REALNETWORKS INC, S-3, 1999-07-28

REALNETWORKS INC
S-3, 1999-07-28
COMPUTER PROGRAMMING SERVICES

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<PAGE>

As filed with the Securities and Exchange Commission on July 28, 1999
Registration No. 333-

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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REALNETWORKS, INC.
(Exact name of Registrant as specified in its charter)
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Washington 91-1628146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2601 Elliott Avenue
Seattle, Washington 98121
(206) 674-2700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Paul Bialek
Senior Vice President--Finance and Operations
and Chief Financial Officer
RealNetworks, Inc.
2601 Elliott Avenue
Seattle, Washington 98121
(206) 674-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Scott L. Gelband
Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
(206) 583-8888
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Approximate date of commencement of proposed sale to the public: As soon as
practicable and until 10 days after the effective date of this Registration
Statement or until such earlier time that all of the shares registered
hereunder have been sold.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, check the following box.
[_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Title of Each Class of Amount Maximum Proposed Maximum Amount of
Securities to Be to Be Offering Price Aggregate Registration
Registered Registered Per Share(1) Offering Price(1) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share(2)... 26,666 $83.03 $2,214,078 $616
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</TABLE>
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(1) The price of $83.03 per share, which was the average of the high and low
prices of the Registrant's common stock on the Nasdaq National Market on
July 27, 1999, is set forth solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) of the Securities Act of
1933, as amended.

(2) Includes associated preferred stock purchase rights.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION. DATED JULY 28, 1999

26,666 Shares

RealNetworks, Inc.

Common Stock

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The selling shareholders identified on page 35 of this prospectus may offer
for sale up to 26,666 shares of RealNetworks' common stock from time to time in
the over-the-counter market through Nasdaq, in privately negotiated
transactions, through put or call options relating to the shares, through short
sales of the shares or through a combination of such methods of sale. They may
sell the shares at fixed prices that may change, at market prices prevailing at
the time of sale, at prices relating to prevailing market prices or at
negotiated prices. Such transactions may or may not involve brokers or dealers.

The selling shareholders may effect such transactions by selling the shares
directly to purchasers, through broker-dealers acting as agents for the selling
shareholders, or to brokers-dealers who may purchase the shares as principals
and thereafter sell such securities from time to time in transactions on any
exchange or market on which our securities are listed or quoted, as applicable.
Any broker-dealers participating in the distribution of the shares may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders and/or the purchasers of the shares for whom such broker-
dealers may act as agents or to whom they may sell as principals, or both. The
compensation paid to a particular broker-dealer might be in excess of customary
commissions.

RealNetworks will not receive any of the proceeds from the sale of shares by
the selling shareholders. Subject to certain exceptions, RealNetworks will pay
all expenses of the registration and sale of the shares.

RealNetworks' common stock is quoted on the Nasdaq National Market under the
symbol "RNWK". The last reported sale price of the common stock on July 27,
1999 was $80.13 per share.

See "Risk Factors" beginning on page 2 to read about certain factors you
should consider before buying shares of the common stock.

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Our principal executive offices are located at 2601 Elliott Avenue, Seattle,
Washington 98121. Our telephone number is (206) 674-2700.

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Neither the Securities and Exchange Commission nor any regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

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Prospectus dated , 1999.
<PAGE>

RISK FACTORS

You should carefully consider the risks described below together with all
of the other information included in or incorporated by reference into this
prospectus before making an investment decision. The risks and uncertainties
described below are not the only ones facing our company. If any of the
following risks actually occurs, our business, financial condition or
operating results could be harmed. In such case, the trading price of our
common stock could decline, and you could lose all or part of your investment.

We have a limited operating history, which makes it difficult to evaluate
our business

We were incorporated in February 1994 and have a limited operating
history. We have limited financial results on which you can assess our future
success. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by growing companies in new and rapidly
evolving markets, such as streaming media software, media delivery systems and
electronic commerce.

To address the risks and uncertainties we face, we must:

. establish and maintain broad market acceptance of our products and
services and convert that acceptance into direct and indirect sources
of revenues;

. maintain and enhance our brand name;

. continue to timely and successfully develop new products, product
features and services and increase the functionality and features of
existing products;

. successfully respond to competition from Microsoft and others; and

. develop and maintain strategic relationships to enhance the
distribution, features and utility of our products and services.

Our business strategy may be unsuccessful and we may be unable to address
the risks we face in a cost-effective manner, if at all. Our inability to
successfully address these risks will harm our business.

We have a history of losses and may never attain profitability

We have incurred significant losses since our inception and we may never
become profitable. As of June 30, 1999, we had an accumulated deficit of
approximately $34.9 million. We devote significant resources to developing,
enhancing, selling and marketing our products and services. As a result, we
will need to generate significant revenues to achieve and maintain
profitability. We may not continue our historical growth or generate
sufficient revenues for profitability. If we do achieve profitability, we may
not sustain or increase profitability on a quarterly or annual basis in the
future.

Our operating results are likely to fluctuate significantly

As a result of our limited operating history and the rapidly changing
nature of the markets in which we compete, our quarterly and annual revenues
and operating results are likely to fluctuate from period to period. These
fluctuations may be caused by a number of factors, many of which are beyond
our control. These factors include the following, as well as others discussed
elsewhere in this section:

. how and when we introduce new products and services and enhance our
existing products and services;

. the timing and success of our brand-building and marketing campaigns;

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. our ability to establish and maintain strategic relationships;

. the demand for Internet advertising and sponsorships;

. the emergence and success of new and existing competition;

. varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure, domestically
and internationally, including the hiring of new employees;

. technical difficulties with our products, system downtime, system
failures or interruptions in Internet access;

. costs related to the acquisition of businesses or technology; and

. costs of litigation and intellectual property protection.

In addition, because the market for our products and services is relatively
new and rapidly changing, it is difficult to predict future financial results.
Our research and development and sales and marketing efforts, and business
expenditures generally, are partially based on predictions regarding certain
developments for media delivery. To the extent that these predictions prove
inaccurate, our revenues and operating expenses may fluctuate.

For these reasons, you should not rely on period-to-period comparisons of
our financial results as indications of future results. Our future operating
results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of
our stock price.

We may be unable to successfully compete with Microsoft and other companies
in the media delivery market

The market for software and services for media delivery over the Internet
is relatively new, constantly changing and intensely competitive. As media
delivery evolves into a central component of the Internet experience, more
companies are entering the market for, and expending increasing resources to
develop, media delivery software and services. We expect that competition will
continue to intensify.

Many of our current and potential competitors have longer operating
histories, greater name recognition, more employees and significantly greater
financial, technical, marketing, public relations and distribution resources
than we do. The competitive environment may require us to make changes in our
products, pricing, licensing, services or marketing to maintain and extend our
current brand and technology franchise. Price concessions or the emergence of
other pricing or distribution strategies of competitors may diminish our
revenues, impact our margins or lead to a reduction in our market share, any of
which will harm our business.

We believe that the primary competitive factors in the media delivery
market include:

. the quality and reliability of the overall media delivery solution;

. access to distribution channels necessary to achieve broad
distribution and use of products;

. the availability of content for delivery over the Internet and access
to necessary intellectual property rights;

. the ability to develop and support secure formats for digital media
delivery, particularly music and video;

. the size of the active audience for streaming media and its appeal to
content providers and advertisers;

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. features for creating, editing and adapting content for the Internet;

. ease of use and interactive user features in products;

. ease of finding and accessing content over the Internet;

. scalability of streaming media and media delivery technology and cost
per user;

. pricing and licensing terms;

. compatibility with new and existing media formats;

. compatibility with the user's existing network components and software
systems; and

. challenges caused by bandwidth constraints and other limitations of
the Internet infrastructure.

Our failure to adequately address any of the above factors could harm our
business strategy and operating results.

Microsoft is a principal competitor in the development and distribution of
streaming media and media distribution technology. Microsoft currently competes
with us in the market for streaming media server and player software and has
announced its intent to compete in the market for digital distribution of
media. We believe that Microsoft's commitment to and presence in the media
delivery industry has increased and that Microsoft will continue to increase
competitive pressure in the overall market for streaming media and media
distribution.

Microsoft distributes its competing streaming media server and tools
products by bundling them with its Windows NT servers at no additional charge
and by making them available for download from its website for free. While we
also provide free downloads of certain of our products, including players,
servers and tools, Microsoft's practices have caused, and may continue to
cause, pricing pressure on our products. These practices could lead to longer
sales cycles, decreased sales and reduced market share. In addition, we believe
that Microsoft has used and may be able to use its dominant position in the
computer industry and its financial resources to secure preferential or
exclusive distribution and bundling contracts for its streaming media products
with third parties such as Internet service providers (ISPs), online service
providers, content providers, entertainment companies, media companies,
broadcasters, value added resellers (VARs) and original equipment manufacturers
(OEMs), including third parties with whom we have relationships. Such
arrangements, together with Microsoft's aggressive marketing of Windows NT and
of its streaming media products, may reduce our share of the streaming media
market.

Microsoft's Windows Media Player competes with our RealPlayer products. The
Windows Media Player is available for download from Microsoft's website for
free, and is bundled by Microsoft with its Windows 98 operating system and with
its Web browser, Internet Explorer. In addition, Microsoft has bundled certain
audio capabilities into a radio toolkit for Internet Explorer 5.0, its latest
Web browser. Internet Explorer 5.0 includes Web Events, which provides links to
multimedia content on the Internet, especially content in Microsoft's streaming
media formats. We expect that by leveraging its dominant position in operating
systems and tying streaming media into its operating system and its browser,
Microsoft will distribute substantially more copies of the Windows Media Player
in the future than it has in the past and may be able to attract more users to
its streaming media products. Currently, our RealPlayer has a high degree of
market penetration: we have over 70 million registered users and estimate that
more than 85% of all Web pages that use streaming media do so using our
technology. Our market position may be difficult to sustain, particularly in
light of Microsoft's efforts and dominant position in operating systems.

On July 23, 1998, Robert Glaser, our chief executive officer, testified
before the Senate Judiciary Committee that if a consumer had the RealPlayer on
his or her computer system, and then

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downloaded the Windows Media Player, the Windows Media Player disabled
important functions of our RealPlayer in certain instances. As a result, some
of our customers who had downloaded the free RealPlayer, or paid for the
RealPlayer Plus, found that their players did not work. We quickly incorporated
a workaround solution into our RealPlayer and RealPlayer Plus and also posted
this workaround solution on our website. We believe the workaround solution
corrected the problem at the time and, as a result, we believe only a small
number of customers were impacted by the situation. However, we believe there
is a continued risk that future versions of Microsoft's products, especially
Internet Explorer and the Windows Media Player, may negatively impact the
experience of our customers by displaying a Windows Media Player when the
customer seeks to play RealAudio or RealVideo content, or by posting an error
message when the customer tries to play content available in RealNetworks'
formats that may not be viewed through the Windows Media Player, without
telling the customer how to obtain the latest RealPlayer. Such actions by
Microsoft could materially reduce market share for the RealPlayer and have a
negative effect on demand for our server software and tools. We have provided
and will continue to seek to provide useful input to Microsoft to address these
situations so as to provide an optimal experience for consumers. In light of
these recent events, our relationship with Microsoft has become more
competitive.

In addition to Microsoft, we face increasing competition from other
companies that are developing and marketing streaming media products. Apple
Computer recently announced the availability of QuickTime 4.0 streaming media
technology, including a free media player and a free streaming media server,
and has made available free source code to the server under the conditions of
their license agreement. We expect that Apple Computer will devote more
resources to developing and marketing streaming media systems, and will seek to
compete more vigorously with us in the marketplace. Other competitors include
Cisco Systems/Precept Software, PictureTel/Starlight Networks and Oracle
Corporation. As more companies enter the market with products that compete with
our servers, players and tools, the competitive landscape could change rapidly
to our disadvantage.

We do not believe that clear standards have emerged with respect to non-PC
wireless and cable-based systems. Likewise, no one company has gained a
dominant position in the mobile device market. Other companies' products and
services or new standards may emerge in any of these areas, which could reduce
demand for our products or render them obsolete.

In addition, our streaming media and media delivery products face
competition from non-streaming, "fast download" media delivery technologies
such as AVI, QuickTime and MP3. Other fast download or non-streaming IP-based
content distribution methods are likely to emerge and could compete with our
products and services, which could harm our business.

We may be unable to successfully compete in other parts of our business

Media Hosting. Our media hosting service, the Real Broadcast Network,
competes with a variety of companies that provide streaming media hosting
services. These companies include Broadcast.com (which has agreed to be
acquired by Yahoo!) and Intervu and emerging broadcast networks such as CMGI's
Magnitude Network and Enron Communications. We may not establish or sustain our
competitive position in this market segment. Some media hosting competitors are
also customers on whom we rely to help drive product download traffic to our
website through their broadcast events.

Website Destinations, Content and Advertising. While Internet advertising
revenues across the industry continue to grow, the number of websites competing
for advertising revenues is also growing. Our websites, including Real.com,
Film.com and LiveConcerts.com, compete for user traffic and Internet
advertising revenues with a wide variety of websites, Internet portals and
ISPs. In particular, aggregators of audio, video and other media, such as
Broadcast.com and Microsoft's Web

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Events, compete with our RealGuide. We also compete with traditional media such
as television, radio and print for a share of advertisers' total advertising
budgets. Our advertising sales force and infrastructure are still in early
stages of development relative to those of our competitors. We cannot be
certain that advertisers will place advertising with us or that revenues
derived from such advertising will be meaningful. If we lose advertising
customers, fail to attract new customers, are forced to reduce advertising
rates or otherwise modify our rate structure to retain or attract customers, or
if we lose website traffic, our business could be harmed.

Electronic Commerce. The electronic commerce features of our websites
compete with a variety of other websites for consumer traffic. To compete
successfully in the electronic commerce market, we must attract sufficient
traffic to our websites by offering high-quality, competitively priced,
desirable merchandise in a compelling, easy-to-purchase format. In addition, we
must successfully leverage our existing user base to develop the market for our
products and services. We may not compete successfully in the growing and
rapidly changing market for electronic commerce. Our failure to do so could
harm our business.

Increased competition may result in price reductions, reduced margins, loss
of market share, loss of customers, and a change in our business and marketing
strategies, any of which could harm our business.

We may not be successful in the market for downloadable media and local media
delivery

In May 1999, we announced the RealSystem MP, a digital music architecture
enabling integration with a wide range of Internet services and hardware
devices. We also released a beta version of RealJukebox, our client software
based on the RealSystem MP. These products represent an extension of our
business into downloadable media and local media delivery, which is a
substantial evolution from our historical focus on streaming media products and
services. We do not know whether there is a sustainable market for products
such as RealSystem MP and RealJukebox. Even if that market exists, we may be
unable to develop a revenue model or sufficient demand to take advantage of the
market opportunity.

While over five million copies of RealJukebox have been downloaded since
its beta release on May 3, 1999, it is too soon to determine if RealJukebox
will be widely received in the marketplace. There are now a number of
competitive products on the market that offer certain of the features that
RealJukebox offers. In addition, given the size and importance of the general
market for music distribution, competitors will likely release products that
directly compete with RealJukebox, which could harm our business. Even if
RealJukebox achieves widespread market acceptance, it may not achieve a high
level of use, which would lead to a low rate of upgrade sales and electronic
commerce opportunities.

RealJukebox has been released only as an early beta version. Although we
tested this version prior to its release, it likely contains errors. We will
spend substantial development resources to continue to test the product, to
correct errors and to improve the product before we release a commercial
version of RealJukebox. We may never release a commercial version. Our
inability to commercially release RealJukebox, to achieve widespread acceptance
for RealSystem MP and RealJukebox, or to create new revenue streams from new
market segments could harm our business.

RealJukebox allows users to record and play back music in a variety of
technical formats, including RealAudio G2 and MP3. However, technical formats
and consumer preferences evolve very rapidly, and we may be unable to
adequately address consumer preferences or fulfill the market demand to the
extent it exists.

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We have had long-term relationships with recording companies, including
major record labels, many of which offer their streaming content in our
formats. However, recording companies, including those with whom we have a
relationship, may be uncomfortable with some features of RealJukebox. As a
result, some record companies may decide to withhold content from RealJukebox,
or refrain from or delay participating in promotional opportunities with
respect to RealJukebox.

RealJukebox is intended to allow users of the product to acquire, record,
play back and manage music for their personal use. It is possible for a user of
RealJukebox to elect not to use the copyright-protection features it contains
and then violate the intellectual property rights of artists and recording
companies by engaging in an authorized distribution of music. The laws
governing the recording, distribution and performance of digital music are new
and largely untested. While we believe we have developed RealJukebox to comply
with U.S. copyright laws, a court may find us in violation of these laws.
Similar action or other litigation in the United States or abroad directed at
us could harm our business, even if such litigation were entirely without
merit.

We may not successfully develop new products and services

Our growth depends on our ability to continue to develop leading edge media
delivery and digital distribution products and services. Our business and
operating results would be harmed if we fail to develop products and services
that achieve widespread market acceptance or that fail to generate significant
revenues to offset development costs. We may not timely and successfully
identify, develop and market new product and service opportunities. If we
introduce new products and services, they may not attain broad market
acceptance or contribute meaningfully to our revenues or profitability.

Because the markets for our products and services are rapidly changing, we
must develop new offerings quickly. We have experienced development delays and
cost overruns in our development efforts in the past and we may encounter such
problems in the future. Delays and cost overruns could affect our ability to
respond to technological changes, evolving industry standards, competitive
developments or customer requirements. Our products also may contain undetected
errors that could cause increased development costs, loss of revenues, adverse
publicity, reduced market acceptance of the products or lawsuits by customers.

We rely on content provided by third parties to increase market acceptance of
our products

If third parties do not develop or offer compelling content to be delivered
over the Internet, our business will be harmed and our products may not achieve
or sustain broad market acceptance. We rely on third-party content providers,
such as radio and television stations, record labels, media companies, websites
and other companies, to develop and offer content in our formats that can be
delivered using our server products and played back using our player products.
While we have a number of short-term agreements with third parties to provide
content from their websites in our formats, most third parties are not
obligated to develop or offer content using our technology. In addition, some
third parties have entered into and may in the future enter into agreements
with our competitors, principally Microsoft, to develop or offer all or a
substantial portion of their content in our competitors' formats. Microsoft has
more resources to secure preferential and even exclusive relationships with
content providers. There could be less demand for and use of our products if
Microsoft or another competitor were to secure preferential or exclusive
relationships with the leading broadcasters, record companies or websites. We
cannot guarantee that third-party content providers will continue to rely on
our technology or offer compelling content in our formats to encourage and
sustain broad market acceptance of our products. Their failure to do so would
harm our business.

As we move into the market for digital distribution of media and local
media playback, our success depends on the availability of third-party content,
especially music, that users of our

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RealJukebox product can lawfully and easily access, record and play back. Our
product may not achieve or sustain market acceptance if third parties are
unwilling to offer their content for free download or purchase by users of
RealJukebox. Competitors could secure exclusive distribution relationships with
such content providers, which would harm our business.

We depend on key personnel who may leave us at any time

Our success substantially depends on the continued employment of our
executive officers and key employees, particularly Robert Glaser, our chairman
of the board and chief executive officer. The loss of the services of Mr.
Glaser or any of our other executive officers or key employees could harm our
business. None of our executive officers has a contract that guarantees
employment. Other than the $2 million insurance policy on the life of Mr.
Glaser, we do not maintain "key person" life insurance policies.

Our failure to attract, train or retain highly qualified personnel could harm
our business

Our success also depends on our ability to attract, train and retain
qualified personnel, specifically those with management and product development
skills. In particular, we must hire additional skilled software engineers to
further our research and development efforts. Competition for such personnel is
intense, particularly in high-technology centers such as the Pacific Northwest.
In making employment decisions, particularly in the Internet and high-
technology industries, job candidates often consider the value of stock options
they may receive in connection with their employment. As a result of recent
volatility in our stock price, we may be disadvantaged in competing with
companies that have not experienced similar volatility or that have not yet
sold their stock publicly. If we do not succeed in attracting new personnel or
retaining and motivating our current personnel, our business could be harmed.

