FILED PURSUANT TO RULE 424(b)(4)
                                                REGISTRATION NO. 333-78589

                                4,000,000 Shares

 [LOGO OF REALNETWORKS]        RealNetworks, Inc.

                                  Common Stock
                                ----------------

    RealNetworks is offering 3,525,000 shares to be sold in the offering. The
selling shareholders identified in this prospectus are offering an additional
475,000 shares. RealNetworks will not receive any of the proceeds from the sale
of shares by the selling shareholders.

    RealNetworks' common stock is quoted on the Nasdaq National Market under
the symbol "RNWK". The last reported sale price of the common stock on June 17,
1999 was $59.63 per share.

    See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.

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

    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.

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



                                                        Per Share    Total
                                                        --------- ------------
                                                            
Initial price to public................................  $58.00   $232,000,000
Underwriting discount..................................  $ 2.32   $  9,280,000
Proceeds, before expenses, to RealNetworks.............  $55.68   $196,272,000
Proceeds, before expenses, to the selling
 shareholders..........................................  $55.68   $ 26,448,000


    The underwriters may, under certain circumstances, purchase up to an
additional 600,000 shares from RealNetworks at the initial price to public less
the underwriting discount.

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

    The underwriters expect to deliver the shares against payment in New York,
New York on June 23, 1999.

Goldman, Sachs & Co.

             BancBoston Robertson Stephens

                          Donaldson, Lufkin & Jenrette

                                         Lehman Brothers

                                                      Thomas Weisel Partners LLC

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

                        Prospectus dated June 17, 1999.


[Inside Front Cover of Prospectus]

Two photographs displaying RealNetworks' RealPlayer G2 product and content
accessible through RealGuide.



                               PROSPECTUS SUMMARY

    You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, as well as our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus. Unless otherwise indicated,
all information in this prospectus (1) reflects a two-for-one split of our
common stock effected on May 10, 1999 and assumes that each share of special
common stock is convertible into two shares of common stock upon its sale to a
third party and (2) assumes no exercise of the underwriters' option to purchase
additional shares in this offering. See "Underwriting."

                                  RealNetworks

    We are 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 60 million registered users of our RealPlayer product and
believe that 85% of all Web pages using streaming media 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 personal computers (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 60 million registered users.

    The proliferation of streaming audio and video on the Internet has enabled
a more compelling online user experience that presently competes with
traditional media for audience share and revenues. As a result of advances in
streaming technology and significant growth in the audience for streaming
media, the amount of multimedia content available on the Internet has grown
dramatically. We believe that the amount of live video and audio content
available on the Internet increased to approximately 300,000 hours per week in
April 1999. More than 1,700 live radio and television stations and leading
Internet broadcasters offer streaming media content using our technology,
including CNN, ABC, ESPN, AOL, Fox News and Bloomberg.

                                       3



    We also believe that the growing popularity of digital media distribution
and localized playback solutions, such as our RealSystem MP, will enable the
development of a range of new distribution and business models for content
owners and further advance the evolution of the PC into a multi-purpose
consumer electronics device. We believe that RealJukebox is one of the first
digital music products that allows consumers to acquire, record, store,
organize and play their personal music collections on PCs and digital playback
devices. Since its beta release on May 3, 1999, more than one million copies of
RealJukebox have been downloaded.

    From our inception, we have strategically chosen to offer our basic
RealPlayer software to consumers free of charge. We believe that this strategy
promotes the widespread adoption of our software and encourages the use of the
Internet as a broadcast medium. More than half of the 60 million registered
users of RealPlayer are registered users of our latest generation RealPlayer G2
software. We have also sold approximately 1.4 million copies of RealPlayer
Plus, a premium version of our RealPlayer product. We have continued our
strategy by offering RealJukebox to consumers free of charge, and we intend to
sell RealJukebox Plus, the premium version of this product, in the future. By
achieving broad distribution of our products to consumers, we believe that we
have created a significant target audience for advertising and other commerce
opportunities.

                                  The Offering

    The following information is based on shares outstanding as of May 1, 1999.
It excludes 25,889,766 shares of common stock reserved for issuance under our
stock option and stock purchase plans, of which 18,959,432 shares were subject
to outstanding options as of May 1, 1999, and includes 80,000 shares of common
stock issuable upon conversion of the 40,000 shares of special common stock
outstanding as of May 1, 1999.

