ 1.80
========== =========
</TABLE>

The Company applies APB Opinion No. 25 in accounting for the 1995 Plan and
the 1996 Plan, and no compensation cost has been recognized for its employee
stock options in the consolidated financial statements. Had the Company
determined compensation cost of employee stock options based on the fair value
of the option at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Net loss:
As reported................... $(1,501,302) $(3,789,245) $ (8,574,716)
Pro forma..................... (1,510,513) (3,865,415) (8,770,334)
Net loss per share:
As reported................... $ (0.14) $ (0.32)
Pro forma..................... (0.14) (0.32)
</TABLE>

F-19
<PAGE> 91

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss and net loss per share
amounts presented above because compensation cost is recognized over the
options' vesting period.

The per share weighted-average fair value of stock options granted during
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997 was $.01, $.07 and $.70, respectively, on the date of grant using the
minimum value method with the following weighted average assumptions:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Expected dividend yield............... 0% 0% 0%
Risk-free interest rate............... 5.9% 6.1% 6.1%
Expected life......................... 3.5 years 4.5 years 3.5 years
</TABLE>

The following table summarizes information about stock options outstanding
under the 1995 Plan and the 1996 Plan at September 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.07 1,193,473 17.58 years $0.07 123,873 $0.07
0.20 1,993,206 18.42 years 0.20 480,438 0.20
0.85-1.50 1,349,535 19.12 years 1.23 62,135 0.93
2.00-3.50 970,000 19.64 years 2.60 4,600 2.30
7.25-8.50 936,500 19.90 years 7.38 4,000 7.25
--------- -------
6,442,714 18.81 years $1.80 675,046 $0.30
========= =======
</TABLE>

(f) Employee Stock Purchase Plan

In September 1997, the Board and the Company's shareholders adopted and
approved the 1998 Employee Stock Purchase Plan (ESPP), which will become
effective January 1, 1998. The Company has reserved 1,000,000 shares of Common
Stock for issuance under the ESPP. The ESPP will be implemented through a series
of offering periods of six months' duration, with new offering periods
commencing on January 1 and July 1 of each year. The ESPP permits eligible
employees to purchase Common Stock at a price equal to 85% of the lower of the
fair market value of the Common Stock at the beginning or end of the offering
period.

(8) LICENSE AGREEMENT

In June 1997, the Company entered into a strategic agreement with Microsoft
pursuant to which the Company granted Microsoft a nonexclusive license to its
Standard Code (as defined in the agreement), which is comprised of certain
substantial elements of the source code of the Company's RealAudio/ RealVideo
Version 4.0 technology included in its basic RealPlayer and substantial elements
of its EasyStart Server (currently known as the Basic Server), and related
Company trademarks. Under the agreement, Microsoft may sublicense its rights to
the Standard Code to third parties under certain conditions. On two occasions
during the first two years following delivery under the agreement, Microsoft may
acquire for $25 million and $35 million, respectively, a nonexclusive license to
subsequently developed versions of the Standard Code, products based on which
are currently distributed to end users by the Company at no charge. If the
Company elects in its sole discretion to grant an Event License the agreement
provides for a full refund of each license fee during the first year, declining
to 0% over the

F-20
<PAGE> 92

REALNETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

following two years. The Company may not assign its obligations under the
agreement without Microsoft's consent, and a merger, the sale of substantially
all of the Company's assets and certain other events will be deemed to be an
assignment under the agreement. Microsoft is obligated to distribute the
Company's RealPlayer Version 4.0 for a defined term as long as the Company's
player supports certain Microsoft architectures. The Company also agreed to work
with Microsoft and several other companies to author and promote the Active
Streaming Format as a standard file format for streaming media. The agreement
also requires the Company to provide Microsoft with engineering consultation
services, certain error corrections, and certain technical support over a
defined term. In July 1997, the Company believes it delivered the Standard Code
in exchange for a license fee of $30,000,000. The Company recognizes revenue,
commencing with delivery of the source code, over the three-year term of its
ongoing obligations. The portion of the license fee that has not yet been
recognized as revenue is included in deferred revenue.

In connection with the agreement, Microsoft purchased a minority interest
in the Company in the form of 3,338,374 shares of Series E Preferred Stock at
$8.99 per share.

(9) SUBSEQUENT EVENTS

(a) License Agreement

The terms of the Company's strategic agreement with Microsoft provide that
the $30,000,000 software license fee will be paid to the Company in two
installments. The first installment of $20,000,000 was due within 30 days of the
signing of the software license agreement, and the remaining $10,000,000 is due
within 30 days of the earlier of (1) the Company's completion of six "man
months" of consulting services, or (2) six months after delivery of the
specified source code to Microsoft. In July 1997, the Company believes it
delivered the Standard Code and subsequently received from Microsoft a payment
of $30,000,000 representing Microsoft's payment of both installments under the
agreement although payment of the second installment of $10,000,000 was not due
at that time. In October 1997, Microsoft requested that the Company return the
$10,000,000 installment that Microsoft had paid prior to its due date. Although
not legally required to do so, the Company refunded the $10,000,000 to
Microsoft. The Company expects Microsoft to make this second installment payment
in accordance with the terms of the agreement.