We may not successfully manage our growth

We cannot successfully implement our business model if we fail to manage
our growth. We have rapidly and significantly expanded our operations
domestically and internationally and anticipate further expansion to take
advantage of market opportunities. We have increased the number of our full-
time employees from 325 on January 1, 1998 to 536 on June 30, 1999. Managing
this substantial expansion has placed a significant strain on our management,
operational and financial resources. If our growth continues, we will need to
continue to improve our financial and managerial control and reporting systems
and procedures.

We are in the process of implementing new management information software
systems. This will affect many aspects of our business, including our
accounting, operations, electronic commerce, customer service, purchasing,
sales and marketing functions. The purchase, implementation and testing of
these systems has resulted, and will result, in significant capital
expenditures and could disrupt our day-to-day operations. If these systems are
not implemented as expected, our ability to provide products and services to
our customers on a timely basis will suffer and delays in the recording and
reporting of our operating results could occur.

The growth of our business depends on the increased use of the Internet for
communications, electronic commerce and advertising

The growth of our business depends on the continued growth of the Internet
as a medium for communications, electronic commerce and advertising. Our
business will be harmed if Internet usage does not continue to grow,
particularly as a source of media information and entertainment and as a
vehicle for commerce in goods and services. Our success also depends on the
efforts of third parties to develop the infrastructure and complementary
products and services necessary to maintain and

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expand the Internet as a viable commercial medium. The Internet may not be
accepted as a viable commercial medium for broadcasting multimedia content or
media delivery for a number of reasons, including:

. potentially inadequate development of the necessary infrastructure to
accommodate growth in the number of users and Internet traffic;

. lack of acceptance of the Internet as a medium for distributing
streaming media content or for media delivery;

. unavailability of compelling multimedia content;

. inadequate commercial support for Web-based advertising; and

. delays in the development or adoption of new technological standards
and protocols or increased governmental regulation, which could
inhibit the growth and use of the Internet.

In addition, we believe that other Internet-related issues, such as
security, reliability, cost, ease of use and quality of service, remain largely
unresolved and may affect the amount of business that is conducted over the
Internet.

If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, specifically the demands of
delivering high-quality media content. As a result, its performance and
reliability may decline. In addition, websites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently in
the future, Internet usage, as well as the usage of our products, services and
websites, could grow more slowly or decline.

Changes in network infrastructure, transmission methods and broadband
technologies pose risks to our business

We believe that increased Internet use may depend on the availability of
greater bandwidth or data transmission speeds (also known as broadband
transmission). If broadband access becomes widely available, we believe it
presents both a substantial opportunity and a significant business challenge
for us. Internet access through cable television set-top boxes, digital
subscriber lines or wireless connections could dramatically reduce the demand
for our products and services by utilizing alternate technology that more
efficiently transmits data. This could harm our business as currently
conducted.

Development of products and services for a broadband transmission
infrastructure involves a number of additional risks, including:

. changes in content delivery methods and protocols;

. the availability of compelling content that takes advantage of
broadband access and helps drive market acceptance of our products and
services;

. the emergence of new competitors, such as traditional broadcast and
cable television companies, which have significant control over access
to content, substantial resources and established relationships with
media providers;

. the development of relationships by our current competitors with
companies that have significant access to or control over the
broadband transmission infrastructure or content;

. the need to establish new relationships with non-PC based providers of
broadband access, such as providers of television set-top boxes and
cable television, some of which may compete with us; and

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. the general risks of new product and service development, including
the challenges to develop error-free products and enhancements,
develop compelling services and achieve market acceptance for these
products and services.

We depend on the efforts of third parties to develop and provide a
successful infrastructure for broadband transmission. Even if broadband access
becomes widely available, heavy use of the Internet may negatively impact the
quality of media delivered through broadband connections. If these third
parties experience delays or difficulties establishing a widespread broadband
transmission infrastructure or if heavy usage limits the broadband experience,
the release of our broadband products and services could be delayed. Even if a
broadband transmission infrastructure is developed for widespread use, our
products and services may not achieve market acceptance or generate sufficient
revenues to offset our development costs.

We could lose strategic relationships that are essential to our business

The loss of certain current strategic relationships, the inability to find
other strategic partners or the failure of our existing relationships to
achieve meaningful positive results for us could harm our business. We rely in
part on strategic relationships to help us:

. maximize adoption of our products through distribution arrangements;

. increase the amount and availability of compelling media content on
the Internet to help boost demand for our products and services;

. enhance our brand;

. expand the range of commercial activities based on our technology;

. expand the distribution of our streaming media content without a
degradation in fidelity; and

. increase the performance and utility of our products and services.

Many of these goals are beyond our traditional strengths. We anticipate
that the efforts of our strategic partners will become more important as the
multimedia experience over the Internet matures. For example, we may become
more reliant on strategic partners to provide multimedia content, provide more
secure and easy-to-use electronic commerce solutions and build out the
necessary infrastructure for media delivery. We may not be successful in
forming strategic relationships. In addition, the efforts of our strategic
partners may be unsuccessful. Furthermore, these strategic relationships may be
terminated before we realize any benefit.

Our industry is experiencing consolidation that may intensify competition

The Internet industry has recently experienced substantial consolidation
and a proliferation of strategic transactions. We expect this consolidation and
strategic partnering to continue. Acquisitions or strategic relationships could
harm us in a number of ways. For example:

. competitors could acquire or partner with companies with which we have
strategic relationships and discontinue our relationship, resulting in
the loss of distribution opportunities for our products and services
or the loss of certain enhancements or value-added features to our
products and services;

. competitors could obtain exclusive access to desirable multimedia
content and prevent that content from being available in our formats,
thus decreasing the use of our products and services to distribute and
experience the content that audiences most desire, and hurting our
ability to attract advertisers to our websites and product offerings;

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<PAGE>

. a competitor could be acquired by a party with significant resources
and experience that could increase the ability of the competitor to
compete with our products and services.

Recent announcements and consolidations that could affect our business
include:

. Microsoft's strategic investments in broadband initiatives, including
its recently announced $5 billion investment in AT&T;

. AT&T's acquisition of TCI and its announcement that it will acquire
MediaOne Communications;

. At Home's acquisition of Excite;

. Yahoo!'s acquisitions of Broadcast.com and GeoCities;

. The Walt Disney Company's recent announcement that it intends to
combine its Internet assets with, and acquire a majority ownership of,
Infoseek, and create a single business called go.com;

. NBC's announcement that it intends to merge its Internet assets with
XOOM.com, Inc. and Snap.com, a subsidiary of CNET.

Potential acquisitions involve risks we may not adequately address

The failure to adequately address the financial and operational risks
raised by acquisitions of technology and businesses could harm our business. We
have acquired complementary technologies and businesses in the past, and intend
to do so in the future. Financial risks related to acquisitions include:

. potentially dilutive issuances of equity securities;

. use of cash resources;

. the incurrence of additional debt and contingent liabilities;

. large write-offs; and

. amortization expenses related to goodwill and other intangible assets.

Acquisitions also involve operational risks, including:

. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company;

. diversion of management's attention from other business concerns;

. impairment of relationships with our employees, affiliates,
advertisers and content providers;

. inability to maintain uniform standards, controls, procedures and
policies;

. the assumption of known and unknown liabilities of the acquired
company;

. entrance into markets in which we have no direct prior experience; and

. loss of key employees of the acquired company.

We currently have an agreement to acquire Xing Technology, an MP3 software
developer, in a transaction that we expect to account for as a pooling of
interests. We may not adequately integrate this or any future acquisitions. In
addition, we may not be able to account for future acquisitions as a pooling of
interests, which could harm our operating results.

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<PAGE>

Our business will suffer if our systems fail or become unavailable

A reduction in the performance, reliability and availability of our
websites and network infrastructure will harm our ability to distribute our
products and services to our users, as well as our reputation and ability to
attract and retain users, customers, advertisers and content providers. Our
revenues depend in large part on the number of users that download our products
from our websites and access the content services on our websites. Our systems
and operations could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, Internet breakdown, earthquake and similar events.
Our systems are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. Our computer and communications
infrastructure is located at a single leased facility in Seattle, Washington.
We do not have fully redundant systems or a formal disaster recovery plan, and
we do not carry adequate business interruption insurance to compensate us for
losses that may occur from a system outage.

Our electronic commerce and digital distribution activities are managed by
sophisticated software and computer systems. We may encounter delays in
developing these systems, and the systems may contain undetected errors that
could cause system failures. Any system error or failure that causes
interruption in availability of products or content or an increase in response
time could result in a loss of potential or existing business services
customers, users, advertisers or content providers. If we suffer sustained or
repeated interruptions, our products, services and websites could be less
attractive to such entities or individuals and our business would be harmed.

A sudden and significant increase in traffic on our websites could strain
the capacity of the software, hardware and telecommunications systems that we
deploy or use. This could lead to slower response times or system failures. Our
operations also depend on receipt of timely feeds from our content providers,
and any failure or delay in the transmission or receipt of such feeds could
disrupt our operations. We depend on Web browsers, ISPs and online service
providers to provide Internet users access to our websites. Many of these
providers have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. In addition, certain ISPs have temporarily
interrupted our website operations in response to the heavy volume of e-mail
transmission we generate and send to our large user base. These types of
interruptions could continue or increase in the future.

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

Online commerce and communications depend on the ability to transmit
confidential information securely over public networks. Any compromise of our
ability to transmit confidential information securely, and costs associated
with preventing or eliminating any problems, could harm our business. Online
transmissions are subject to a number of security risks, including:

. our own or licensed encryption and authentication technology may be
compromised, breached or otherwise be insufficient to ensure the
security of customer information;

. we could experience unauthorized access, computer viruses and other
disruptive problems, whether intentional or accidental;

. a third party could circumvent our security measures and
misappropriate proprietary information or interrupt operations; and

. credit card companies could restrict online credit card transactions.

The occurrence of any of these or similar events could damage our
reputation and expose us to litigation or liability. We may also be required to
expend significant capital or other resources to protect against the threat of
security breaches or to alleviate problems caused by such breaches.

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<PAGE>

Our international operations involve risks

We operate subsidiaries in Australia, England, France, Germany and Japan,
and market and sell products in several other countries. For the six months
ended June 30, 1999, approximately 24% of our revenues, excluding revenues
derived from our license agreement with Microsoft, were derived from
international operations. We are subject to the normal risks of doing business
internationally, as well as risks specific to Internet-based companies in
foreign markets. These risks include:

. delays in the development of the Internet as a broadcast, advertising
and commerce medium in international markets;

. difficulties in managing operations due to distance, language and
cultural differences, including issues associated with establishing
management systems infrastructures in individual markets;

. unexpected changes in regulatory requirements;

. export and import restrictions, including those restricting the use of
encryption technology;

. tariffs and trade barriers and limitations on fund transfers;

. difficulties in staffing and managing foreign operations;

. longer payment cycles and problems in collecting accounts receivable;

. potential adverse tax consequences;

. exchange rate fluctuations;

. increased risk of piracy and limits on our ability to enforce our
intellectual property rights; and

. other legal and political risks.

Any of these factors could harm our business. We do not currently hedge our
foreign currency exposures.

We may be unable to adequately protect our proprietary rights

Our inability to protect our proprietary rights, and the costs of doing so,
could harm our business. Our success and ability to compete partly depend on
the superiority, uniqueness or value of our technology, including both
internally developed technology and technology licensed from third parties. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright and trade secret laws, confidentiality agreements with our employees
and third parties, and protective contractual provisions. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy or infringe
aspects of our technology, products, services or trademarks, or obtain and use
information we regard as proprietary. Our proprietary rights may be especially
difficult to protect in foreign countries, where unrelated third parties may
have registered our domain names and trademarks under their own names in an
attempt to prevent us from using the domain names and trademarks in those
countries without paying them a significant sum of money. This could prevent us
from using our valuable brands in those countries, and reduce the value of our
intellectual property. In addition, others may independently develop
technologies that are similar or superior to ours, which could reduce the value
of our intellectual property.

Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time,
other parties' proprietary rights, including patent rights, have come to our
attention and on several

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<PAGE>

occasions we have received notice of claims of infringement of other parties'
proprietary rights, and we may receive such notices in the future.

From time to time we receive claims and inquiries from third parties
alleging that our internally developed technology or technology we license from
third parties may infringe the third parties' proprietary rights. We are now
investigating a few of such pending claims. We could be required to spend
significant amounts of time and money to defend ourselves against such claims.
If any of these claims were to prevail, we could be forced to pay damages,
comply with injunctions, or stop distributing our products while we re-engineer
them or seek licenses to necessary technology, which might not be available on
reasonable terms. We could also be subject to claims for indemnification
resulting from infringement claims made against our customers and strategic
partners, which could increase our defense costs and potential damages. Any of
these events could harm our business.

We are subject to risks associated with governmental regulation and legal
uncertainties

We are not currently 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 our
products. Few existing laws or regulations specifically apply to the Internet.
However, it is likely that a number of laws and regulations may be adopted in
the United States and other countries with respect to the Internet. These laws
may relate to areas such as content issues (such as obscenity, indecency and
defamation), copyright and other intellectual property rights, encryption, use
of key escrow data, caching of content by server products, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, e-mail, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect the available distribution channels
for and costs associated with our products and services, and may affect the
growth of the Internet. Such laws or regulations may therefore harm our
business.

We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:

. limit the growth of the Internet;

. create uncertainty in the marketplace that could reduce demand for our
products and services;

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<PAGE>

. increase our cost of doing business;

. expose us to significant liabilities associated with content available
on our websites or distributed or accessed through our products or
services; or

. lead to increased product development costs, or otherwise harm our
business.

On October 28, 1998, the Digital Millennium Copyright Act (DMCA) was
enacted. The DMCA includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate transmissions. Under
these statutory licenses, we and our broadcast customers will be required to
pay licensing fees for sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The DMCA does not
specify the rate and terms of the licenses, which will be determined either
through voluntary inter-industry negotiations or arbitration. We currently
anticipate that representatives of the webcasting industry will engage in
arbitration with the Recording Industry Association of America to determine
what, if any, licensee fee should be paid. Depending on the rates and terms
adopted for the statutory licenses, our business could be harmed both by
increasing our own cost of doing business, as well as by increasing the cost of
doing business for our customers.

The Child Online Protection Act and the Child Online Privacy Protection Act
(COPA) were enacted in October 1998. The COPA impose civil and criminal
penalties on persons distributing material harmful to minors (e.g., obscene
material) over the Internet to persons under the age of 17, or collecting
personal information from children under the age of 13. We do not currently
distribute the types of materials that we believe the COPA would deem illegal,
and do not knowingly collect and disclose personal information from such
minors. The manner in which the COPA may be interpreted and enforced cannot be
fully determined, and future legislation similar to the COPA could subject us
to potential liability, which in turn could harm our business. Such laws could
also damage the growth of the Internet generally and decrease the demand for
our products and services.

Shareholders may be unable to exercise control because management owns a large
percentage of our stock

Our officers, directors and affiliated persons beneficially own
approximately 49.8% of our common stock. Robert Glaser, our chief executive
officer and chairman of the board, beneficially owns approximately 37.9% of our
common stock. As a result, our officers, directors and affiliated persons will
have significant influence to:

. elect or defeat the election of our directors;

. amend or prevent amendment of our articles of incorporation or bylaws;

. effect or prevent a merger, sale of assets or other corporate
transaction; and

. control the outcome of any other matter submitted to the shareholders
for vote.

Management's stock ownership may discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of
RealNetworks, which in turn could reduce our stock price or prevent our
shareholders from realizing a premium over our stock price.

Provisions of our charter documents, shareholder rights plan and Washington law
could discourage our acquisition by a third party

Our articles of incorporation provide for a strategic transaction committee
of the board of directors currently comprised of Messrs. Glaser, Breyer and
Kapor. Without the prior approval of this

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<PAGE>

committee, and subject to certain limited exceptions, the board of directors
does not have the authority to:

. adopt a plan of merger;

. authorize the sale, lease, exchange or mortgage of:

(A) assets representing more than 50% of the book value of our assets
prior to the transaction; or

(B) any other asset or assets on which our long-term business strategy
is substantially dependent;

. authorize our voluntary dissolution; or

. take any action that has the effect of any of the above.

RealNetworks also entered into an agreement providing Mr. Glaser with a
direct contractual right to require RealNetworks to abide by and perform all
terms of the articles of incorporation with respect to the strategic
transactions committee. This agreement also provides that so long as Mr. Glaser
owns a specified number of shares, RealNetworks will 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 Mr. Glaser will serve, or
will appoint another officer of RealNetworks to serve, as our policy ombudsman,
with the exclusive authority to adopt or change our editorial policies as
reflected on our websites or in other communications or media in which we have
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.

We have adopted a shareholder rights plan that provides that shares of our
common stock have associated preferred stock purchase rights. These rights
become exercisable and detachable from the associated common stock only
following the acquisition by a person or a group of 15% or more of our
outstanding common stock or 10 days following the announcement of a tender or
exchange offer for 15% or more of our outstanding common stock. The rights
entitle our shareholders, other than the person or entity that has acquired or
made an exchange or tender offer for 15% or more of our outstanding common
stock, to acquire additional shares of our capital stock at a price equal to
one-half of the market price at the time of the event and, in certain
circumstances, would allow our shareholders to acquire capital stock in the
entity that has acquired or made an exchange or tender offer for 15% or more of
our outstanding common stock at a similar discount. The exercise of these
rights would make the acquisition of RealNetworks by a third party more
expensive to that party and has the effect of discouraging third parties from
acquiring our company without the approval of our board of directors, which has
the power to redeem these rights and prevent their exercise.

Washington law imposes restrictions on some transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with some
exceptions, from engaging in certain significant business transactions with an
"acquiring person," which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the acquisition. Such
prohibited transactions include, among other things:

. a merger or consolidation with, disposition of assets to, or issuance
or redemption of stock to or from the acquiring person;

. termination of 5% or more of the employees of the target corporation
as a result of the acquiring person's acquisition of 10% or more of
the shares; or

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<PAGE>

. allowing the acquiring person to receive any disproportionate benefit
as a shareholder.

After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not opt out of this statute. This provision may have the effect
of delaying, deterring or preventing a change in control of RealNetworks.

The foregoing provisions of our charter documents, shareholder rights plan
and Washington law, as well as those relating to a classified board of
directors and the availability of "blank check" preferred stock, 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 us. These provisions may therefore have the effect of limiting the price
that investors might be willing to pay in the future for our common stock.

Our stock price has been and may continue to be volatile

The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, during the 52-week period ended July 23, 1999,
the price of our common stock ranged from $7.625 to $131.875 per share. Our
stock price could be subject to wide fluctuations in response to factors such
as:

. actual or anticipated variations in quarterly operating results;

. announcements of technological innovations, new products or services
by us or our competitors;

. changes in financial estimates or recommendations by securities
analysts;

. the addition or loss of strategic relationships;

. conditions or trends in the Internet, media streaming, media delivery
and online commerce markets;

. changes in the market valuations of other Internet, online service or
software companies;

. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;

. additions or departures of key personnel;

. sales of our common stock; and

. general market conditions.

In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may reduce our stock price, regardless
of our operating performance. The trading prices of the stocks of many
technology companies are at or near historical highs and reflect price-earnings
ratios substantially above historical levels. These trading prices and price-
earnings ratios may not be sustained.

We may be subject to assessment of sales and other taxes for the sale of our
products, license of technology or provision of services

We may have to pay past sales or other taxes that we have not collected
from our customers. We do not currently collect sales or other taxes on the
sale of our products, license of technology or provision of services in states
and countries other than those in which we have offices or employees.