                                            
 Shares offered by RealNetworks................  3,525,000 shares

 Shares offered by the selling shareholders....    475,000 shares

 Shares to be outstanding after this offering.. 71,490,612 shares

 Use of proceeds............................... For general corporate purposes,
                                                principally working capital and
                                                capital expenditures, and for
                                                potential acquisitions and
                                                strategic investments.

 Nasdaq National Market symbol................. "RNWK"

 

                                       4


                   Summary Consolidated Financial Information
                     (in thousands, except per share data)



                                                              Quarter Ended
                                 Year Ended December 31,        March 31,
                                ---------------------------  -----------------
                                 1996      1997      1998      1998     1999
                                -------  --------  --------  --------  -------
                                                               (unaudited)
                                                        
Statement of Operations Data:
Total net revenues............  $14,012  $ 32,720  $ 64,839  $ 12,502  $23,525
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
Acquisition charges...........      --        --      8,723     8,723      --
Operating loss................   (4,016)  (13,161)  (20,990)  (12,009)  (1,705)
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




                                                            March 31, 1999
                                                        -----------------------
                                                         Actual  As Adjusted(1)
                                                        -------- --------------
                                                              (unaudited)
                                                           
Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $ 89,120    $284,692
Working capital........................................   50,216     245,788
Total assets...........................................  133,739     329,311
Shareholders' equity...................................   82,917     278,489

- --------
(1) These calculations give effect to the application of the net proceeds from
    the sale of the 3,525,000 shares of common stock by RealNetworks in this
    offering at the public offering price of $58.00 per share, after deducting
    the underwriting discount and estimated offering expenses payable by
    RealNetworks. See "Use of Proceeds" and "Capitalization."

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

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

                                       5


                                  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 revenue;

  .   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 March 31, 1999, we had an accumulated deficit of
approximately $34.7 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. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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;

                                       6


  .   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;

                                       7


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

  .   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 60 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.

                                       8


    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 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.

    For additional discussion of our relationship with Microsoft, see
"Business--Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Microsoft Relationship."

    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.

    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

                                       9


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. 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 one 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

                                       10


rapidly, and we may be unable to adequately address consumer preferences or
fulfill the market demand to the extent it exists.

    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. The
Recording Industry Association of America, an industry group, recently pursued
legal action to enjoin the distribution of the Rio, an MP3 player made by
Diamond Multimedia. 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. If we fail to develop
products and services that achieve widespread market acceptance or that fail to
generate significant revenues to offset development costs, our business and
operating results would be harmed. 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. If Microsoft or another competitor were to secure
preferential or exclusive relationships with the leading broadcasters, record
companies or websites, it could result in less demand for and use of our
products. We cannot guarantee that third-party content providers will

                                       11


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 RealJukebox product can lawfully and easily
access, record and play back. If third parties are unwilling to offer their
content for free download or purchase by users of RealJukebox, our product may
not achieve or sustain market acceptance. 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 490 on March 31, 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, 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

                                       12


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 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 this 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;

  .   obtaining 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;

                                       13


  .   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 be our competitors; and

  .   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; or

                                       14


  .   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 announcement that it will acquire Excite; and

  .   Yahoo!'s announcements that it will acquire Broadcast.com and
      GeoCities.

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;

  .   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.

    Although we do not have any other commitments or agreements regarding any
material acquisitions or investments, we may use a portion of the net proceeds
of this offering for future acquisitions or investments. See "Use of Proceeds."

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

                                       15


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 are currently relocating this infrastructure to our new
corporate headquarters, also in Seattle, Washington. Although we plan to
temporarily operate multiple computer systems to minimize the risk of system
outage, moving this infrastructure involves risks. 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 they 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 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.


                                       16


Our international operations involve risks

    We operate subsidiaries in England, France, Germany and Japan, and market
and sell products in several other countries. For the quarter ended March 31,
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

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

    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

                                       17


seek to enjoin us from the alleged infringing activity and to recover damages
in an amount no less than a reasonable royalty. We believe the allegations are
without merit and intend to vigorously defend ourselves against these claims.
However, litigation is inherently uncertain, and we may be unable to
successfully defend ourselves against this claim.