(b) Special Common Stock

In October 1997, the Company's Board of Directors and shareholders approved
an amendment to the Company's Amended and Restated Articles of Incorporation to
provide that any shares of Special Common Stock held by Microsoft will convert
automatically into Common Stock upon transfer by a purchaser who is not
affiliated with the holder.

In October 1997, Microsoft agreed in writing to accept Special Common Stock
in connection with any conversion of shares of Series E Preferred Stock held by
Microsoft.

F-21
<PAGE> 93

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., BancAmerica Robertson Stephens
and NationsBanc Montgomery Securities, Inc. are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
-------------------------------------------------------------------- ----------
<S> <C>
Goldman, Sachs & Co................................................. 983,100
BancAmerica Robertson Stephens...................................... 618,750
NationsBanc Montgomery Securities, Inc.............................. 618,750
BT Alex. Brown...................................................... 79,050
A.G. Edwards & Sons, Inc............................................ 79,050
Hambrecht & Quist LLC............................................... 79,050
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................. 79,050
Morgan Stanley & Co. Incorporated................................... 79,050
UBS Securities LLC.................................................. 79,050
Ragen MacKenzie Incorporated........................................ 79,050
Wessels, Arnold & Henderson, L.L.C.................................. 79,050
Cowen & Company..................................................... 49,000
The Nikko Securities Co. International, Inc......................... 49,000
SoundView Financial Group, Inc...................................... 49,000
---------
Total............................................................. 3,000,000
=========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.48 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 450,000
additional shares of Common Stock at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,000,000 shares of Common
Stock offered.

As of the date of this Prospectus, The Goldman Sachs Group, L.P., an
affiliate of Goldman, Sachs & Co., beneficially owns 66,401 shares, and a
warrant to purchase 19,920 shares, of Series D Preferred Stock. These shares and
the warrant were purchased on November 27, 1996 in reliance on the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving a public offering. Goldman, Sachs & Co. acted
as placement agent for the Company in connection with the Company's sale of
2,381,010 shares of Series D Preferred Stock and warrants to purchase 714,303
shares of Series D Preferred Stock in November 1996. In connection with its
services as placement agent, Goldman, Sachs & Co. received total fees of
$889,186.

The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than with respect to

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<PAGE> 94

(i) employee stock option or stock purchase plans existing, or on the conversion
or exchange of convertible or exchangeable securities outstanding, on the date
of this Prospectus and (ii) an aggregate of 250,000 shares of Common Stock in
connection with the establishment of strategic relationships or in connection
with business combinations, provided that the purchasers thereof enter into
Lock-Up Agreements extending at least 180 days after the date of this
Prospectus) which are substantially similar to the Common Stock or which are
convertible into or exchangeable for securities which are substantially similar
to the Common Stock without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the offering.

In addition, the officers, directors and certain persons who prior to
closing of the offering hold shares of capital stock of the Company (including
but not limited to all holders of 1% or more of the Company's capital stock)
have agreed that they will not offer, sell or otherwise dispose of any shares of
Common Stock owned of record or beneficially as of the date of the Prospectus,
including securities convertible into or exercisable or exchangeable for shares
of Common Stock as of said date, as well as any shares of Common Stock later
acquired by reason of the conversion, exercise or exchange of such securities,
or enter into any swap or other transaction with respect to the shares that
would transfer the economic consequences of ownership of the Common Stock to
another person, for a period of 180 days following the date of this Prospectus,
except that (i) persons other than officers, directors and holders of 1% or more
of the capital stock of the Company each will be free to sell or otherwise
dispose of up to 5,000 shares of Common Stock to the extent permissible under
Rule 144 or Rule 701 and (ii) directors, officers and holders of 1% of the
Company's capital stock may dispose of shares of Common Stock as bona fide gifts
if the recipient of any such gift agrees in writing with the Underwriters to be
bound by the terms of this 180-day transfer restriction.

At the request of the Company, the Underwriters have reserved up to 300,000
shares of Common Stock for sale, at the initial public offering price, to
employees and friends of the Company through a directed share program. The
number of shares of Common Stock available for sale to the general public in the
public offering will be reduced to the extent such persons purchase such
reserved shares.

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.

Prior to the offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
representatives. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market conditions,
were the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.

In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "RNWK," subject to notice of issuance. The Company has
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act.

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 21
Dividend Policy........................... 21
Capitalization............................ 22
Dilution.................................. 23
Selected Consolidated Financial Data...... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 25
Business.................................. 36
Management................................ 52
Certain Transactions...................... 61
Principal Shareholders.................... 64
Description of Capital Stock.............. 66
Shares Eligible for Future Sale........... 69
Legal Matters............................. 71
Experts................................... 71
Additional Information.................... 71
Index to Consolidated Financial
Statements.............................. F-1
Underwriting.............................. U-1
THROUGH AND INCLUDING DECEMBER 16, 1997 (THE
25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

=================================================
</TABLE>

============================================================

3,000,000 SHARES

REALNETWORKS, INC.
(FORMERLY "PROGRESSIVE NETWORKS, INC.")

COMMON STOCK
(PAR VALUE $.001 PER SHARE)
[REALNETWORKS LOGO]
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON
STEPHENS
NATIONSBANC MONTGOMERY
SECURITIES, INC.

REPRESENTATIVES OF THE UNDERWRITERS
============================================================