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<PAGE>

In October 1998, the Internet Tax Freedom Act (ITFA) was signed into law. Among
other things, the ITFA imposes a three-year moratorium on discriminatory taxes
on electronic commerce. Nonetheless, foreign countries or, following the
moratorium, one or more states, may seek to impose sales or other tax
obligations on companies that engage in such activities within their
jurisdictions. Our business would be harmed if one or more states or any
foreign country were able to require us to collect sales or other taxes from
current or past sales of products, licenses of technology or provision of
services, particularly because we would be unable to go back to customers to
collect sales taxes for past sales and may have to pay such taxes out of our
own funds.

Year 2000 compliance issues could harm our business

We are in the process of assessing and remediating any Year 2000 issues
associated with our own products, and the computer systems, software, other
property and equipment we use. Despite our testing and remediation efforts, our
products and systems, and those of third parties, including content providers,
advertisers, affiliates and end users, may contain errors or faults with
respect to the year 2000. Known or unknown errors or defects that affect the
operation of our products and systems or those of third parties could result in
delay or loss of revenues, interruptions of services, cancellation of customer
contracts, diversion of development resources, damage to our reputation,
increased service and warranty costs and litigation costs, any of which could
harm our business.

We intend to donate a portion of net income to charity

If we achieve and sustain profitability, we intend to donate approximately
5% of our annual net income to charitable organizations. This will reduce our
net income.

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<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this prospectus and in the
documents that are incorporated by reference in this prospectus, all of which
are subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not limited
to, statements as to our expectations regarding:

. the future development and growth of, and opportunities for, the
Internet and the online media delivery market;

. the future adoption of our current and future products, services and
technologies;

. future revenue opportunities;

. the future growth of our customer base;

. our ability to successfully develop and introduce future products and
services;

. future international revenues;

. future expense levels (including research and development, sales and
marketing and general and administrative expenses);

. future sales and marketing efforts;

. future capital needs;

. the future of our relationships with Microsoft and other companies;

. the effect of past and future acquisitions;

. the future effectiveness of our intellectual property rights;

. the effect of current litigation in which we are involved; and

. the effect of the Year 2000 situation.

When we use words such as "believe," "expect" and "anticipate" or similar
words, we are making forward-looking statements.

You should note that an investment in our common stock involves certain
risks and uncertainties that could affect our future business success or
financial results. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.

We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described
in the risk factors and elsewhere in this prospectus could materially and
adversely affect our business, financial condition and operating results. We
undertake no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.

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<PAGE>

USE OF PROCEEDS

The proceeds from the sale of the common stock offered pursuant to this
prospectus are solely for the account of the selling shareholders. Accordingly,
we will not receive any proceeds from the sale of the shares from the selling
shareholders.

CORPORATE INFORMATION

RealNetworks was incorporated in Washington in February 1994. References in
this prospectus, and the documents incorporated by reference in this
prospectus, to "RealNetworks," "we," "our," and "us" refer to RealNetworks,
Inc., a Washington corporation, and its subsidiaries. Our principal executive
offices are located at 2601 Elliott Avenue, Seattle, Washington 98121 and our
telephone number is (206) 674-2700. Information contained in our website does
not constitute part of this prospectus.

Our registered and unregistered trademarks, trade names and service marks
include, among others:

<TABLE>
<S> <C> <C>
. RealNetworks(R) .Real Broadcast Network(TM) .RealEncoder(TM)
. RealSystem(TM) .RealGuide(TM) .RealProducer(TM)
. RealAudio(R) .Real logo(R) .RealServer(TM)
. RealVideo(R) .RealPlayer(R) .Basic Server(TM)
. RealText(R) .RealPlayer Plus(TM) .RealStore.com(R)
. RealPix(TM) .RealPublisher(TM) .Film.com(R)
. RealSystem MP(TM) .RealPresenter(TM) .Daily Briefing(TM)
. RealJukebox(TM) .RealDeveloper(TM) .SureStream(TM)
</TABLE>

This prospectus and the documents incorporated by reference in this
prospectus also include trademarks, trade names and service marks other than
those identified above, all of which are the property of their respective
holders.

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<PAGE>

BUSINESS

Overview

RealNetworks is a leading provider of media delivery and digital
distribution solutions designed for the Internet. Our solutions enable
consumers to experience and content providers to deliver a broad range of
multimedia content, including audio, video, text and animation. We pioneered
the development and commercialization of streaming media systems that enable
the creation, real-time delivery and playback of multimedia content. We believe
that we have established a leadership position in the market for these systems.
We have more than 70 million registered users of our RealPlayer product and
believe that more than 85% of all Web pages using streaming media content use
our technology. The broad acceptance of the Internet as a means of content
delivery, combined with recent technological advances, has greatly increased
the practicality and popularity of a number of new online media delivery
formats. In response, we have extended our media delivery platform to include a
digital music management system that allows consumers to acquire, record,
store, organize and play their personal music collections on PCs and digital
playback devices.

Our solutions include a variety of integrated products and services for
consumers, content providers, service providers and advertisers. Our products
and services include:

. RealSystem G2, an open and extensible advanced streaming media
solution that consists of our RealPlayer client software, through
which users experience multimedia content, and our RealServer software
and related software tools, which enable broadcasters and content
providers to create and deliver multimedia content.

. Real Broadcast Network, a service based on a distributed multi-tier
network designed to enable content providers to reliably and cost-
effectively deliver high-quality streaming media over the Internet to
large audiences.

. RealJukebox, a product that turns a PC into a digital music management
system and is based on RealSystem MP, our open and extensible digital
music management solution.

. RealGuide, a comprehensive directory that enables easy and
personalized access to high-quality media programming on the Internet.

. RealStore, an electronic commerce website from which we market, sell
and distribute our own and third-party media delivery products and
services to our base of more than 70 million registered users.

Industry Background

The Internet has grown rapidly in recent years and is now recognized as a
new mass medium for communication, commerce and multimedia content. As an
interactive and searchable medium, the Internet offers a highly engaging
experience and allows users unlimited access to a wide variety and supply of
content at their convenience. The Internet also enables content providers and
advertisers to establish personalized experiences for and communications with
consumers. We believe that these features, combined with advances in media
delivery and the increasing availability of broadband access, are enabling the
further development and broad acceptance of the Internet as a powerful medium
for online media delivery and distribution.

We believe that the emergence of streaming media technology in 1995
transformed online media delivery. Streaming media technology enables the
continuous transmission and playback of multimedia content and represents a
significant advancement over earlier technologies, which required download
delays before playback. As a result, streaming media has enabled live
broadcasts over the Internet and has enhanced and simplified the consumer's
online media experience. We believe that the amount of live video and audio
content available on the Internet has increased to more than 300,000 hours per
week in April 1999. As the demand for streaming media has grown

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<PAGE>

substantially, many new business models have emerged. Companies are publishing
and aggregating streaming media for consumers over the Internet and employees
over intranets, developing streaming media authoring tools, offering turnkey
services and advertising in a variety of new ways.

The demand for streaming media and media content has also grown with the
increasing availability of new broadband access technologies such as cable
modems and digital subscriber lines. Cost-effective broadband access makes it
possible for consumers to experience higher-quality streaming media and enables
content providers to deliver to large audiences more compelling and engaging
media content. The emergence of television set-top boxes and other non-PC
Internet devices further extends the reach of online media. We believe that as
the Internet provides the means to deliver content at quality levels comparable
to those of traditional media, there will be a significant market opportunity
for media companies and advertisers to provide customized, interactive targeted
programming and advertising.

Recently, new online media delivery formats such as MP3 have become popular
with consumers as a method of online media distribution. These formats enable
users to store and play back versions of music and other media types directly
on PCs and non-PC multimedia devices. Today, consumers can download music and
other content from websites or record from local sources, such as CDs. Advances
in encoding and playback technologies have significantly reduced download times
and storage requirements, thereby greatly increasing the practicality and
popularity of these distribution formats. A number of systems that encode,
store and play back content have been designed to capitalize on this
opportunity. Systems are also being designed to provide security and copyright
protection for content owners. Forrester Research forecasts that the market for
online music downloads will grow from $1 million in 1999 to over $1 billion by
2003.

Today, many businesses are using corporate intranets and websites to
improve communications with their employees, customers and suppliers. In
addition, there has been a proliferation of broadcasters and content providers
that offer interactive audio, video and other multimedia content to enrich
their websites and compete with traditional media. We believe that the
broadened acceptance of new online media delivery and distribution formats are
creating a significant market opportunity for providers of these solutions.

We believe that the following key challenges must be addressed to
capitalize on this market opportunity:

. Deliver compelling 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. Despite the increasing availability of broadband
access, bandwidth remains limited in many Internet environments
because of network congestion caused by an increasing number of users
and growing popularity of higher-bandwidth content and applications.
For the foreseeable future, bandwidth constraints will continue to
pose significant technological challenges for reliable delivery of
high-quality streaming media.

. Maintain compatibility with numerous developing standards and evolving
technologies. The evolving nature and strategic importance of online
media delivery and distribution have resulted in the development of
numerous competing formats, platforms and technologies that are not
necessarily compatible. We believe that consumers and content
providers desire a widely accepted solution that will provide them
with a broad selection of media and access to a large audience, will
address the security concerns of content providers and can be updated
easily as technologies and standards evolve.

. Enable cost-effective delivery of content. Online media providers and
advertisers must make significant investments to create and distribute
content to large audiences. To generate an adequate return on their
investments, they need to cost-effectively reach a

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sufficiently large or clearly targeted audience and have the ability
to appropriately capitalize on advertising or commerce opportunities.

. Drive consumer usage. We believe that consumer interest in online
media content is driven in large part by the ability to find and
experience that content easily and cost-effectively. There is a strong
need for well-marketed websites or other branded navigational tools
that connect consumers effectively with an array of online media
content.

The RealNetworks Solution

Advanced technology. We pioneered the development and commercialization of
streaming media technology and continue to offer advanced streaming media
software solutions. Our products use advanced compression, decompression,
transmission and error-correction technologies to facilitate high-quality
delivery, management and playback of multimedia content within bandwidth-
constrained environments. We have designed our products to be flexible and
compatible with heterogeneous operating systems, hardware and media formats.
Our products use an open and extensible architecture to allow developers and
content providers to enhance the utility and user experience of our products by
developing "add-on" applications and tools that can be easily integrated into
or used with our products. In addition, we have developed the Real Broadcast
Network, a distributed multi-tier Internet broadcast network, to reliably and
cost-effectively deliver high-quality streaming media over the Internet to
large audiences.

Product presence and brand strength. From our inception, we have
strategically chosen to offer our RealPlayer software to consumers free of
charge. Our newest product, RealJukebox, is also offered to consumers free of
charge. Our Basic Server is offered free of charge to broadcasters and media
content providers.

We believe we have created a significant audience for advertising and other
commerce opportunities.

. More than half of the 70 million registered users of RealPlayer are
registered users of our latest generation RealPlayer G2.

. Since its beta release on May 3, 1999, more than five million copies
of RealJukebox have been downloaded.

. We have sold approximately 1.4 million copies of RealPlayer Plus.

. Approximately 1,300 third-party developers are members of our Real
Developer Program. This program assists members in developing websites
and streaming media products that include or work with our technology.

. We believe that more than 85% of all Web pages using streaming media
use our technology.

As a result of these activities and our extensive promotional efforts, we
believe that the "Real" brand has become one of the most widely recognized
brands on the Internet.

Connection of consumers to content. Our network of websites highlights
third-party streaming media programming and organizes links to this
programming. This makes it easy for consumers to quickly find and link to
streaming media and for content providers to promote their offerings. We
provide:

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. Our programming guide. Our recently enhanced RealGuide provides access
to programming from our nearly 200 RealChannels and RealStations, more
than 1,700 live radio and television stations broadcasting on the
Internet and over 4,500 third-party multimedia websites.

. Navigational tools. The RealPlayer incorporates navigational tools
such as RealChannels, Presets and Destination Buttons to provide one-
click access to popular third-party programming. Similar capabilities
are incorporated into RealJukebox.

. Our showcase websites and programming. Our websites and programming,
Real.com, Film.com, Daily Briefing and LiveConcerts.com, organize and
present streaming media programming.

We believe that these services and sites stimulate demand for multimedia
content that uses our system, which in turn generates advertising revenues for
RealNetworks and our broadcasters and content providers.

Distribution capabilities. Our more than 70 million registered users
represent a significant direct channel for the digital distribution of our own
and others' products and services. Since January 1, 1999, we have averaged more
than 150,000 downloads of RealPlayer each day. We designed our electronic
commerce distribution program to increase the use of our products and services
and to drive sales of upgrades, our new products and services and related
products of other companies. Our AutoUpdate capability, a feature of RealPlayer
G2, enables users to automatically download new products and product upgrades
as they become available from us. Our RealStore website is an online store
through which we sell our products and third-party multimedia products. We
believe that our distribution strategy will continue to facilitate the growth
of the streaming media and digital media distribution industries by providing a
centralized and low-cost marketplace for developers of new and innovative tools
and other products.

Strategic relationships. We have established strategic relationships with a
variety of leaders in the entertainment, online and traditional media and
software, hardware and Internet infrastructure industries. We believe these
relationships will (1) increase the adoption of our technologies,
(2) accelerate the development of compelling multimedia content, (3) expand the
range of commercial activities based on our technology and brand name and (4)
foster the development of industry standard software protocols. The reach of
our strategic relationships includes:

. Product distribution. RealPlayer G2 is a bundled feature of AOL's
installation software and Netscape's Navigator Web browser, and is
bundled by several leading PC manufacturers. RealServer G2 technology
is integrated with server offerings from companies such as Lotus, Sun
Microsystems and SGI.

. Content delivery. Our streaming media technology is deployed by
leading Internet broadcasters such as CNN, ESPN, ABC, AOL, Fox News,
Bloomberg, CBS SportsLine and Broadcast.com.

. Technology innovation. We have strategic relationships to develop
and/or deploy our streaming media solution with backbone providers
such as Cable & Wireless, Sprint and AT&T, broadband access providers
such as At Home and Enron Communications, infrastructure technology
providers such as Inktomi, and ISPs such as Concentric Networks,
MindSpring and Earthlink.

. Development tools. We have agreements with Intel, CBT, Avid
Technology, Adobe Systems, Macromedia and others to develop and deploy
tools for RealSystem G2 to enable the production and development of
richer, more dynamic media presentations.

. Digital music distribution. We are working with IBM, AT&T (a2b),
Liquid Audio and others to develop secure digital download
capabilities for RealJukebox and RealSystem MP.

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Strategy

Our objective is to be the leading provider of media delivery and
distribution products and services that enable and promote the creation,
delivery and playback of multimedia content over the Internet. We believe that
our continuing efforts to foster an "ecosystem" of partners, including
consumers, broadcasters, content providers, advertisers and technology
partners, and our efforts to create meaningful economic opportunities for each
of these parties, is central to the execution of our strategy. Our strategy for
pursuing these goals includes the following:

Increase our number of users. We intend to continue our aggressive drive to
increase the number of consumers using our products and services and to promote
the availability of multimedia content for their consumption. To that end, we
will continue to heavily promote our RealPlayer, RealServer and RealJukebox
products and to seek additional mass distribution opportunities, such as our
relationships with AOL and a variety of OEMs. We believe that our more than 70
million registered users is a strategic asset that is attractive to
broadcasters, content providers and advertisers. This audience represents a
significant market for the sale of our own and third-party products and
services.

Drive higher consumer adoption and usage of online media. By creating a
simple, easy-to-use and engaging consumer experience, we believe that we help
accelerate the adoption and use of online media. We focus our efforts on
enhancing the consumer experience through superior technology and on ensuring
that consumers have ready access to the high-quality media programming on the
Web. We will continue to enhance and develop our navigational tools and
programming guides to enable deeper personalization by consumers.

Continue to diversify revenue opportunities. We believe that we can
continue to expand the number and size of revenue opportunities available to us
as our user base and the level of product use grow.

. Electronic commerce. With most of the approximately 1.4 million sales
of RealPlayer Plus originating from our website, we believe that we
are a leading electronic commerce site. We are expanding the range of
our own and third-party products sold at our RealStore electronic
commerce site to capitalize on this opportunity.

. Advertising and sponsorships. We believe that our ability to connect
our large base of registered users with multimedia content on the
Internet represents a significant business opportunity. We intend to
increase our advertising and sponsorship revenues through our recently
launched RealGuide, through our network of advertiser-supported
websites and programming and by selling placements on the navigational
tools on our RealPlayer and RealJukebox client software.

Further expand our presence in digital music distribution. With the
introduction of RealJukebox and our RealSystem MP digital music distribution
solution, we have expanded our presence beyond our traditional streaming media
market into the rapidly emerging market for digital music distribution. We
intend to continue expanding into this area by aggressively marketing our new
products to our large base of RealPlayer users, developing additional products
and facilitating the sale and digital distribution of music over the Internet.
We expect to drive downloads of RealJukebox through the AutoUpdate capability
on RealPlayer G2. We believe our RealJukebox product contains a number of
features that will enable it to be the preferred method for consumers to
access, browse and download digital music on the Internet for local playback
and management.

Extend our technology leadership and focus on broadband opportunities. We
are focused on maintaining our technology leadership by aggressively
introducing new products and services and by driving the development of
industry-wide technology standards. A central element of our technology
strategy is our ongoing effort to maximize the scalability of our software
solutions to

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accommodate and enable the rapid growth of multimedia content on the Internet.
In addition, we intend to focus on developing products designed for media
delivery over broadband access technologies such as digital subscriber lines
and cable modems. We believe that our experience in delivering media over
bandwidth-constrained networks will enable us to deliver solutions to broadband
providers to enhance quality of service and network efficiency.

Products and Services

RealSystem G2

RealSystem G2, introduced in November 1998, fully integrates players,
servers and tools to create an end-to-end streaming media solution for
consumers and content providers. RealSystem G2 provides the necessary
components to generate a high-quality user experience that is scalable across
the heterogeneous Internet infrastructure. It allows consumers to experience
and content providers to create rich and dynamic media content that can be
viewed and heard in real time across varying narrowband and broadband
environments.

Players. RealPlayer G2 enables a user to listen to and view content from
websites that use our server products. RealPlayer G2 provides basic functions
such as play, stop, fast-forward, rewind and volume adjustment and customizable
navigational tools for easy and personalized access to multimedia content. We
offer RealPlayer G2 for free from our website and through bundling with third-
party products. We sell our premium RealPlayer Plus, which has additional
features such as clearer, sharper audio and video, high-fidelity audio quality
with a graphic equalizer and picture quality controls such as contrast,
brightness and tint.

Servers. Our server technology allows broadcasters and content providers to
broadcast audio, video and other multimedia programming to large numbers of
simultaneous users over varying Internet connections. We price our servers
based on features and streaming capacity and offer four server products to meet
the varying needs and requirements of broadcasters and content providers:

Basic Server G2, available for free download, supports 25 concurrent users
of live and on-demand multimedia broadcasts.

Basic Server Plus G2 is designed for hobbyists and small- to medium-sized
businesses. It supports 40 concurrent users, with additional administrative
capabilities and content creation tools.

The RealServer G2 Internet Solution is designed for use primarily by
broadcasters, ISPs, distance learning providers and large websites. It supports
large audiences and provides more advanced administrative features and new in-
stream advertising insertion and rotation capabilities. Customized solutions
are available. For example, we offer authentication features to help ensure
site security or enable pay-per-view broadcasting and to support back-end
credit card and transaction-processing systems, features that are designed and
priced specifically for educational institutions or teachers and features that
enable ISPs to host the streaming media content of their customers.

RealSystem G2 Enterprise Solution is designed for corporate intranets.
Popular applications include live executive broadcasts at company meetings,
sales force training and enterprise learning.