    Claims based on other parties' proprietary rights may involve our
internally developed technology or technology and enhancements that we license
from third parties. Claims of this nature could require us to spend significant
amounts of time and money to defend ourselves against them. If any of these
claims were to prevail, we could be forced to pay damages, comply with
injunctions, or halt distribution of 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;

  .   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

                                       18


the licenses, which will be determined either through voluntary inter-industry
negotiations or arbitration. Depending on the rates and terms adopted for the
statutory licenses, the DMCA could harm our business.

    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

    Following this offering, our officers, directors and affiliated persons
will beneficially own approximately 50.8% of our common stock (50.4% if the
underwriters exercise their over-allotment option in full). Robert Glaser, our
chief executive officer and chairman of the board, will beneficially own
approximately 38.7% of our common stock (38.4% if the underwriters exercise
their over-allotment option in full) following this offering. 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. See "Management"
and "Selling Shareholders."

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 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.

                                       19


    We also entered into an agreement providing Mr. Glaser with a direct
contractual right to require us to abide by and perform all terms of the
articles with respect to the strategic transactions committee. This agreement
also provides that so long as Mr. Glaser owns a specified number of shares, we
will use our 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 who 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

  .   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.


                                       20


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 June 11, 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 have broad discretion in spending the offering proceeds

    We expect to use the net proceeds from this offering for general corporate
purposes, principally working capital and capital expenditures. We may use a
portion of the net proceeds to acquire or invest in other complementary
technologies and businesses. Consequently, our management will have the
discretion to allocate the net proceeds to uses that shareholders may not deem
desirable. Investments we make with the net proceeds may not yield a favorable
return.

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. 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,

                                       21


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. Our efforts to address this issue are described in more
detail in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."

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.

                                       22


               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," "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.

                                       23


                                USE OF PROCEEDS

    The net proceeds we will receive from the sale of 3,525,000 shares of our
common stock in this offering are estimated to be $195.6 million at the public
offering price of $58.00 per share ($229.0 million if the over-allotment option
is exercised in full), after deducting the underwriting discount and estimated
offering expenses we will pay.

    We expect to use the net proceeds from this offering principally for
working capital and general corporate purposes. In addition, we may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses or to make strategic investments. 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 currently have no other
commitments or agreements with respect to any material acquisitions or
investments. Pending the uses described above, we intend to invest the net
proceeds in interest-bearing, investment-grade securities. We will not receive
any proceeds from the sale of the shares being sold by the selling
shareholders. See "Selling Shareholders."

                          PRICE RANGE OF COMMON STOCK

    Our common stock has been quoted on the Nasdaq National Market under the
symbol "RNWK" since our initial public offering on November 21, 1997. Before
that time, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale prices per share
of our common stock as reported on the Nasdaq National Market. These quotations
represent prices between dealers and do not include retail markups, markdowns
or commissions and may not represent actual transactions.



                                                                  High    Low
                                                                 ------- ------
                                                                   
1997
  Fourth Quarter (from November 21, 1997)....................... $  9.44 $ 6.81
1998
  First Quarter................................................. $ 14.88 $ 6.75
  Second Quarter................................................ $ 19.72 $ 9.97
  Third Quarter................................................. $ 24.13 $ 7.63
  Fourth Quarter................................................ $ 24.88 $11.06
1999
  First Quarter................................................. $ 72.75 $18.00
  Second Quarter (through June 17, 1999)........................ $131.88 $51.00


    On May 10, 1999, we effected a two-for-one stock split of all outstanding
shares of our common stock. The table above has been adjusted to reflect the
stock split.

    On June 17, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $59.63 per share. As of May 1, 1999, there were 436
shareholders of record of our common stock.

                                DIVIDEND POLICY

    We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.

                                       24


                             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:

 .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)

    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.

                                       25


                                 CAPITALIZATION

    The following table sets forth our capitalization as of March 31, 1999 (1)
on an actual basis and (2) on an as adjusted basis to give effect to our sale
and issuance of 3,525,000 shares of common stock in this offering at the public
offering price of $58.00 per share, with estimated net proceeds to us of $195.6
million.