Tools. We offer a variety of products that improve the distribution and
quality of customers' RealSystem G2 content and presentations. Our products
include:

RealProducer G2, available for free download, is our basic multimedia
creation and publishing tool.

RealProducer Plus G2 is a more advanced tool that offers Web designers and
production artists building RealSystem G2 presentations the ability to reach a
wider audience and produce higher-quality content.

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RealProducer Pro G2 is a professional solution designed for Web authors and
production experts. It includes timeline-based features for creating
synchronized multimedia templates for Synchronized Multimedia Integration
Language (SMIL) and Hypertext Mark-up Language (HTML) layout and flexible
compression control.

RealSystem MP

RealSystem MP, introduced in May 1999 and based on the media delivery
platform of RealSystem G2, is an open and extensible digital music management
solution that provides consumers with a convenient method for recording,
playing, organizing and acquiring music from the Internet and local digital
sources. RealSystem MP provides the music industry and content owners with a
secure method for digital distribution of their music. RealSystem MP can be
integrated with various Internet services and supports a range of products and
hardware devices. Key features of RealSystem MP include:

. Content insertion services that enable consumers to create and manage
their own personal music database.

. A secure plug-in interface that supports a variety of security
initiatives, including IBM's electronic music management system,
AT&T's a2b technology and Liquid Audio's technology. RealSystem MP's
open architecture will enable it to comply with the goals of the
Recording Industry Association of America's task force on the Secure
Digital Music Initiative.

. File format support for popular music formats such as MP3, WAV, MIDI
and our RealAudio G2 format.

. Information services that provide access to information from an online
music database, including track name, artist, album and genre.

. Content extraction services that enable a range of devices and
products, including portable digital devices, CD recorders, flash
memory cards and high-capacity disks, to use the content and
information in a user's personal music database.

. Home networking services that enable the distribution of music
throughout a home network.

RealJukebox. RealJukebox, a beta version of which was introduced in May
1999, is based on RealSystem MP. RealJukebox is a completely digital music
product that enables consumers to acquire, record, store, organize and play
their personal music collections. Using RealJukebox, consumers can acquire
music from a number of different sources, including free promotional music
downloads, purchased Internet music downloads and music purchased through links
to online music retailers. Consumers can also record CDs onto their hard disks
at three to five times playback speed. RealJukebox records to a number of high-
quality digital audio formats, including RealAudio G2 and MP3.

RealJukebox enables consumers to listen to music at their convenience from
a PC, in a home network and on their digital playback devices. Music is sorted
by a number of categories, including artist, song title, genre and type of
file. Consumers can create personal playlists by dragging and dropping songs.

We intend to sell a premium version of our RealJukebox product in the
future.

Other Products

RealStore is an online store for the sale of our own products and upgrades,
as well as for third-party products and training products for use on corporate
intranets. Through this distribution channel, we are able to offer a broad
selection of products with little inventory risk or merchandising expense.

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Services

RealGuide. RealGuide offers the ability to search for and locate multimedia
content. RealGuide is a comprehensive directory that enables easy and
personalized access to high-quality multimedia programming information
available on the Internet. RealGuide provides viewers with one-click access to
the day's top stories and programming from nearly 200 RealChannels and
RealStations, more than 1,700 live radio and television stations broadcasting
on the Internet and over 4,500 third-party multimedia websites.

Real Broadcast Network. The Real Broadcast Network is our Internet
broadcast service through which we provide hosting services on behalf of
broadcasters and content providers. We provide full turnkey services, including
the hardware, software, personnel, network connectivity and bandwidth necessary
to enable businesses to deliver live and on-demand programming over the
Internet. The Real Broadcast Network features a distributed multi-tier
architecture designed to improve Internet broadcasts by routing consumers to
the nearest broadcast hub on the Internet or within an Internet service
provider. We believe the relationships we have formed with leading backbone
providers and ISPs support and enhance the services we provide.

Showcase websites and programming. In addition to our main website,
Real.com, we offer websites that organize and offer streaming media programming
through navigational and theme-oriented sites. LiveConcerts.com offers live
streamed music concerts and services such as up-to-date concert schedules.
Film.com provides in-depth information about movies, including reviews and
previews, as well as streaming media clips. Daily Briefing allows users to
design and receive customized daily streaming media newscasts in the areas of
current events, sports, entertainment, music, business and technology.

Technology

Our media delivery solutions are designed to optimize the delivery of
multimedia content over the Internet. Our solutions are based on open industry
standards and work with a broad range of operating systems, hardware platforms,
network environments and media types.

RealSystem G2 technology. RealSystem G2 is a streaming media platform based
on advanced transmission technologies and protocols that address the inherent
limitations of the Internet with respect to multimedia delivery. The following
are key elements of our RealSystem G2 technology:

. AutoUpdate, an automatic upgrade feature, notifies users and allows
them to easily download new products and product upgrades as they
become available.

. SureStream transport technology enables reliable and continuous end-
user playback by scaling dynamically to deliver high-quality RealAudio
and RealVideo to users at the varying connection rates found under
real-world network conditions. SureStream technology utilizes bi-
directional communication that enables the server and player to
communicate during transmission regarding the bandwidth and quality of
the user's connection to optimize the transmission.

. Buffering ensures continuous delivery by caching data packets and
requesting retransmission of any missing packets.

. Error-Mitigation reduces performance degradation by reconstructing
lost data packets based on approximations regarding adjacent or
closely related data packets.

. Smart Networking allows a server to automatically select the
appropriate transmission protocol depending on current network
conditions and the presence of firewalls or proxies when streaming
content to the player.

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. Video-Optimized Transmission incorporates technologies that reduce
unnecessary repetition of redundant background data in neighboring
video frames, and reduces the amount of video content being streamed
if video performance is degraded during a given transmission. This
technology instead focuses on maintaining the continuity of the audio
stream, which is often more central to the user experience.

. Advertising Application allows for the insertion of banner and
streaming media advertising into streaming media content while
seamlessly integrating with existing ad-serving software and
solutions.

. Cross-Platform Support ensures that our products operate across a
disparate array of broadcast platforms, such as Alpha UNIX, FreeBSD,
HP/UX, Linux, SCO Unix, SGI IRIX, Sun OS and Win32, Internet
infrastructures and emerging clients, such as PCs, set-top boxes,
portable devices and all popular browsers.

RealSystem G2 builds on industry standards, implementing Real Time
Streaming Protocol, a standard client/server protocol for streaming media.
RealSystem G2 also supports SMIL, which enables rich, multi-screen content to
be delivered over a typical modem connection. SMIL allows content creators to
easily synchronize their media presentations with a wide range of media,
including voice, music, visual effects, text and graphics, to produce audio-
visual content using a simple text editor.

RealSystem MP technology. Building on the technology of RealSystem G2, we
developed RealSystem MP, a complete digital music management solution.
RealSystem MP uses an open and extensible architecture that enables its
integration with a wide range of Internet services and media formats, including
secure digital download, extraction to consumer playback devices and access to
online music information databases.

Technologies enabling large-scale delivery of streamed multimedia. Our
splitter and caching technologies allow broadcasters to transmit large numbers
of simultaneous streams using reduced bandwidth by sending a separate signal to
multiple users through the same network links. Our splitter technology enables
a host server to broadcast a signal to a set of servers distributed around a
network. Those servers then transmit the signal to the end user, thereby
minimizing the use of the network backbone and improving signal quality. We use
this technology in the Real Broadcast Network and license it to other Internet
broadcasters, ISPs and networks. The caching and proxy server technology we co-
developed with Inktomi enables widespread and efficient distribution of
multimedia content by moving the data closer to the end user. This proxy
caching technology enables ISPs and backbone providers to greatly reduce
bandwidth and infrastructure costs, and provides a more compelling experience
for the user.

Codecs. Our RealSystem G2 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 broadcasts
(or streams) the packets from a server to a client, our RealPlayer. RealPlayer
then reassembles the packets in the correct order and allows a user to play
back the streaming media content in real time without waiting to download. The
compression process enables the data to be streamed to the player even in very
low bandwidths (14.4 kbps) or congested network environments by reducing the
amount of data to be streamed. We have licensed and integrated Intel's
streaming Web video technology into RealSystem G2, enabling significantly
faster video encoding than previous streaming media delivery systems and
delivery of higher-image performance and quality to consumers. RealSystem MP is
compatible with both the RealAudio G2 and MP3 codecs. Our MP3 codecs are based
on licenses obtained from third parties. We plan to continue to develop
proprietary codecs and license third-party codec technology to improve our
products' capabilities.

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Research and Development

We devote a substantial portion of our resources to developing new
products, enhancing existing products, expanding and improving our fundamental
streaming technology and strengthening our technological expertise. During the
years ended December 31, 1996, 1997 and 1998, and the six months ended June 30,
1999, we expended approximately 34%, 41%, 32% and 30% of our total net revenues
on research and development activities. We intend to continue to devote
substantial resources to research and development for the next several years.
As of June 30, 1999, RealNetworks had 225 full-time employees, or approximately
42% of our work force, engaged in research and development activities.

Sales, Marketing and Distribution

We believe that any individual or company that desires to send, support or
receive multimedia content over the Internet is a potential customer. To reach
as many of these potential customers as possible, we sell our products and
services through several distribution channels, both directly (over the
Internet and through a sales force) and indirectly (through OEMs, VARs and
other distributors). As of June 30, 1999, we had 199 full-time employees, or
approximately 37% of our work force, engaged in sales and marketing activities.

Electronic commerce. Substantially all of the products we sell can be
purchased and delivered directly from our websites. Our websites provide us
with a low-cost, globally accessible sales channel that is available 24 hours
per day, seven days per week.

Direct sales force. Our direct sales force primarily markets and sells our
server products to corporate customers. We also have an advertising sales force
that markets and sells advertising on our websites and within the media streams
that we host on behalf of our corporate customers. We have subsidiaries in
Japan, the United Kingdom, France and Germany, and offices in several other
countries, which market and sell our products outside the United States.

OEMs and VARs. We have entered into various distribution relationships with
third parties pursuant to which our products and technologies are incorporated
into, bundled with or offered with third-party products for delivery by the
third party to end users.

Sales through other distributors. We sell our software systems and services
to other distributors, including content aggregators, ISPs and other hosting
providers that redistribute or provide end users access to our streaming
technology from their websites and systems. We have agreements with owners of
many popular websites and software companies to distribute our products as a
click-through or to bundle our RealPlayer G2 into their applications and
software.

Real Developer Program. We provide development tools, technical assistance
and marketing opportunities to those who work with our streaming media
technology. We offer a program targeted to Web masters, Web designers and
content creators who are building interactive, multimedia-rich websites. We
also assist application developers who create and market RealAudio- or
RealVideo-enabled applications and who develop datatypes for integration into
the RealSystem G2 client/server architecture. Approximately 1,300 developers
are members of our Real Developer Program.

Marketing programs. Our marketing programs are aimed at increasing brand
awareness, stimulating market demand and educating potential customers about
the economic opportunities in delivering multimedia content over the Internet.
We have a number of marketing initiatives, including:

. Showcasing our various products and solutions in trade shows,
conferences and seminars.

. Providing product-specific information through our websites.

. Promoting and co-promoting special events with our broadcast partners.

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. Advertising products and services in print and electronic media.

. Sponsoring our annual RealNetworks Conference.

Customers

Our customers include businesses and consumers located throughout the
world. Sales to customers outside the United States, primarily in Asia and
Europe, were approximately 19%, 27%, 23% and 24% of total net revenues,
excluding revenues from the Microsoft license agreement, in the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999.
Software license fees under a license agreement with Microsoft accounted for
approximately 15%, 15% and 10% of total net revenues for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1999.

Customer Support

Our customers have a choice of support options depending on the level of
service desired and the nature of the products acquired. Customer support is
provided by our customer relations department and third-party contractors.
Customers can access a technical support hotline to answer inquiries or
initiate e-mail inquiries. We also provide an online database of technical
information for customer self-service. As of June 30, 1999, we employed 21
full-time technical and customer support representatives, approximately 4% of
our work force, to respond to customer requests for support.

Competition

Many of our current and potential competitors have longer operating
histories, greater name recognition, more employees and significantly greater
financial, technical, marketing, public relations and distribution resources
than we do. We are committed to the continued market penetration of our brand,
products and services. The competitive environment may require us to make
changes in our products, pricing, licensing, services or marketing to maintain
and extend our current brand and technology franchise. Price concessions or the
emergence of other pricing or distribution strategies of competitors may
diminish our revenues, impact our margins or lead to a reduction in our market
share, any of which will harm our business.

Microsoft is a principal competitor in the development and distribution of
streaming media and media distribution technology. Microsoft currently competes
with us in the market for streaming media server and player software and has
announced its intent to compete in the market for digital distribution of
media. In addition, Microsoft competes with us to attract broadcasters of high-
quality or popular content to promote and deliver such content in Microsoft's
formats, in some cases on an exclusive or preferential basis. We believe that
Microsoft's commitment to and presence in the media delivery industry has
increased and that Microsoft will continue to increase competitive pressure in
the overall market for streaming media and media distribution.

In addition to Microsoft, we face increasing competition from other
companies that are developing and marketing streaming media products.
Competitors include Apple Computer, which has just announced the availability
of QuickTime 4.0 with a streaming media server, Cisco Systems/Precept Software,
PictureTel/Starlight Networks and Oracle. As more companies enter the market
with products that compete with our servers, players and tools, the competitive
landscape could change rapidly to our disadvantage.

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Our media hosting service, the Real Broadcast Network, competes with a
variety of companies that provide streaming media hosting services. These
companies include Broadcast.com (which has agreed to be acquired by Yahoo!) and
Intervu and emerging broadcast networks such as CMGI's Magnitude Network and
Enron Communications. Some media hosting competitors are also customers on whom
we rely to help drive product download traffic to our website through their
broadcast events.

While Internet advertising revenues across the industry continue to grow,
the number of websites competing for advertising revenues is also growing. Our
websites, including Real.com, Film.com and LiveConcerts.com, compete for user
traffic and Internet advertising revenues with a wide variety of websites,
Internet portals and ISPs. In particular, aggregators of audio, video and other
media, such as Broadcast.com and Microsoft's Web Events, compete with our
RealGuide. We also compete with traditional media such as television, radio and
print for a share of advertisers' total advertising budgets.

The electronic commerce features of our websites compete with a variety of
other websites for consumer traffic. To compete successfully in the electronic
commerce market, we must attract sufficient traffic to our websites by offering
high-quality, competitively priced merchandise in a compelling, easy-to-
purchase format. In addition, we must successfully leverage our existing user
base to develop the market for our products and services.

Governmental Regulation

. limit the growth of the Internet;

. create uncertainty in the marketplace that could reduce demand for our
products and services;

. increase our cost of doing business;

. expose us to significant liabilities associated with content available
on our websites or distributed or accessed through our products or
services; or

. lead to increased product development costs or otherwise harm our
business.

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Intellectual Property

As of May 14, 1999, we had 25 registered U.S. trademarks or service marks,
and had applications pending for an additional 39 U.S. trademarks. We also have
several unregistered trademarks. In addition, RealNetworks has several foreign
trademark registrations and pending applications. Many of our marks begins with
the word "Real" (such as RealSystem, RealAudio and RealVideo). We are aware of
other companies that use "Real" in their marks alone or in combination with
other words, and we do 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 our proprietary rights to the same extent as
do the laws of the United States, and effective patent, copyright, trademark
and trade secret protection may not be available in such jurisdictions.

As of May 14, 1999, we had nine U.S. patents and 11 patent applications on
file relating to various aspects of our technology. We are preparing additional
patent applications on other features of our technology. Patents with respect
to our technology may not be granted and, if granted, may be challenged or
invalidated. Issued patents may not provide us with any competitive advantages
and may be challenged by third parties. In addition, others could independently
develop substantially equivalent intellectual property.

Many of our current and potential competitors dedicate substantially
greater resources to protection and enforcement of their intellectual property
rights, especially patents. If a blocking patent has issued or issues in the
future, we would need to either obtain a license or design around the patent.
We may not be able to obtain such a license on acceptable terms, if at all, or
design around the patent. As with other software products, our products are
susceptible to unauthorized copying and uses that may go undetected, and
policing such unauthorized use is difficult.

To protect our proprietary rights, we rely on a combination of patent,
trademark, copyright and trade secret laws, confidentiality agreements with our
employees and third parties, and protective contractual provisions. These
efforts to protect our intellectual property rights may not be effective in
preventing misappropriation of our technology, or may not prevent the
development and design by others of products or technologies similar to or
competitive with those we develop.

Employees

As of June 30, 1999, we had 536 full-time employees, 462 of whom were based
at our executive offices in Seattle, Washington, 40 of whom were based in our
foreign offices and 34 of whom were based in our domestic sales offices. None
of our employees is subject to a collective bargaining agreement, and we
believe that our relations with our employees are good.

Position on Charitable Responsibility

We are strongly committed to charitable responsibility, as evidenced by our
donations of software to charitable organizations. If we achieve sustained
profitability, we intend to donate approximately 5% of our annual net income to
charitable organizations. We hope to encourage employee giving by using a
portion of our intended contribution to match charitable donations made by
employees.

Properties

We have entered into a lease agreement for our new corporate headquarters
in Seattle, Washington. The lease commenced on April 1, 1999 and expires on
April 1, 2011, with an option to renew for either a three- or a ten-year
period. We are initially leasing approximately 148,000 square feet at an
average monthly rent of approximately $210,000. We will be leasing
approximately 114,000 square feet of additional space in stages during 1999
through 2001, at an average additional

33
<PAGE>

monthly rent of approximately $185,000. We moved into the new location in May
1999. This move could cause a disruption in our operations and unexpected
costs, which would adversely affect our business.

Legal Proceedings

In August 1998, Venson M. Shaw and Steven M. Shaw filed a lawsuit against
us and co-defendant Broadcast.com in the United States District Court for the
Northern District of Texas--Dallas Division. The plaintiffs allege that we,
individually and in combination with Broadcast.com, infringe on a certain
patent by making, using, selling and/or offering to sell software products and
services directed to media delivery systems for the Internet and corporate
intranets. The plaintiffs seek to enjoin us from our alleged infringing
activity and to recover damages in an amount no less than a reasonable royalty.
Although we can give no assurance as to the outcome of this lawsuit, we believe
that the allegations in this action are without merit, and intend to vigorously
defend ourselves against these claims. We may be required to indemnify
Broadcast.com under the terms of our license agreement with it. The plaintiffs
filed a similar claim based on the same patent and seeking similar remedies as
a separate lawsuit against Microsoft and Broadcast.com in the same court. The
court has consolidated the lawsuit against Microsoft and Broadcast.com with the
lawsuit against RealNetworks and Broadcast.com.

On July 29, 1998, Left Bank Management, Inc. filed a lawsuit against us in
the U.S. District Court for the Western District of Washington. The plaintiff
alleges that we entered into an oral agreement with it in 1995 pursuant to
which the plaintiff claims it is entitled to 30% of our revenues from the use
of RealAudio technology to promote, sample or sell music. The plaintiff claims
breach of contract, unjust enrichment, promissory estoppel and breach of
implied-in-fact contract. We have denied each of the plaintiff's claims. In
response to our motion to dismiss, the plaintiff withdrew its claim for breach
of fiduciary duty. Although no assurance can be given as to the outcome of this
lawsuit, we believe the allegations in this action are without merit, and we
intend to vigorously defend ourselves against these claims.

From time to time we are, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of our business, including
contract-related claims and claims of alleged infringement of third-party
patents, trademarks and other intellectual property rights. These claims, even
if not meritorious, could force us to spend significant financial and
managerial resources. We currently are not aware of any legal proceedings or
claims that we believe will have, individually or taken together, a material
adverse effect on our business, prospects, financial condition and operating
results.

34
<PAGE>

SELLING SHAREHOLDERS

The following table sets forth information known to us with respect to the
beneficial ownership of our common stock held by each selling shareholder as of
July 26, 1999, and as adjusted to reflect the sale of common stock offered by
such shareholder. As of July 26, 1999, there were 72,977,641 shares of common
stock outstanding. Beneficial ownership is determined in accordance with the
rules of the SEC.

<TABLE>
<CAPTION>
Ownership Prior to Ownership After
Offering Offering(1)
-------------------- --------------------
Number of Shares Being Number of
Beneficial Owner Shares Percentage Offered Shares Percentage
---------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Michael Comish........... 32,000 * 16,000 16,000 *
Mark Comish.............. 21,334 * 10,668 10,666 *
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Assumes the sale of all the shares of common stock offered by each of the
selling shareholders.

None of the selling shareholders has had any material relationship with
RealNetworks or its affiliates within the past three years. The selling
shareholders received all the shares from RealNetworks on April 1, 1999 in a
private transaction, pursuant to which Ultisoft Inc., a company owned by the
selling shareholders, merged with a wholly owned subsidiary of RealNetworks.
All the shares were "restricted securities" under the Securities Act prior to
this registration.

The selling shareholders have represented to us that they acquired the
shares for their own account for investment only and not with a view toward
selling or distributing them, except pursuant to sales registered under the
Securities Act or exemptions from the registration requirements of the
Securities Act. In recognition of the fact that the selling shareholders, even
though acquiring the shares for investment, may wish to be legally permitted to
sell their shares, RealNetworks agreed with the selling shareholders to file
the registration statement to register the resale of the shares. RealNetworks
agreed to prepare and file all necessary amendments and supplements to the
registration statement to keep it effective until the earlier of (1) ten
trading days after the date of this prospectus and (2) the date on which the
selling shareholders have sold all the shares.

35
<PAGE>

PLAN OF DISTRIBUTION

We are registering the shares of common stock on behalf of the selling
shareholders and their successors (including donees, pledgees, transferees or
other successors-in-interest, who may sell shares they receive from the selling
shareholders as a gift, pledge, partnership distribution or other non-sale-
related transfer after the date of this prospectus).

The selling shareholders or their successors may sell all of the shares
from time to time in transactions (which may include block transactions) in the
over-the-counter market through Nasdaq, in privately negotiated transactions,
through put or call option transactions relating to the shares, through short
sales of the shares or through a combination of such methods of sale. They may
sell the shares at fixed prices that may change, at market prices prevailing at
the time of sale, at prices relating to prevailing market prices or at
negotiated prices. Such transactions may or may not involve brokers or dealers.

The selling shareholders have advised us that they have not entered into
any arrangements for the sale of the shares with any underwriters or broker-
dealers and that no underwriter or coordinating broker is now acting in
connection with the proposed sale of shares.

In connection with distributions of the shares or otherwise, the selling
shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares in the course of hedging the positions they assume with the selling
shareholders. The selling shareholders may also sell shares short and redeliver
the shares to close out such short positions. The selling shareholders may also
enter into option or other transactions with broker-dealers which require the
delivery to the broker-dealer of the shares, which the broker-dealer may resell
or otherwise transfer pursuant to this prospectus. The selling shareholders may
also loan or pledge the shares to a broker-dealer and the broker-dealer may
sell the shares so loaned or, upon a default, the broker-dealer may effect
sales of the pledged shares pursuant to this prospectus.

The selling shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
rather than pursuant to this prospectus, provided they meet the criteria and
conform to the requirements of such rule.

Any broker-dealers participating in the distribution of the shares may
receive compensation in the form of discounts, concessions or commissions from
the selling shareholders and/or the purchasers of the shares for whom such
broker-dealers may act as agents or to whom they may sell as principals, or
both. The compensation paid to a particular broker-dealer might be in excess of
customary commissions. The selling shareholders and broker-dealers who assist
in the sale of the shares may be "underwriters" within the meaning of Section
2(11) of the Securities Act. Any commissions paid or any discounts or
concessions allowed to any such broker-dealers, and any profits received on the
resale of such shares of common stock purchased by them, may be underwriting
discounts and commissions under the Securities Act. Selling shareholders who
are "underwriters" within the meaning of Section 2(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities Act.

36
<PAGE>

The rules of the SEC generally prohibit underwriters, brokers, dealers and
certain other persons engaged or participating in the distribution of these
shares, including the selling shareholders, from making a market in such shares
during the "cooling off" period preceding the commencement of such
distribution, which may limit the timing of purchases and sales of our common
stock by the selling shareholders. We have informed the selling shareholders
that the antimanipulative provisions of Regulation M of the Exchange Act may
apply to sales of the shares in the market and to the activities of the selling
shareholders and their affiliates.

To comply with the securities laws of certain states, if applicable, our
common stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states, our common stock
may not be sold unless such shares have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

To the extent required, the number of the shares to be sold, the purchase
prices or public offering prices of the shares, the names of any agents,
dealers or underwriters, any applicable commissions or discounts with respect
to a particular offer and any other material facts will be set forth by us in a
supplement to this prospectus or, if appropriate, a post-effective amendment to
the registration statement of which this prospectus is a part. In addition, a
supplement to this prospectus will be filed upon notification to us by a
selling shareholder that one or more of his donees, pledgees, transferees or
other successors-in-interest intends to sell more than 500 shares.

RealNetworks will pay all expenses (other than selling commissions and
fees, stock transfer taxes and fees and expenses of legal counsel for the
selling shareholders) of the registration and sale of the shares. However, the
selling shareholders have agreed to reimburse RealNetworks for the first
$20,000 in legal fees and associated costs incurred by RealNetworks in
connection with the registration and sale of the shares. RealNetworks also has
agreed to indemnify the selling shareholders against certain liabilities,
including liabilities under the Securities Act. The selling shareholders may
indemnify any agent, dealer or broker-dealer that assists them in selling the
shares against certain liabilities, including liabilities arising under the
Securities Act.

We have agreed to use our best efforts to maintain the effectiveness of
this registration statement with respect to the shares of common stock offered
by the selling shareholders until the earlier of the sale of such shares or ten
trading days after the date of this prospectus. No sales may be made pursuant
to this prospectus after such date unless we amend or supplement this
prospectus to indicate that we have agreed to extend such period of
effectiveness. RealNetworks may suspend use of this prospectus under certain
circumstances. We cannot guarantee that the selling shareholders will sell any
or all of the shares.

RealNetworks will not receive any proceeds from the sale of the shares by
the selling shareholders.

37
<PAGE>

LEGAL MATTERS

The validity of the securities offered by this prospectus will be passed
upon for RealNetworks by Perkins Coie LLP, Seattle, Washington.

EXPERTS

The consolidated financial statements and schedule of RealNetworks, Inc.
and subsidiaries as of December 31, 1997 and 1998 and for each of the years in
the three-year period ended December 31, 1998, have been included in this
prospectus and in the registration statement in reliance upon the report of
KPMG LLP, independent auditors, appearing elsewhere in this prospectus, and
upon the authority of that firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of its Public Reference
Room.

The SEC allows us to "incorporate by reference" into this prospectus the
information we have filed with it. The information incorporated by reference is
an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Section 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934, after the initial filing of the registration
statement that contains this prospectus and before the time that all the
securities offered by this prospectus are sold:

. Our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;

. Our Quarterly Report on Form 10-Q for the quarter ended March 31,
1999;

. Our Current Report on Form 8-K, filed on May 4, 1999; and

. The description of our capital stock contained in the Registration
Statements on Form 8-A filed on September 26, 1997 and December 14,
1998 under Section 12 of the Exchange Act, including any amendment or
report updating such description.

You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:

RealNetworks, Inc.
Kelly Jo MacArthur
Vice President, General Counsel and Secretary
2601 Elliott Avenue
Seattle, Washington 98121
(206) 674-2700

38
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2

Consolidated Statements of Operations and Comprehensive Loss............... F-3

Consolidated Balance Sheets................................................ F-4

Consolidated Statements of Shareholders' Equity (Deficit).................. F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7

</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and
Shareholders
RealNetworks, Inc.:

We have audited the accompanying consolidated balance sheets of
RealNetworks, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.

/s/ KPMG LLP

Seattle, Washington
January 21, 1999, except for Note
10(a), which is as of May 10, 1999

F-2
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- -------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues:
Software license fees....... $11,876 $ 25,494 $ 46,949 $ 9,418 $17,010
Service revenues............ 1,120 4,972 14,742 2,622 5,249
Advertising................. 1,016 2,254 3,148 462 1,266
------- -------- -------- -------- -------
Total net revenues........ 14,012 32,720 64,839 12,502 23,525
------- -------- -------- -------- -------
Cost of revenues:
Software license fees....... 1,343 3,153 8,032 1,586 2,811
Service revenues............ 554 2,392 2,631 521 920
Advertising................. 288 920 1,727 332 550
------- -------- -------- -------- -------
Total cost of revenues.... 2,185 6,465 12,390 2,439 4,281
------- -------- -------- -------- -------
Gross profit.............. 11,827 26,255 52,449 10,063 19,244
------- -------- -------- -------- -------
Operating expenses:
Research and development.... 4,812 13,268 20,828 4,419 7,289
Sales and marketing......... 7,540 20,124 32,451 6,830 10,215
General and administrative.. 3,491 6,024 9,841 2,100 2,913
Goodwill amortization....... -- -- 1,596 -- 532
Acquisition charges......... -- -- 8,723 8,723 --
------- -------- -------- -------- -------
Total operating expenses.. 15,843 39,416 73,439 22,072 20,949
------- -------- -------- -------- -------
Operating loss............ (4,016) (13,161) (20,990) (12,009) (1,705)
------- -------- -------- -------- -------
Other income (expense):
Interest income............. 296 2,225 5,325 1,266 1,308
Other expense............... (69) (233) (749) (189) (339)
------- -------- -------- -------- -------
Other income, net......... 227 1,992 4,576 1,077 969
------- -------- -------- -------- -------
Net loss.................. $(3,789) $(11,169) $(16,414) $(10,932) $ (736)
======= ======== ======== ======== =======
Basic and diluted net loss per
share........................ $ (5.95) $ (1.44) $ (0.25) $ (0.18) $ (0.01)
======= ======== ======== ======== =======
Shares used to compute basic
and diluted net loss per
share........................ 642 8,081 64,646 62,084 67,457
Comprehensive loss:
Net loss.................... $(3,789) $(11,169) $(16,414) $(10,932) $ (736)
Translation adjustment...... (11) (151) 36 (14) (115)
------- -------- -------- -------- -------
Comprehensive loss........ $(3,800) $(11,320) $(16,378) $(10,946) $ (851)
======= ======== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-------------------------- March 31,
1997 1998 1999
------------ ------------ -----------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-
term investments................. $ 92,537 $ 89,777 $ 89,120
Trade accounts receivable, net of
allowances for doubtful accounts
and sales returns of $829 in
1997, $1,166 in 1998 and $1,287
in 1999.......................... 5,270 4,941 5,031
License fee receivable............ 10,000 -- --
Prepaid expenses and other current
assets........................... 2,052 3,212 3,276
------------ ------------ ------------
Total current assets.............. 109,859 97,930 97,427
------------ ------------ ------------
Equipment and leasehold
improvements, at cost:
Equipment and software............ 6,549 10,914 12,497
Leasehold improvements............ 1,347 1,441 7,384
------------ ------------ ------------
Total equipment and leasehold
improvements..................... 7,896 12,355 19,881
Less accumulated depreciation and
amortization..................... 2,753 6,082 6,945
------------ ------------ ------------
Net equipment and leasehold
improvements..................... 5,143 6,273 12,936
------------ ------------ ------------
Restricted cash equivalents........ -- 13,700 13,700
Other assets....................... 1,702 1,108 1,160
Goodwill, net of accumulated
amortization of $1,596 in 1998 and
$2,128 in 1999.................... -- 9,048 8,516
------------ ------------ ------------
Total assets...................... $ 116,704 $ 128,059 $ 133,739
============ ============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable.................. $ 2,136 $ 3,563 $ 3,256
Accrued liabilities............... 3,653 10,418 13,810
Deferred revenue, excluding non-
current portion.................. 16,550 23,742 30,145
------------ ------------ ------------
Total current liabilities......... 22,339 37,723 47,211
------------ ------------ ------------
Deferred revenue, excluding current
portion........................... 15,500 5,833 2,617
Note payable....................... 963 987 994
Shareholders' equity:
Preferred stock, $0.001 par value,
no shares issued and outstanding
Series A: authorized 200 shares... -- -- --
Undesignated series: authorized
59,800 shares.................... -- -- --
Common stock, $0.001 par value
Authorized 293,704 shares (295,791
shares authorized in 1999);
issued and outstanding 55,055
shares in 1997, 61,975 shares in
1998 and 66,604 shares in 1999... 55 62 66
Special common stock, $0.001 par
value
Authorized 6,296 shares (4,209
shares authorized in 1999);
issued and outstanding 3,338
shares in 1997, 2,586 shares in
1998 and 500 shares in 1999...... 3 3 1
Additional paid-in capital........ 95,530 117,515 117,765
Accumulated other comprehensive
loss............................. (162) (126) (241)
Accumulated deficit............... (17,524) (33,938) (34,674)
------------ ------------ ------------
Total shareholders' equity........ 77,902 83,516 82,917
------------ ------------ ------------
Commitments, contingencies and
subsequent events
Total liabilities and
shareholders' equity............. $ 116,704 $ 128,059 $ 133,739
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Special Accumulated
Preferred Stock Common Stock Common Stock Additional Other Total
------------------ ------------- -------------- Paid-In Comprehensive Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit Equity (Deficit)
--------- ------- ------ ------ ------ ------ ---------- ------------- ----------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995.............. 13,713 $ 14 74 $-- -- $-- $ 922 $ -- $ (2,047) $ (1,111)
Exercise of common
stock options..... -- -- 997 1 -- -- 43 -- -- 44
Issuance of
preferred stock
warrants.......... -- -- -- -- -- -- 1,579 -- -- 1,579
Accretion of
redemption value
of redeemable,
convertible
preferred stock... -- -- -- -- -- -- -- -- (31) (31)
Translation
adjustment........ -- -- -- -- -- -- -- (11) -- (11)
Net loss......... -- -- -- -- -- -- -- -- (3,789) (3,789)
--------- ------ ------ ---- ------ ---- -------- ----- -------- --------
Balances at
December 31,
1996.............. 13,713 14 1,071 1 -- -- 2,544 (11) (5,867) (3,319)
Exercise of common
stock options..... -- -- 2,288 2 -- -- 254 -- -- 256
Issuance of common
stock in exchange
for services...... -- -- 32 -- -- -- 55 -- -- 55
Issuance of
preferred stock
warrants.......... -- -- -- -- -- -- 4,068 -- -- 4,068
Accretion of
redemption value
of redeemable,
convertible
preferred stock... -- -- -- -- -- -- -- -- (488) (488)
Exercise of common
stock warrants.... -- -- 368 -- -- -- 37 -- -- 37
Conversion of
convertible
preferred stock
into common
stock............. (13,713) (14) 27,426 28 -- -- (14) -- -- --
Conversion of
redeemable,
convertible
preferred stock
into common stock
and special common
stock............. -- -- 16,970 17 3,338 3 50,051 -- -- 50,071
Sale of common
stock for cash,
net of issuance
costs of $4,582... -- -- 6,900 7 -- -- 38,535 -- -- 38,542
Translation
adjustment........ -- -- -- -- -- -- -- (151) -- (151)
Net loss......... -- -- -- -- -- -- -- -- (11,169) (11,169)
--------- ------ ------ ---- ------ ---- -------- ----- -------- --------
Balances at
December 31,
1997.............. -- -- 55,055 55 3,338 3 95,530 (162) (17,524) 77,902
Exercise of common
stock options..... -- -- 1,785 2 -- -- 744 -- -- 746
Exercise of common
stock warrants.... -- -- 1,333 1 -- -- 3,846 -- -- 3,847
Common stock sold
pursuant to
Employee Stock
Purchase Plan..... -- -- 95 -- -- -- 873 -- -- 873
Issuance of common
stock and stock
options in
business
combination....... -- -- 2,203 2 -- -- 16,524 -- -- 16,526
Conversion of
special common
stock to common
stock............. -- -- 1,504 2 (752) -- (2) -- -- --
Translation
adjustment........ -- -- -- -- -- -- -- 36 -- 36
Net loss......... -- -- -- -- -- -- -- -- (16,414) (16,414)
--------- ------ ------ ---- ------ ---- -------- ----- -------- --------
Balances at
December 31,
1998.............. -- -- 61,975 62 2,586 3 117,515 (126) (33,938) 83,516
Exercise of common
stock options
(unaudited)....... -- -- 456 -- -- -- 252 -- -- 252
Conversion of
special common
stock to common
stock
(unaudited)....... -- -- 4,173 4 (2,086) (2) (2) -- -- --
Translation
adjustment
(unaudited)....... -- -- -- -- -- -- -- (115) -- (115)
Net loss
(unaudited)...... -- -- -- -- -- -- -- -- (736) (736)
--------- ------ ------ ---- ------ ---- -------- ----- -------- --------
Balances at March
31, 1999
(unaudited)....... -- $ -- 66,604 $ 66 500 $ 1 $117,765 $(241) $(34,674) $ 82,917
========= ====== ====== ==== ====== ==== ======== ===== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
-------- --------- -------- -------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $ (3,789) $ (11,169) $(16,414) $(10,932) $ (736)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.............. 699 2,132 5,053 706 1,318
Acquisition charges........ -- -- 8,723 8,723 --
Other...................... -- 27 -- -- --
Equity in net losses of
joint venture............. -- 182 448 125 152
Deferred income tax expense
(benefit)................. -- (777) 777 -- --
Change in certain assets
and liabilities:
Trade accounts
receivable............... (2,665) (1,919) 512 237 (128)
License fee receivable.... -- (10,000) 10,000 -- --
Prepaid expenses and other
current assets........... (484) (1,119) (1,686) (770) (290)
Accounts payable.......... 2,220 (260) 853 86 (287)
Accrued liabilities....... 1,118 2,340 4,267 456 3,462
Deferred revenue.......... 2,266 29,163 (3,028) 349 3,206
-------- --------- -------- -------- --------
Net cash provided by (used
in) operating
activities............... (635) 8,600 9,505 (1,020) 6,697
-------- --------- -------- -------- --------
Cash flows from investing
activities:
Purchases of equipment and
leasehold improvements.... (2,784) (4,627) (4,373) (637) (7,490)
Purchases of short-term
investments............... (30,515) (203,046) (93,161) (25,594) (25,244)
Sales of short-term
investments............... 28,644 177,621 85,542 10,105 8,144
Investment in joint
venture................... -- (998) -- -- --
Increase in other assets... (182) (251) -- -- --
Increase in restricted cash
equivalents............... -- -- (13,700) -- --
Cash obtained through
acquisition............... -- -- 203 203 --
-------- --------- -------- -------- --------
Net cash used in investing
activities............... (4,837) (31,301) (25,489) (15,923) (24,590)
-------- --------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
note payable.............. -- 991 -- -- --
Net proceeds from sales of
preferred and common stock
and exercise of stock
options and warrants...... 17,091 69,333 5,667 2 252
-------- --------- -------- -------- --------
Net cash provided by
financing activities..... 17,091 70,324 5,667 2 252
-------- --------- -------- -------- --------
Effect of exchange rate
changes on cash............ (11) (106) (62) (5) (116)
-------- --------- -------- -------- --------
Net increase (decrease) in
cash and cash
equivalents.............. 11,608 47,517 (10,379) (16,946) (17,757)
Cash and cash equivalents at
beginning of period........ 3,130 14,738 62,255 62,255 51,876
-------- --------- -------- -------- --------
Cash and cash equivalents at
end of period.............. $ 14,738 $ 62,255 $ 51,876 $ 45,309 $ 34,119
======== ========= ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest.............. $ 4 $ 27 $ -- $ -- $ --
Cash paid during the period
for income taxes.......... $ -- $ 700 $ 600 $ -- $ --
Supplemental disclosure of
noncash financing and
investing activities:
Accretion of preferred
stock..................... $ 31 $ 488 $ -- $ -- $ --
Conversion of redeemable,
convertible preferred
stock to common stock and
special common stock...... $ -- $ 50,071 $ -- $ -- $ --
Common stock issued in
business combination...... $ -- $ -- $ 16,526 $ 16,526 $ --
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and March 31, 1998 and 1999
(information as of and for the quarters ended March 31, 1998 and 1999 is
unaudited)
(in thousands, except per share data)

1. Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

RealNetworks, Inc. and subsidiaries (Company) is a leading provider of
media delivery and digital distribution solutions designed for the Internet.
The Company's solutions enable consumers to experience and content providers to
deliver a broad range of multimedia content, including audio, video, text and
animation. The Company pioneered the development and commercialization of
"streaming media" systems that enable the creation, real-time delivery and
playback of multimedia content. The Company extended its media delivery
platform to include a digital music management system that allows consumers to
acquire, record, store, organize and play their personal music collections on
personal computers and digital playback devices.

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 and corporate intranets as a communications medium, the acceptance
of the Company's technology by the marketplace and the Company's ability to
generate license, service 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 considers all 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, 1997 and 1998 and March 31, 1999. At December 31,
1997 and 1998 and March 31, 1999, all short-term investments had original
contractual maturities of two years or less.

F-7
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and March 31, 1998 and 1999
(information as of and for the quarters ended March 31, 1998 and 1999 is
unaudited)
(in thousands, except per share data)

The Company's cash, cash equivalents and short-term investments consist of
the following:

<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash............................................... $ 4,679 $ 5,876 $ 5,329
Commercial paper................................... 57,576 42,000 28,790
U.S. Government agency securities.................. -- 4,000 --
------- ------- -------
Total cash and cash equivalents.................. 62,255 51,876 34,119
------- ------- -------
Short-term investments:
Corporate notes.................................... 6,717 30,602 38,188
U.S. Government agency securities.................. 21,065 5,300 16,813
Certificates of deposit............................ 2,500 1,999 --
------- ------- -------
Total short-term investments..................... 30,282 37,901 55,001
------- ------- -------
Total cash, cash equivalents and short-term
investments..................................... $92,537 $89,777 $89,120
======= ======= =======
Restricted cash equivalents.......................... $ -- $13,700 $13,700
======= ======= =======
</TABLE>

Restricted cash equivalents represent a restricted escrow account
established in connection with a lease agreement for new corporate
headquarters. Under certain circumstances, $10,000 of the escrow account will
be maintained for the term of the lease. The remaining $3,700 will be released
as the Company funds tenant improvements. The Company expects to take
occupancy of the new facilities during the quarter ending June 30, 1999.

(d) Depreciation and Amortization

Depreciation and amortization of equipment and leasehold improvements is
computed using the straight-line method over the estimated useful lives of the
assets, generally three years, or the lease term if shorter.

Goodwill represents the excess of the purchase price over the fair value
of identifiable tangible and intangible assets acquired in a business
combination accounted for under the purchase accounting method. Goodwill is
amortized using the straight-line method over five years.

(e) Stock-Based Compensation

The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123). Accordingly, the Company accounts for stock-
based compensation transactions with employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Options Issued to Employees," and related interpretations.
Compensation cost for employee stock options is measured as the excess, if
any, of the fair value of the Company's common stock at the date of grant over
the stock option exercise price.

F-8
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

(f) Revenue Recognition

On January 1, 1998, the Company adopted the provisions of Statement of
Position 97-2, "Software Revenue Recognition" (SOP 97-2), which provides
specific industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation or training. Under
SOP 97-2, the determination of fair value is based on objective evidence that
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. The adoption of SOP 97-2 did not have a material
effect on revenue recognition or the Company's results of operations.

Revenue from software license fees is recognized upon delivery, net of an
allowance for estimated returns, provided all the requirements of SOP 97-2 have
been met. Prior to January 1, 1998, the Company recognized revenue from
software license fees upon delivery, net of an allowance for estimated returns,
provided that no significant obligations of the Company remained and collection
of the resulting receivable was 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 is
recognized on the straight-line method over the term of the contract.

Service revenues include payments under support and upgrade contracts and
fees from consulting and streaming media content hosting. Support and upgrade
revenues are recognized ratably over the term of the contract, which typically
is twelve months. Other service revenues are recognized when the service is
performed.

Revenues from advertising appearing on the Company's websites are
recognized ratably 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 websites 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.

(g) Research and Development

Costs incurred in research and development are expensed as incurred.
Software development costs are required to be capitalized when a product's
technological feasibility has been established through the date the product is
available for general release to customers. The Company has not capitalized any
software development costs as technological feasibility is generally not
established until substantially all development is complete.

F-9
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

(h) Advertising Expenses

The Company expenses the cost of advertising and promoting its products as
incurred. Such costs are included in sales and marketing expense and totaled
approximately $665 in 1996, $1,110 in 1997, and $783 in 1998.

(i) Income Taxes

The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. 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.

(j) Financial Instruments and Concentrations of Risk

The Company's financial instruments consist of cash, cash equivalents,
short-term investments, trade accounts receivable, accounts payable, accrued
liabilities 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.

The Company is subject to concentrations of credit risk 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.

(k) Net Loss Per Share

Basic net loss per share is computed by dividing the sum of net loss plus
accretion of redemption value of redeemable preferred stock by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the sum of net loss plus accretion of
redemption value of redeemable preferred stock by the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
As the Company had a net loss attributable to common shareholders in each of
the periods presented, basic and diluted net loss per share are the same.

The following table reconciles the Company's reported net loss to net loss
attributable to common shareholders used to compute basic and diluted net loss
per share:

<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Net loss...................... $(3,789) $(11,169) $(16,414) $(10,932) $(736)
Accretion of redemption value
of redeemable preferred stock
prior to conversion into
common stock................. (31) (488) -- -- --
------- -------- -------- -------- -----
Net loss attributable to
common shareholders.......... $(3,820) $(11,657) $(16,414) $(10,932) $(736)
======= ======== ======== ======== =====
</TABLE>

F-10
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

The computation of diluted net loss per share excludes the following
options to acquire shares of common stock for the periods indicated because the
effect would be anti-dilutive:

<TABLE>
<CAPTION>
Year Ended December Quarter Ended
31, March 31,
-------------------- -------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares of common stock.................. 10,668 13,862 16,320 15,110 18,004
Weighted average exercise price per
share.................................. $ 0.14 $ 1.46 $ 6.06 $ 2.46 $13.62
</TABLE>

(l) Comprehensive Loss

On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of financial statements. The Company's comprehensive loss for the
years ended December 31, 1996, 1997 and 1998 and the quarters ended March 31,
1998 and 1999 consisted of net loss and the gross amount of foreign currency
translation adjustments. The tax effect of the translation adjustments was
insignificant. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.

(m) Foreign Currency

The functional currency of the Company's foreign subsidiaries is the local
currency of 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 translation adjustment
and included in accumulated other comprehensive income (loss) in shareholders'
equity. Gains and losses from foreign currency transactions are included in the
consolidated statement of operations. There were no significant foreign
currency transaction gains or losses in 1996, 1997 and 1998 and in the quarters
ended March 31, 1998 and 1999.

(n) 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.

(o) Impairment of Long-Lived Assets and Goodwill

The Company reviews its long-lived assets, including goodwill, 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, including goodwill, 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. Assets to be disposed of are reported at
the lower of their carrying amount or fair value less costs to sell.

F-11
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

(p) Reclassifications

Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform with the 1998 presentation.

(q) New Accounting Pronouncements

In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. The Company adopted SOP 98-1
on January 1, 1999. There was no material impact on the consolidated financial
statements as a result of adoption of SOP 98-1.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 establishes a new model for accounting for derivatives and hedging
activities and supersedes and amends existing accounting standards and is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires
that all derivatives be recognized in the balance sheet at their fair market
value, and the corresponding derivative gains or losses be either reported in
the statement of operations or as a component of other comprehensive income
depending on the type of hedge relationship that exists with respect to such
derivative. The Company does not expect the adoption of SFAS 133 to have a
material impact on its consolidated financial statements.

In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" (SOP 98-9) which amends certain elements of SOP 97-2 and
is effective for fiscal years beginning after March 15, 1999. The Company
believes that the adoption of SOP 98-9 will not have a material effect on the
Company's results of operations or financial position.

(r) Unaudited Interim Consolidated Financial Statements

In the opinion of the Company's management, the unaudited interim
consolidated financial statements as of March 31, 1999 and for the quarters
ended March 31, 1998 and 1999 include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation.

2. Acquisition

In March 1998, the Company completed the acquisition of Vivo Software, Inc.
(Vivo), a developer of streaming media creation tools. Under terms of the
acquisition, the Company issued approximately 2,203 shares of its common stock
in exchange for all outstanding shares of Vivo common stock. In addition, the
Company issued options to purchase approximately 95 shares of the Company's
common stock in exchange for outstanding unvested options to purchase Vivo
common stock. The acquisition was accounted for using the purchase method of
accounting, and, accordingly, the results of Vivo's operations are included in
the Company's consolidated financial statements since the date of acquisition.

F-12
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

A summary of the purchase price for the acquisition is as follows:

<TABLE>
<S> <C>
Stock and stock options......................................... $16,526
Direct acquisition costs........................................ 445
Accrued liabilities assumed..................................... 1,640
Other liabilities assumed....................................... 1,057
-------
Total......................................................... $19,668
=======
</TABLE>

The purchase price was allocated as follows:

<TABLE>
<S> <C>
Cash acquired................................................... $ 203
Other current assets acquired................................... 148
Equipment....................................................... 100
Goodwill........................................................ 10,644
In-process research and development............................. 8,573
-------
Total......................................................... $19,668
=======
</TABLE>

In-process research and development represents the fair value of
technologies acquired for use in the Company's own development efforts. The
Company determined the amount of the purchase price to be allocated to in-
process research and development based on the time and cost to incorporate the
acquired technology into the Company's development projects, expected
incremental revenues and expenses associated with the development projects
utilizing the acquired technology, and risks and uncertainties associated with
the acquired technology. Such risks and uncertainties include inherent
difficulties and uncertainties in incorporating the acquired technology into
the Company's development projects and risks related to the viability of and
potential changes to target markets. The Company also concluded that the
acquired technology had no alternative future use.

Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired and is amortized using the
straight-line method over its estimated life of five years.

The acquisition of Vivo qualified as a tax-free reorganization under the
Internal Revenue Code (IRC). Therefore, the charge for in-process research and
development is not deductible for income tax purposes. The Company acquired net
operating loss carryforwards of approximately $16,000, which expire from 2008
to 2012. Under the provisions of the IRC, the amount of these net operating
loss carryforwards available annually to offset future taxable income is
significantly limited. No value has been attributed to these net operating
losses in the purchase price allocation due to these limitations. Any
utilization of the net operating loss carryforwards in the future will result
in a reduction of the carrying amount of goodwill.

In connection with the acquisition, approximately 441 shares of common
stock issued were placed in escrow to secure indemnification obligations of
former shareholders of Vivo. As of December 31, 1998 and March 31, 1999, 220
and no shares remained in escrow, respectively.

The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of each of the years presented. The
pro forma results of operations exclude $8,723 of acquisition related charges
as the charges are not expected to have a continuing impact on the Company's
results of operations. The pro forma information is not necessarily indicative
of the

F-13
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

combined results that would have occurred had the acquisition taken place at
the beginning of 1997 or at the beginning of 1998, nor is it necessarily
indicative of results that may occur in the future.

<TABLE>
<CAPTION>
Year Ended
December 31,
---------------- Quarter Ended
1997 1998 March 31, 1998
------- ------- --------------
<S> <C> <C> <C>
Total net revenues....................... $34,501 $65,492 $13,155
Net loss................................. (18,730) (9,279) (3,797)
Net loss per share--basic and diluted.... (1.91) (0.14) (0.06)
</TABLE>

3. Investment in Joint Venture and Note Payable

The Company has a 24% interest in a Japanese limited liability company that
operates an Internet streaming business in Japan. The Company accounts for this
investment using the equity method. At December 31, 1998, the Company had
outstanding a note payable to one of its joint venture partners, which is due
in May 2000. The note is denominated in Japanese yen, bears interest at a rate
not to exceed the Japanese Short Term Prime Rate (1.5% at December 31, 1998)
and is secured by the Company's shares in the joint venture. The Company may,
under certain circumstances, tender its shares in the joint venture as
repayment of the note. Equity in net losses of the joint venture was $125 and
$152 in the quarters ended March 31, 1998 and 1999, respectively and $182 and
$448 in the years ended December 31, 1997 and 1998, respectively. The carrying
amount of the Company's investment in joint venture was $216 at March 31, 1999
and $816 and $368 at December 31, 1997 and 1998, respectively.

4. Shareholders' Equity

(a) Initial Public Offering

On November 21, 1997, the Company completed its initial public offering and
all outstanding shares of preferred stock were converted to either common stock
or special common stock.

(b) Special Common Stock

Special common stock is not entitled to vote, except as required by law.
All other rights and preferences of the special common stock are identical to
common stock, except as otherwise required by law or expressly provided in the
Company's Articles of Incorporation. All shares of special common stock are
held by Microsoft Corporation (Microsoft) and each share automatically converts
into two shares of common stock upon sale or transfer by Microsoft to an
unaffiliated third party. During 1998, Microsoft sold 752 shares which were
converted into 1,504 shares of common stock. During the quarter ended March 31,
1999, Microsoft sold an additional 2,086 shares, which were converted into
4,173 shares of common stock.

Each share of Series A preferred stock entitles the holder to one thousand
votes and dividends equal to one thousand times the aggregate per share amount
of dividends declared on the common stock.

F-14
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

Undesignated preferred stock will have rights and preferences that are
determinable by the Board of Directors when determination of a new series of
preferred stock has been established.

(d) Shareholder Rights Plan

On October 16, 1998, the Company's board of directors declared a dividend
of one preferred share purchase right (Right) in connection with its adoption
of a Shareholder Rights Plan dated December 4, 1998, for each outstanding share
of the Company's common stock on December 14, 1998 (Record Date). Each share of
common stock issued after the Record Date will be issued with an attached
Right. The Rights will not immediately be exercisable and detachable from the
common stock. The Rights will become exercisable and detachable only following
the acquisition by a person or a group of 15 percent or more of the outstanding
common stock or ten days following the announcement of a tender or exchange
offer for 15 percent or more of the outstanding common stock (Distribution
Date). After the Distribution Date, each Right will entitle the holder to
purchase for $75 (Exercise Price), a fraction of a share of the Company's
Series A preferred stock with economic terms similar to that of one share of
the Company's common stock. Upon a person or a group acquiring 15 percent or
more of the outstanding common stock, each Right will allow the holder (other
than the acquiror) to purchase common stock or securities of the Company having
a then current market value of two times the Exercise Price of the Right. In
the event that following the acquisition of 15 percent of the common stock by
an acquiror, the Company is acquired in a merger or other business combination
or 50 percent or more of the Company's assets or earning power are sold, each
Right will entitle the holder to purchase for the Exercise Price, common stock
or securities of the acquiror having a then current market value of two times
the Exercise Price. In certain circumstances, the Rights may be redeemed by the
Company at a redemption price of $0.005 per Right. If not earlier exchanged or
redeemed, the Rights will expire on December 4, 2008.

(e) Stock Warrants

In connection with the sales of preferred stock in 1996 and 1997, the
Company issued warrants to purchase additional shares of stock. During 1997 and
1998, 368 and 1,333 warrants were exercised, respectively. No warrants were
outstanding at December 31, 1998.

(f) Stock Option Plan

The Company has a stock option plan (Plan) to compensate employees for past
and future services and has reserved 29,800 shares of common stock for option
grants under the Plan. Generally, options vest based on continuous employment,
over a five year period. The options expire twenty years from the date of grant
and are exercisable at the fair market value of the common stock at the grant
date.

F-15
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

A summary of stock option related activity is as follows:

<TABLE>
<CAPTION>
Options Outstanding
----------------------
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Price
--------- ---------- ---------
<S> <C> <C> <C>
Balances at December 31, 1995................ 1,474 5,664 $ 0.04
Plan introduction.......................... 6,000 -- --
Options granted............................ (7,532) 7,532 0.17
Options exercised.......................... -- (997) 0.05
Options canceled........................... 1,530 (1,531) 0.05
------ ---------
Balances at December 31, 1996................ 1,472 10,668 0.14
Plan amendment............................. 11,600 -- --
Options granted............................ (7,344) 7,344 2.75
Options exercised.......................... -- (2,288) 0.11
Options canceled........................... 1,862 (1,862) 0.66
------ ---------
Balances at December 31, 1997................ 7,590 13,862 1.46
Plan amendment............................. 5,000 -- --
Options granted............................ (5,964) 5,964 14.11
Options assumed in acquisition............. -- 95 0.12
Options exercised.......................... -- (1,785) 0.42
Options canceled........................... 1,816 (1,816) 3.71
------ ---------
Balances at December 31, 1998................ 8,442 16,320 6.06
Options granted............................ (3,234) 3,234 46.93
Options exercised.......................... -- (456) 0.56
Options canceled........................... 1,094 (1,094) 2.68
------ ---------
Balances at March 31, 1999................... 6,302 18,004 $ 13.62
====== =========
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- --------------- --------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.04-$ 0.75 6,268 17.06 $ 0.23 2,670 $ 0.16
1.00- 3.63 2,634 18.52 2.46 382 1.74
4.25- 7.50 2,136 18.90 5.45 2 4.25
7.69- 16.44 3,234 19.44 12.41 -- --
16.50- 21.07 2,048 19.70 18.18 -- --
------ ---------
16,320 18.39 $ 6.06 3,054 $ 0.36
====== =========
</TABLE>

F-16
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

In accordance with the disclosure requirements of SFAS 123, if the Company
had elected to recognize compensation cost based on the fair value of options
granted at grant date as prescribed, net loss and net loss per share would have
been increased to the pro forma amounts indicated in the table below:

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................. $(3,789) $(11,169) $(16,414)
Pro forma.................................... (3,865) (11,643) (26,009)
Basic and diluted net loss per share:
As reported.................................. (5.95) (1.44) (0.25)
Pro forma.................................... (6.07) (1.50) (0.40)
</TABLE>

The per share weighted average fair value of stock options granted during
the years ended December 31, 1996, 1997 and 1998 was $0.04, $0.56 and $8.27
respectively, on the date of grant. Prior to the Company's initial public
offering, the fair value of each option grant was determined on the date of
grant using the minimum value method. Subsequent to the offering, the fair
value was determined using the Black-Scholes model. Except for the volatility
assumption which was only used under the Black-Scholes model, the following
weighted average assumptions were used to perform the calculations:

<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield.................................... 0% 0% 0%
Risk-free interest rate.................................... 6.10% 6.10% 5.15%
Expected life (years)...................................... 4.5 3.5 3.5
Volatility................................................. n/a 60% 85%
</TABLE>

(g) Employee Stock Purchase Plan

Effective January 1998, the Company adopted an Employee Stock Purchase Plan
(ESPP), and has reserved 2,000 shares of common stock for issuance under the
ESPP. Under the ESPP, an eligible employee may purchase shares of common stock,
based on certain limitations, at a price equal to the lesser of 85% of the fair
market value of the common stock at the beginning or end of the respective
semi-annual offering periods. There were 95 shares purchased under the ESPP
during 1998. The weighted average fair value of the employee stock purchase
rights was $5.61 in 1998. The following assumptions were used to perform the
calculation: expected dividend yield--0%; risk-free interest rate--5.15%;
expected life--six months; volatility--85%.

5. Significant Customer

In June 1997, the Company entered into a strategic agreement with Microsoft
pursuant to which the Company granted Microsoft a nonexclusive license to
certain substantial elements of the source code of the Company's
RealAudio/RealVideo Version 4.0 technology. The $30 million license fee is
being recognized ratably over the three-year term of the Company's ongoing
support obligations.

F-17
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

Under the agreement, Microsoft may sublicense its rights to the Standard
Code to third parties under certain conditions without additional compensation
to the Company. In addition, Microsoft has an option to receive two additional
deliveries of updated versions of the Standard Code. Microsoft's right to
receive the first delivery expired unexercised in July 1998. Microsoft may
elect to receive a delivery of the then current version of the Standard Code
once before July 1999, upon payment of a license fee of $35 million. If the
Company elects in its sole discretion to grant an Event License (as defined in
the agreement) to a third party, the agreement provides for a refund of a
portion of the license fee paid by Microsoft, based on a declining scale over
the term of the agreement.

In connection with the agreement, Microsoft made a $30 million minority
investment in the Company in the form of 3,338 shares of nonvoting preferred
stock, which shares were converted into 3,338 shares of nonvoting special
common stock upon the completion of the Company's initial public offering in
1997.

Software license fees under the license agreement with Microsoft accounted
for approximately 15% of total net revenues in 1997 and 1998 and 19% and 10% of
total net revenues for the quarters ended March 31, 1998 and 1999,
respectively. No single customer accounted for more than 10% of total net
revenues in 1996.

6. Income Taxes

The components of loss before income taxes are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
U.S. operations................................. $(3,789) $ (8,480) $(16,208)
Foreign operations.............................. -- (2,689) (206)
------- -------- --------
$(3,789) $(11,169) $(16,414)
======= ======== ========
</TABLE>

The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
December 31,
-----------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Current................................................... $-- $ 777 $(777)
Deferred.................................................. -- (777) 777
---- ----- -----
$-- $ -- $ --
==== ===== =====
</TABLE>

Income tax expense (benefit) differs from "expected" income tax expense
(benefit) (computed by applying the U.S. Federal income tax rate of 34%) in
1998 due to nondeductible acquisition charges and related amortization of
goodwill and an increase in the valuation allowance on deferred tax assets. The
1996 and 1997 effective rate differed principally due to the change in the
valuation allowance related to deferred tax assets.

F-18
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

The tax effects of temporary differences that give rise to significant
portions of net deferred tax assets are comprised of the following:

<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ -- $ 7,650
Deferred revenue........................................... 6,552 6,649
Allowances for doubtful accounts and sales returns......... 282 404
Depreciation............................................... 217 472
Other...................................................... 167 1,121
------ -------
Gross deferred tax assets.................................... 7,218 16,296
Less valuation allowance................................... 6,441 16,296
------ -------
Net deferred tax assets...................................... $ 777 $ --
====== =======
</TABLE>

The valuation allowance for deferred tax assets increased by $1,335, $4,613
and $9,855 for the years ended December 31, 1996, 1997 and 1998, respectively.
Due to operating losses and the uncertainty regarding the recoverability of
deferred tax assets, the Company has provided a full valuation allowance at
December 31, 1998.

At December 31, 1998, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $22,500, expiring in the year
2013. A majority of the net operating loss carryforward results from stock
option deductions, the realization of which would result in a credit to
shareholders' equity. This net operating loss carryforward excludes $16,000 of
net operating loss carryforwards acquired from Vivo which are subject to
significant limitations.

7. Segment Information

During 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments.

The Company operates in one business segment, streaming media, for which
the Company receives revenues from its customers. The Company's Chief Operating
Decision Maker is considered to be the Company's Operating Committee (COC)
which is comprised of the Company's Chief Executive Officer and the Company's
Senior Vice Presidents. The COC reviews financial information presented on a
consolidated basis accompanied by disaggregated information about products and
services and geographical region for purposes of making decisions and assessing
financial performance. The COC does not review discrete financial information
regarding profitability of the Company's different products or services and,
therefore, the Company does not have operating segments as defined by SFAS 131.

F-19
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

The Company's customers consist primarily of end users located in the
United States and various foreign countries. Revenues by geographic region are
as follows:

<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
----------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
North America....................... $11,308 $20,346 $42,611 $ 8,012 $15,990
Europe.............................. 1,037 3,425 7,144 1,019 2,786
Asia................................ 1,013 3,225 4,429 913 1,975
Rest of world....................... 654 890 987 141 357
------- ------- ------- ------- -------
Subtotal.......................... 14,012 27,886 55,171 10,085 21,108
Microsoft license agreement......... -- 4,834 9,668 2,417 2,417
------- ------- ------- ------- -------
Total............................. $14,012 $32,720 $64,839 $12,502 $23,525
======= ======= ======= ======= =======
</TABLE>

Revenue from external customers by product type is as follows:

<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
----------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Streaming media license revenue.... $11,876 $20,660 $37,281 $ 7,001 $14,593
Streaming media service revenue.... 1,120 4,972 14,742 2,622 5,249
Microsoft license agreement........ -- 4,834 9,668 2,417 2,417
Advertising revenue................ 1,016 2,254 3,148 462 1,266
------- ------- ------- ------- -------
Total net revenues............... $14,012 $32,720 $64,839 $12,502 $23,525
======= ======= ======= ======= =======
</TABLE>

Long-lived assets by geographic location are as follows:

<TABLE>
<CAPTION>
December 31,
--------------
March 31,
1997 1998 1999
------ ------- ---------
<S> <C> <C> <C>
United States....................................... $4,369 $14,538 $20,692
Japan............................................... 404 454 412
Europe.............................................. 370 329 348
------ ------- -------
Total............................................. $5,143 $15,321 $21,452
====== ======= =======
</TABLE>

F-20
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

8. Commitments

(a) Lease Commitments

The Company leases its office facilities under terms of operating lease
agreements expiring through May 1999. During 1998, the Company entered into a
lease agreement for a new location for its corporate headquarters. The lease
commences on April 1, 1999 and expires in April 2011. Future minimum lease
payments are:

<TABLE>
<CAPTION>
Years Ending December 31, Minimum Lease Payments
------------------------- ----------------------
<S> <C>
1999............................................... $ 3,071
2000............................................... 3,294
2001............................................... 4,065
2002............................................... 4,633
2003............................................... 4,744
Thereafter......................................... 37,092
-------
Total minimum lease payments..................... $56,899
=======
</TABLE>

Rent expense was approximately $600 in 1996, $1,800 in 1997 and $2,600 in
1998.

(b) 401(k) Retirement Savings Plan

The Company has a salary deferral plan (401(k) Plan) that covers
substantially all employees. The Company, at its discretion, may make
contributions to the 401(k) Plan, although it has not made any contributions to
date. Employees can contribute a portion of their salary to the maximum allowed
by the federal tax guidelines. The Company currently does not provide matching
contributions. The Company has no other post-employment or post-retirement
benefit plans.

In August 1998, Venson M. Shaw and Steven M. Shaw filed a lawsuit against
the Company and co-defendant Broadcast.com in the United States District Court
for the Northern District of Texas--Dallas Division. The plaintiffs allege that
the Company, individually and in combination with Broadcast.com, infringes on a
certain patent by making, using, selling and/or offering to sell software
products and services directed to media delivery systems for the Internet and
corporate intranets. The plaintiffs seek to enjoin the Company from its alleged
infringing activity and to recover damages in an amount no less than a
reasonable royalty. Although the Company can give no assurance as to the
outcome of this lawsuit, it believes that the allegations in this action are
without merit, and intends to vigorously defend itself against these claims.
The Company may be required to indemnify Broadcast.com under the terms of the
Company's license agreement with it. The plaintiffs filed a similar claim based
on the same patent and seeking similar remedies as a separate lawsuit against
Microsoft and Broadcast.com in the same court. The court has consolidated the
lawsuit against Microsoft and Broadcast.com with the lawsuit against the
Company and Broadcast.com.

On July 29, 1998, Left Bank Management, Inc. filed a lawsuit against the
Company in the U.S. District Court for the Western District of Washington. The
plaintiff alleges that the Company entered into an oral agreement with it in
1995 pursuant to which the plaintiff claims it is entitled to 30% of
the Company's revenues from the use of RealAudio technology to promote, sample
or sell music.

F-21
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

The plaintiff claims breach of contract, unjust enrichment, promissory estoppel
and breach of implied-in-fact contract. The Company has denied each of the
plaintiff's claims. In response to the Company's motion to dismiss, the
plaintiff withdrew its claim for breach of fiduciary duty. Although no
assurance can be given as to the outcome of this lawsuit, the Company believes
the allegations in this action are without merit, and it intends to vigorously
defend itself against these claims.

From time to time the Company is, and expects to continue to be, subject to
legal proceedings and claims in the ordinary course of its business, including
contract-related claims and claims of alleged infringement of third-party
patents, trademarks and other intellectual property rights. These claims, even
if not meritorious, could force the Company to spend significant financial and
managerial resources. The Company currently is not aware of any legal
proceedings or claims that it believes will have, individually or taken
together, a material adverse effect on its business, prospects, financial
condition and operating results.

9. Quarterly Information (Unaudited)

The following table summarizes the unaudited statement of operations for
each quarter of 1998 and 1997. In response to recent Securities and Exchange
Commission interpretative guidance surrounding the valuation methodology used
in determining charges associated with acquisition related in-process research
and development, the Company has revised the original accounting for the
purchase price allocation related to the 1998 acquisition of Vivo and the
related amortization of goodwill. This adjustment decreased the amount
previously allocated to in-process research and development by $9,156, which
has been capitalized as goodwill and is being amortized using the straight-line
method over five years.

<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1998
As originally reported:
Net Revenues..................... $12,502 $15,056 $17,244 $20,037 $64,839
Gross Profits.................... 10,063 12,095 13,993 16,298 52,449
Operating Loss................... (21,165) (3,296) (2,602) (2,167) (29,230)
Net Loss......................... (20,088) (2,104) (1,359) (1,103) (24,654)
Net Loss per share............... (0.32) (0.03) (0.02) (0.02) (0.38)
As restated:
Net Revenues..................... 12,502 15,056 17,244 20,037 64,839
Gross Profits.................... 10,063 12,095 13,993 16,298 52,449
Operating Loss................... (12,009) (3,754) (3,060) (2,167) (20,990)
Net Loss......................... (10,932) (2,562) (1,817) (1,103) (16,414)
Net Loss per share............... (0.18) (0.04) (0.03) (0.02) (0.25)
1997
Net Revenues..................... 6,356 7,010 9,051 10,303 32,720
Gross Profits.................... 4,335 5,977 7,496 8,447 26,255
Operating Loss................... (3,911) (2,897) (2,951) (3,402) (13,161)
Net Loss......................... (3,706) (2,666) (2,203) (2,594) (11,169)
Net Loss per share............... (3.17) (1.99) (1.08) (0.10) (1.44)
</TABLE>

F-22
<PAGE>

REALNETWORKS, INC. AND SUBSIDIARIES

10. Subsequent Events

(a) Stock Split

On April 27, 1999, the board of directors approved a 2-for-1 split of the
Company's common stock payable in the form of a stock dividend. The stock split
was effected on May 10, 1999. Accordingly, the accompanying consolidated
financial statements have been retroactively restated to reflect the stock
split.

(b) Pending Acquisition (unaudited)

On April 13, 1999, the Company entered into a definitive agreement to
acquire privately held Xing Technology Corporation (Xing), a leading developer
and provider of MP3 software. The Company will acquire Xing in exchange for
shares of common stock of the Company with a maximum value of $75 million. The
acquisition, which is expected to be accounted for as a pooling of interests
and is subject to certain customary conditions, is expected to be completed no
later than the third quarter of 1999.

F-23
<PAGE>

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

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Risk Factors............................................................... 2
Special Note Regarding Forward-Looking Statements.......................... 19
Use of Proceeds............................................................ 20
Corporate Information...................................................... 20
Business................................................................... 21
Selling Shareholders....................................................... 35
Plan of Distribution....................................................... 36
Legal Matters.............................................................. 38
Experts.................................................................... 38
Where You Can Find More Information........................................ 38
Index to Consolidated Financial Statements................................. F-1
</TABLE>

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

26,666 Shares

RealNetworks, Inc.

Common Stock

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

PROSPECTUS

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

, 1999

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The fees and expenses incurred by the Registrant in connection with the
distribution are payable by the Registrant and, other than filing fees, are
estimated as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 616
Nasdaq filing fee for listing additional shares.................. 534
Printing and engraving expenses.................................. 10,000
Legal fees and expenses.......................................... 14,000
Accounting fees and expenses..................................... 10,000
Miscellaneous fees and expenses.................................. 6,850
-------
Total.......................................................... $42,000
=======
</TABLE>

ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The Registrant's Bylaws provide for indemnification of the
registrant's directors, officers, employees and agents to the maximum extent
permitted by Washington law. The directors and officers of the Registrant also
may be indemnified against liability they may incur for serving in that
capacity pursuant to a liability insurance policy maintained by the Registrant
for such purpose.

Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. The registrant's Restated Articles of
Incorporation contain provisions implementing, to the fullest extent permitted
by Washington law, such limitations on a director's liability to the Registrant
and its shareholders.

The Registrant has entered into certain indemnification agreements with its
officers and directors. The indemnification agreements provide the Registrant's
officers and directors with indemnification to the maximum extent permitted by
the WBCA.

The Investor Rights Agreement (Exhibit 4.4 hereto) provides for
indemnification by the selling shareholders of the Registrant and its executive
officers and directors, and by the Registrant of the selling shareholders, for
certain liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the selling
shareholders for inclusion in this Registration Statement.

II-1
<PAGE>

ITEM 16. EXHIBITS.

The following exhibits are filed with this Registration Statement:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Restated Articles of Incorporation, incorporated herein by reference
to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
4.2 Designation of Rights and Preferences of Series A Preferred Stock,
incorporated herein by
reference to Exhibit A to the Shareholder Rights Plan, dated as of
December 4, 1998,
between the Registrant and ChaseMellon Shareholder Services, L.L.C.,
filed as Exhibit 1 to
the Registrant's Registration Statement on Form 8-A, dated as of
December 14, 1998.
4.3 Shareholder Rights Plan, dated as of December 4, 1998, between the
Registrant and
ChaseMellon Shareholder Services, L.L.C., incorporated herein by
reference to the
Registrant's Registration Statement on Form 8-A, dated as of December
14, 1998.
4.4 Investor Rights Agreement, dated as of March 31, 1999, between the
Registrant and the
former shareholders of Ultisoft Inc.
5.1 Opinion of Perkins Coie LLP.
23.1 Consent of Perkins Coie LLP (included in Exhibit 5.1).
23.2 Consent of KPMG LLP.
24.1 Power of Attorney (included on page II-4 of this Registration
Statement under the caption
"Signatures").
</TABLE>

ITEM 17. UNDERTAKINGS.

A.The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and

(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the

II-2
<PAGE>

securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

B.Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment of the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Seattle, State of Washington, on this 28th day
of July, 1999.

RealNetworks, Inc.

/s/ Paul Bialek
By: _________________________________
Paul Bialek
Senior Vice President--Finance
and Operations
and Chief Financial Officer

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and
appoints Robert Glaser and Paul Bialek, and each of them, with full power of
substitution and resubstitution and full power to act without the other, as his
true and lawful attorney-in-fact and agent to act in his name, place and stead
and to execute in the name and on behalf of each person, individually and in
each capacity stated below, and to file, any and all amendments to this
Registration Statement, including any and all post-effective amendments and
amendments thereto and any registration statement relating to the same offering
as this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing, ratifying and confirming all that said attorneys-in-
fact and agents or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on July 28, 1999.

<TABLE>
<CAPTION>
Signature Title
--------- -----

<S> <C>
/s/ Robert Glaser Chief Executive Officer, Chairman of the
______________________________________ Board and Treasurer (Principal Executive
Robert Glaser Officer and Chairman of the Board)

/s/ Paul Bialek Senior Vice President--Finance and
______________________________________ Operations and Chief Financial Officer
Paul Bialek (Principal Financial and Accounting
Officer)

/s/ Edward Bleier Director
______________________________________
Edward Bleier

/s/ James Breyer Director
______________________________________
James Breyer

/s/ Bruce Jacobsen Director
______________________________________
Bruce Jacobsen

/s/ Mitchell Kapor Director
______________________________________
Mitchell Kapor
</TABLE>

II-4
<PAGE>

Schedule II--Valuation and Qualifying Accounts

RealNetworks, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
(In thousands)

<TABLE>
<CAPTION>
Balance Charged Balance
at to Costs at End
Beginning and Costs and of
Description of Period Expenses Deduction Period
----------- --------- -------- --------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Valuation accounts deduced from assets:
Allowance for doubtful accounts
receivable and sales returns......... $ 130 $ 563 $ (310) $ 383
Valuation allowance for deferred tax
assets............................... 493 1,335 -- 1,828
====== ====== ======= =======
Year ended December 31, 1997:
Valuation accounts deduced from assets:
Allowance for doubtful accounts
receivable and sales returns......... 383 2,294 (1,848) 829
Valuation allowance for deferred tax
assets............................... 1,828 4,613 -- 6,441
====== ====== ======= =======
Year ended December 31, 1998:
Valuation accounts deduced from assets:
Allowance for doubtful accounts
receivable and sales returns......... 829 4,632 (4,295) 1,166
Valuation allowance for deferred tax
assets............................... $6,441 $9,855 $ -- $16,296
====== ====== ======= =======
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
4.1 Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
4.2 Designation of Rights and Preferences of Series A Preferred Stock, incorporated herein by
reference to Exhibit A to the Shareholder Rights Plan, dated as of December 4, 1998,
between the Registrant and ChaseMellon Shareholder Services, L.L.C., filed as Exhibit 1 to
the Registrant's Registration Statement on Form 8-A, dated as of December 14, 1998.
4.3 Shareholder Rights Plan, dated as of December 4, 1998, between the Registrant and
ChaseMellon Shareholder Services, L.L.C., incorporated herein by reference to the
Registrant's Registration Statement on Form 8-A, dated as of December 14, 1998.
4.4 Investor Rights Agreement, dated as of March 31, 1999, between the Registrant and the
former shareholders of Ultisoft Inc.
5.1 Opinion of Perkins Coie LLP.
23.1 Consent of Perkins Coie LLP (included in Exhibit 5.1).
23.2 Consent of KPMG LLP.
24.1 Power of Attorney (included on page II-4 of this Registration Statement under the caption
"Signatures").
</TABLE>

<PAGE>

EXHIBIT 4.4

INVESTOR RIGHTS AGREEMENT

This Investor Rights Agreement (this "Agreement") is made and entered into
as of March 31, 1999 (the "Effective Date"), by and between RealNetworks, Inc.,
a Washington corporation ("RealNetworks"), and Mark Comish and Michael Comish
(collectively, the "Shareholders" and each individually a "Shareholder"), who
immediately prior to the effective time of the Merger (as such term is defined
below) represented all of the shareholders of Ultisoft Inc., an Oregon
corporation (the "Company").

RECITALS

A. RealNetworks, the Company, Vegas Acquisition Corp. (the "Purchaser")
and the Shareholders have entered into an Agreement and Plan of Merger (the
"Merger Agreement") dated as of March 31, 1999, pursuant to which Purchaser will
merge with and into the Company in a reverse triangular merger, with the Company
to be the surviving corporation of the Merger (the "Merger").

B. As a condition precedent to the consummation of the Merger, each of the
Shareholders shall execute this Investor Rights Agreement pursuant to which the
Shareholders shall be granted certain registration rights with respect to the
shares of the common stock of RealNetworks, par value $0.001 per share (together
with associated preferred stock purchase rights pursuant to the Shareholder
Rights Plan, dated as of December 4, 1998, between RealNetworks and ChaseMellon
Shareholder Services, L.L.C., the "RealNetworks Common Stock"), that are issued
to the Shareholders in the Merger (the "Merger Shares"), subject to the terms
and conditions set forth in this Agreement.

C. Capitalized terms used herein and not otherwise defined shall have the
meaning set forth in the Merger Agreement.

NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants hereinafter set forth, the parties hereto hereby agree as follows:

1. REGISTRATION RIGHTS

1.1 Definitions

For purposes of this Section 1:

(a) Registration. The terms "register," "registered" and
"registration" refer to a registration effected by preparing and filing a
registration statement on Form S-3 (or such analogous substitute or replacement
form as the SEC (as defined below) shall have then approved) with the SEC in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of effectiveness of such registration statement
by the SEC.

<PAGE>

(b) Registrable Securities. The term "Registrable Securities" means:
fifty percent (50%) of (i) the Merger Shares and (ii) any shares of RealNetworks
Common Stock issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of, the Merger Shares. The number of Registrable
Securities as to which each Shareholder shall have the right to register for
resale pursuant to this Agreement is as set forth in Exhibit A hereto.

(c) Prospectus. The term "Prospectus" shall mean the prospectus
included in any Registration Statement filed pursuant to the provisions hereof,
as amended or supplemented by any prospectus supplement (including, without
limitation, any prospectus supplement with respect to the terms of the offering
of any portion of the Registrable Securities covered by such Registration
Statement), and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

(d) Holder. For purposes of this Agreement, the term "Holder" means
any person owning of record Registrable Securities that have not been sold to
the public pursuant to an effective Registration Statement.

(e) SEC. The term "SEC" means the U.S. Securities and Exchange
Commission.

1.2 Registration

(a) Initial Registration. Upon written request signed by all of the
Shareholders and delivered to RealNetworks within 15 days following the
Effective Time, RealNetworks shall prepare and file with the SEC within 45 days
following the Effective Time, and use its best efforts to have declared
effective as soon as practicable thereafter, a registration statement on Form S-
3 (the "Registration Statement") providing for the resale by the Holders of all
the Registrable Securities then owned by the Holders in accordance with the
manner of sale provisions set forth in Rule 144(f) under the Securities Act or
otherwise in customary brokerage transactions on the Nasdaq National Market or
other public market on which shares of RealNetworks Common Stock are traded.
RealNetworks shall use its best efforts to keep the Registration Statement
effective, pursuant to the rules, regulations or instructions under the
Securities Act applicable to such Registration Statement, until the earlier of
(i) the tenth trading day following the date on which the Registration Statement
is declared effective by the SEC, and (ii) the date upon which all Registrable
Securities have been sold or distributed by the Holders (the "Effectiveness
Period"). Notwithstanding the foregoing, RealNetworks shall not be obligated to
seek effectiveness of the Registration Statement until the Pooling Period (as
herein defined) has been satisfied.

(b) Restrictions on Purchasers and S-3 Registrations. Notwithstanding any
other provision of this Section 1.2, the Company may postpone for up to ninety
(90) days the filing or the effectiveness of a Registration Statement, or
prohibit or suspend the use of such

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<PAGE>

Registration Statement, if the Company's Chief Executive Officer delivers a
written certification to each Holder of the Registrable Securities requested to
be included therein stating either that (i) the Company's Board of Directors has
declared that such registration would not be in the best interests of the
Company or (ii) the Company proposes to file, within such ninety (90) day
period, another Registration Statement for shareholders other than the Holders,
in which case, the Registrable Securities shall be included in such Registration
Statement; provided that in any such event, the Effectiveness Period shall be
extended by the length of any such postponement.

(c) Expenses. All brokers' commissions, stock transfer taxes and similar
charges, and legal fees and disbursements of counsel for the selling Holders
shall be borne by the Shareholders. All other expenses incurred in connection
with the Registration Statement shall be borne by RealNetworks; provided,
however, that the Shareholders agree to reimburse RealNetworks for the first
$20,000 in legal fees and associated costs (including filing fees and printing
fees) expended by RealNetworks in connection with the drafting and filing of the
Registration Statement.

1.3 Obligations of RealNetworks

If required to effect the registration of any Registrable Securities under
this Agreement, RealNetworks shall, as expeditiously as reasonably possible:

(a) Prepare promptly and file with the SEC the Registration Statement
as provided in Section 1.2(a), which Registration Statement (including any
amendments or supplements thereto and Prospectuses contained therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, and cause
such Registration Statement to become effective as soon as practicable.

(b) Prepare promptly and file with the SEC such amendments and
supplements to such Registration Statement and the Prospectus used in connection
with such Registration Statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition prior to the
expiration of the Effectiveness Period of the Registration Statement of all
securities covered by such Registration Statement.

(c) Furnish to the Holders such number of copies of a Prospectus and
such other documents and legal opinions as reasonably requested in order to
facilitate the disposition of the Registrable Securities owned by such Holders
that are included in such registration.

(d) Use its best efforts to register and qualify the securities
covered by such Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided, however, that

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<PAGE>

RealNetworks shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.

(e) Notify the Holders promptly (i) of any request by the SEC or any
other federal or state governmental authority during the Effectiveness Period of
the Registration Statement for amendments or supplements to such Registration
Statement or related Prospectus or for additional information, (ii) of the
issuance by the SEC or any other federal or state governmental authority of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (iii) of the receipt by
RealNetworks of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose.

1.4 Furnish Information

It shall be a condition precedent to the obligations of RealNetworks to
take any action pursuant to Section 1.2 that each Holder shall furnish to
RealNetworks such information regarding Holder, the Registrable Securities held
by such Holder and the intended method of disposition of such securities as
shall be required to timely effect the registration of such Holder's Registrable
Securities.

1.5 Indemnification

(a) Incident to any Registration Statement and subject to applicable law,
RealNetworks will indemnify and hold harmless each Holder (including its
respective directors, officers, members, employees and agents), and each person
who controls any of them within the meaning of Section 15 of the Securities Act
or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations promulgated thereunder, from and against any
and all losses, claims, damages, expenses and liabilities, joint or several
(including any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such Registration Statement
(including any related Prospectus, or any amendment or supplement to such
Registration Statement or Prospectus), (ii) any omission or alleged omission to
state in such document a material fact required to be stated in it or necessary
to make the statements in it not misleading, or (iii) any violation by
RealNetworks of the Securities Act, any state securities or "blue sky" laws or
any rule or regulation thereunder in connection with such registration, provided
that RealNetworks will not be liable to the extent that such loss, claim,
damage, expense or liability arises from and is based on an untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with

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<PAGE>

information furnished in writing to RealNetworks by such Holder or controlling
person expressly for use in such Registration Statement. With respect to such
untrue statement or omission or alleged untrue statement or omission in the
information furnished in writing to RealNetworks by such Holder expressly for
use in such Registration Statement, such Holder will indemnify and hold harmless
RealNetworks (including its directors, officers, members, employees and agents),
each other Holder (including its respective directors, officers, employees and
agents), and each person who controls any of them within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, expenses and liabilities, joint or several, to
which they, or any of them, may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise to the same extent provided in the immediately preceding
sentence. In no event, however, shall the liability of a Holder for
indemnification under this Section 1.5(a) exceed the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified against equal to the proportion of the total Registrable Securities
sold under such Registration Statement which is being sold by such Holder or
(ii) the proceeds received by such Holder from its sale of Registrable
Securities under such Registration Statement.

(b) If the indemnification provided for in Section 1.5(a) above for any
reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
1.5, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by RealNetworks and the
other selling Holders from the offering of the Registrable Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the other selling
Holders in connection with the statements or omissions which resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by RealNetworks and
the selling Holders shall be deemed to be in the same respective proportions as
the net proceeds from the offering (before deducting expenses) received by
RealNetworks and the selling Holders, in each case as set forth in the table on
the cover page of the applicable prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of
RealNetworks and the selling Holders shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by RealNetworks or the selling Holders and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. RealNetworks and the Holders agree that it
would not be just and equitable if contribution pursuant to this Section 1.5(b)
were determined by pro rata or per capita allocations or by any other method of
allocation which does not take account of the equitable considerations referred
to in the first sentence of this Section 1.5(b).

-5-
<PAGE>

In no event, however, shall a Holder be required to contribute any amount under
this Section 1.5(b) in excess of the lesser of (i) that proportion of the total
of such losses, claims, damages or liabilities indemnified against equal to the
proportion of the total Registrable Securities sold under such Registration
Statement which is being sold by such Holder or (ii) the proceeds received by
such Holder from its sale of Registrable Securities under such Registration
Statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

(c) The amount paid or payable by an indemnified party as a result of the
losses, claims, damages and liabilities referred to in this Section 1.5 shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. The indemnification and
contribution provided for in this Section 1.5 will remain in full force and
effect regardless of any investigation made by or on behalf of the indemnified
parties or any officer, director, employee, agent or controlling person of the
indemnified parties.

2. OBLIGATIONS OF THE SHAREHOLDERS

2.1 Representations and Warranties of the Shareholders

Each Shareholder represents with respect to himself that:

(a) Good Title. (i) Such Shareholder owns, beneficially and of
record, the shares of capital stock of the Company listed opposite such
Shareholder's name on Exhibit A hereto, (ii) such shares of capital stock of the
Company are free and clear of any lien, encumbrance, adverse claim, mortgage,
pledge, deed of trust, security interest, charge, restriction on sale or
transfer (other than restrictions imposed by applicable securities laws),
preemptive right, option or other adverse claim or interest of any kind, (iii)
such Shareholder has all necessary power, right and authority to enter into this
Agreement and each of the agreements, certificates, instruments and documents
executed or delivered pursuant to the terms of the Merger Agreement by such
Shareholder and to consummate the transactions contemplated hereby and thereby
and (iv) this Agreement has been duly authorized, executed and delivered by
Shareholder and is a legal, valid and binding obligation of Shareholder,
enforceable in accordance with its terms.

(b) Ability to Bear Risk. Such Shareholder is in a financial position
to hold the RealNetworks Common Stock for an indefinite period of time and is
able to bear the economic risk and withstand a complete loss of his investment
in the RealNetworks Common Stock.

(c) SEC Documents. Such Shareholder acknowledges that he has received
and had the opportunity to review to such Shareholder's satisfaction the
materials

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<PAGE>

disseminated by Company in connection with the written consent or special
meeting of Shareholders to approve the Merger and the transactions contemplated
thereby, including those filings and reports of RealNetworks filed with the SEC
since the completion of RealNetworks's most recent fiscal year, consisting of
RealNetworks's Annual Report on Form 10-K for the fiscal year ending December
31, 1997 (the "Form 10-K"), its Quarterly Reports on Form 10-Q filed after the
date of the Form 10-K, all Form 8-Ks filed after the date of the Form 10-K, the
press release dated January 26, 1999 with respect to certain financial results
for the year ended December 31, 1998 and its Proxy Statement relating to its
1998 Annual Meeting of Shareholders.

(d) Professional Advice. Such Shareholder has obtained, to the extent
that he deems necessary, professional advice with respect to the risks inherent
in acquiring the RealNetworks Common Stock, the financial condition of
RealNetworks and the suitability of an investment in the RealNetworks Common
Stock in light of such Shareholder's financial condition and investment needs.

(e) Sophistication. Such Shareholder, either alone or with the
assistance of his professional advisors, is a sophisticated investor, is able to
fend for himself in the transactions contemplated by this Agreement relating to
the RealNetworks Common Stock and has such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of
the prospective investment in the RealNetworks Common Stock.

(f) Accredited Investor. Except as set forth on Schedule A hereto,
such Shareholder is an "accredited investor" as defined in Rule 501(a) of
Regulation D under the Securities Act (an "Accredited Investor").

(g) Investment for Own Account. The RealNetworks Common Stock is
being acquired by such Shareholder for investment for his account, not as a
nominee or agent, and not with a view to the distribution of any part thereof;
such Shareholder has no present intention of selling, granting any participation
in or otherwise distributing any of the RealNetworks Common Stock in a manner
contrary to the Securities Act or to any applicable state securities or Blue Sky
law, nor does Shareholder have any contract, undertaking, agreement or
arrangement with any person or entity to sell, transfer or grant a participation
to such person or entity with respect to any of the RealNetworks Common Stock.

(h) Restricted Securities. Such Shareholder acknowledges that the
RealNetworks Common Stock has not been and will not prior to issuance be
registered under the Securities Act and that the RealNetworks Common Stock is
characterized under the Securities Act as "restricted securities" and,
therefore, cannot be sold or transferred until such sale or transfer is
registered under the Securities Act as provided in this Agreement or an
exemption from such registration is available.

-7-
<PAGE>

(i) Exemption Reliance. Such Shareholder has been advised that the
RealNetworks Common Stock is being issued under this Agreement pursuant to
exemptions from applicable federal and state securities laws, and that
RealNetworks's reliance on such exemptions is predicated in part on such
Shareholder's representations contained herein.

(j) Residence. For purposes of the application of state securities
laws, each Shareholder is a resident of the state of Oregon.

(k) Legend. Each Holder understands that prior to the effectiveness
of the Registration Statement certificates or other instruments representing any
of the Registrable Securities acquired by Holder will bear legends substantially
similar to the following, in addition to any other legends required by federal
or state laws:

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE LAW, AND NO
INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED
OR OTHERWISE TRANSFERRED UNLESS (a) THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING ANY SUCH TRANSACTION INVOLVING THESE
SECURITIES OR (b) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR
THE HOLDER OF THESE SECURITIES (CONCURRED IN BY LEGAL COUNSEL FOR THE
COMPANY) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR
THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT
FROM REGISTRATION.

Each holder agrees that, in order to ensure and enforce compliance with the
restrictions imposed by applicable law and those referred to in the foregoing
legends, or elsewhere herein, RealNetworks may, prior to the effectiveness of
the Registration Statement, issue appropriate "stop transfer" instructions to
its transfer agent, if any, with respect to any certificate or other instrument
representing Registrable Securities, or if RealNetworks transfers its own
securities, that it may make appropriate notations to the same effect in
RealNetworks's records.

2.2 Investor Questionnaire

Each Shareholder who is not an Accredited Investor shall complete and
execute an Investor Questionnaire in the form attached hereto as Exhibit B.

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<PAGE>

2.3 Further Restrictions on Resale

Each Shareholder covenants to and agrees with RealNetworks that he will not
sell, transfer or otherwise reduce his financial risk with respect to any shares
of RealNetworks Common Stock until such time as financial results covering at
least 30 days of combined operations of the Company and RealNetworks have been
published within the meaning of Section 20.01 of the SEC's Codification of
financial reporting policies, which shall include, without limitation, a press
release or other public filing or announcement (the "Pooling Period").

3. ASSIGNMENT

The registration rights of a Holder under Section 1 hereof may not be
assigned.

4. GENERAL PROVISIONS

4.1 Notices

Any notice or demand desired or required to be given hereunder shall be in
writing given by personal delivery, certified or registered mail, confirmed
facsimile transmission, or overnight courier service, in each case addressed as
respectively set forth below or to such other address as any party shall have
previously designated by such a notice. The effective date of any notice or
request shall be the date of personal delivery, four days after the date of
mailing by certified or registered mail, the date on which successful facsimile
transmission is confirmed, or the date undertaken for delivery by a reputable
overnight courier service, as the case may be, in each case properly addressed
as provided herein and with all charges prepaid.

If to RealNetworks:

RealNetworks, Inc.
1111 Second Avenue
Suite 2900
Seattle, WA 98101
Attention: General Counsel
Fax: (206) 674-2695

with a copy to:

Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, Washington 98101
Attention: Scott L. Gelband
Fax: 206/583-8500

If to the Shareholders:

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<PAGE>

At their respective addresses set forth on Exhibit A attached
hereto.

with a copy to:

Brophy, Mills, Schmor, ,Gerking & Brophy, LLP
201 W. Main Street, Suite 5A
Medford, OR 97501
Attention: Lee A. Mills
Fax: (541) 772-7249

4.2 Severability

If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby be consummated as originally contemplated to
the fullest extent possible.

4.3 Entire Agreement

This Agreement, the Merger Agreement and each of the agreements,
certificates, instruments and documents to be executed or delivered pursuant to
the terms of the Merger Agreement constitute the entire agreement among the
parties with respect to the subject matter hereof and thereof and supersede all
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof and thereof.

4.4 Successors and Assigns

Subject to the provisions of Section 3, the provisions of this Agreement
shall inure to the benefit of, and shall be binding upon, the successors and
permitted assigns of the parties hereto.

4.5 Governing Law

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Washington applicable to contracts executed in and to be
performed in that State. All actions and proceedings arising out of or relating
to this Agreement shall be heard and determined in any Washington state or
federal court thereof.

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<PAGE>

4.6 Third Parties

This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.

4.7 Headings

The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.

4.8 Specific Performance

Each of the parties acknowledges and agrees that the other parties hereto
would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties hereto agrees the other parties
hereto will be entitled to an injunction to prevent breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the terms and
provisions of this Agreement (including the indemnification provisions hereof)
in any competent court having jurisdiction over the parties, in addition to any
other remedy to which they might be entitled at law or in equity.

4.9 Counterparts

This Agreement may be executed and delivered in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement. To expedite the process
of entering into this Agreement, the parties acknowledge that Transmitted Copies
of this Agreement will be equivalent to original documents until such time as
original documents are completely executed and delivered. "Transmitted Copies"
will mean copies that are reproduced or transmitted via photocopy, facsimile or
other process of complete and accurate reproduction and transmission.

4.10 Amendment of Rights

This Agreement may not be amended except by an instrument signed by
RealNetworks and the Shareholders.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have entered into and signed this
Agreement as of the date and year first above written.

REALNETWORKS, INC.

By: /s/ Paul Bialek
----------------
Name: Paul Bialek
Its: Senior Vice President, Finance and
Operations and Chief Financial Officer

SHAREHOLDERS

By: /s/ Mark Comish
----------------
Name: Mark Comish

By: /s/ Michael Comish
-------------------
Name: Michael Comish

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<PAGE>

EXHIBIT A

List of Shareholders

Number of Shares of Number of Shares of Number of Registrable Accredited
Capital Stock of RealNetworks Common Securities Subject to Investor
Name and Address Company Held Stock Held Section 1 hereof Status
- -------------------------- --------------------- --------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Michael Comish 60 16,000 8,000 Non-accredited
Mark Comish 40 10,667 5,333 Non-accredited
</TABLE>

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<PAGE>

EXHIBIT 5.1

[Perkins Coie LLP Letterhead]

July 28, 1999

RealNetworks, Inc.
2601 Elliott Avenue
Seattle, WA 98121

Re: Registration Statement on Form S-3

Ladies and Gentlemen:

We have acted as counsel to you in connection with the preparation of a
Registration Statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), which you are filing
with the Securities and Exchange Commission with respect to the resale of up to
26,666 shares of common stock, par value $0.001 per share (the "Shares"). We
have examined the Registration Statement and such documents and records of the
Company and other documents as we have deemed necessary for the purpose of this
opinion.

Based on the foregoing, we are of the opinion that the Shares have been
duly authorized and are validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all post-
effective amendments, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters." In giving such
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.

Very truly yours,

Perkins Coie LLP

<PAGE>

Exhibit 23.2

CONSENT AND REPORT OF INDEPENDENT AUDITORS

The Board of Directors
RealNetworks, Inc.:

The audits referred to in our report dated January 21, 1999, except for
Note 10(a), which is as of May 10, 1999, included the related financial
statement schedule for each of the years in the three-year period ended
December 31, 1998, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. our
responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

We consent to the use of our reports included herein and to the reference
to our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.

KPMG LLP

Seattle, Washington
July 28, 1999