                                                             March 31, 1999
                                                          ---------------------
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                             (in thousands)
                                                              
Note payable............................................. $    994   $    994
Shareholders' equity:
  Preferred stock; $0.001 par value; 60,000,000 shares
   authorized; no shares issued or outstanding, actual
   and as adjusted:
    Series A Preferred Stock; 200,000 shares authorized;
     no shares issued or outstanding, actual and as
     adjusted............................................      --         --
  Common stock; $0.001 par value; 295,790,695 shares
   authorized; 66,603,784 shares issued and outstanding,
   actual; and 70,128,784 shares issued and outstanding,
   as adjusted...........................................       66         70
  Special common stock; $0.001 par value; 4,209,305
   shares authorized; 500,000 shares issued and
   outstanding, actual and as adjusted...................        1          1
Additional paid-in capital...............................  117,765    313,333
Accumulated other comprehensive loss.....................     (241)      (241)
Accumulated deficit......................................  (34,674)   (34,674)
                                                          --------   --------
  Total shareholders' equity.............................   82,917    278,489
                                                          --------   --------
    Total capitalization................................. $ 83,911   $279,483
                                                          ========   ========

   These calculations exclude 26,193,260 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 18,003,926
shares were subject to outstanding options as of March 31, 1999.

                                    DILUTION

    As of March 31, 1999, we had a net tangible book value of approximately
$74.4 million, or $1.10 per share of common stock. Net tangible book value per
share represents total net tangible assets less total net liabilities divided
by the number of shares of common stock outstanding at that date. After giving
effect to the estimated net proceeds we will receive from the sale of 3,525,000
shares of common stock at the public offering price of $58.00 per share, the
net tangible book value at March 31, 1999 would have been approximately $270.0
million, or $3.80 per share. This represents an immediate increase in net
tangible book value of $2.70 per share to existing shareholders and an
immediate dilution of $54.20 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:

                                                                   
Public offering price per share...................................       $58.00
  Net tangible book value per share at March 31, 1999............. $1.10
  Increase in net tangible book value per share attributable to
   new investors..................................................  2.70
                                                                   -----
Pro forma net tangible book value per share after the offering....         3.80
                                                                         ------
Dilution in net tangible book value per share to new investors....       $54.20
                                                                         ======


   These calculations exclude 26,193,260 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 18,003,926
shares were subject to outstanding options as of March 31, 1999.

                                       26


                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)

    The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included elsewhere in this prospectus or incorporated by
reference. The consolidated statement of operations data set forth below for
the years ended December 31, 1996, 1997 and 1998, and the consolidated balance
sheet data as of December 31, 1997 and 1998, have been derived from our
consolidated financial statements included elsewhere in this prospectus, which
have been audited by KPMG LLP, independent auditors. The consolidated statement
of operations data set forth below for the period from February 9, 1994
(inception) to December 31, 1994 and for the year ended December 31, 1995, and
the consolidated balance sheet data as of December 31, 1994, 1995 and 1996,
have been derived from our financial statements not included in this
prospectus, which have been audited by KPMG LLP, independent auditors. The
consolidated statement of operations data set forth below for the quarters
ended March 31, 1998 and March 31, 1999 and the consolidated balance sheet data
as of March 31, 1999 have been derived from our unaudited consolidated
financial statements, included elsewhere in this prospectus. The historical
results are not necessarily indicative of results to be expected for any future
period.



                                                                                   Quarter Ended
                                        Year Ended December 31,                      March 31,
                          ------------------------------------------------------  -----------------
                                1994         1995     1996      1997      1998      1998     1999
                          ----------------- -------  -------  --------  --------  --------  -------
                          (since inception)                                         (unaudited)
                                                                       
Consolidated
 Statement of Operations
 Data:
Net revenues:
 Software license fees..       $   --       $ 1,782  $11,876  $ 25,494  $ 46,949  $  9,418  $17,010
 Service revenues.......           --            30    1,120     4,972    14,742     2,622    5,249
 Advertising............           --           --     1,016     2,254     3,148       462    1,266
                               -------      -------  -------  --------  --------  --------  -------
 Total net revenues.....           --         1,812   14,012    32,720    64,839    12,502   23,525
                               -------      -------  -------  --------  --------  --------  -------
Cost of revenues:
 Software license fees..           --            29    1,343     3,153     8,032     1,586    2,811
 Service revenues.......           --            33      554     2,392     2,631       521      920
 Advertising............           --           --       288       920     1,727       332      550
                               -------      -------  -------  --------  --------  --------  -------
 Total cost of
  revenues..............           --            62    2,185     6,465    12,390     2,439    4,281
                               -------      -------  -------  --------  --------  --------  -------
 Gross profit...........           --         1,750   11,827    26,255    52,449    10,063   19,244
                               -------      -------  -------  --------  --------  --------  -------
Operating expenses:
 Research and
  development...........           202        1,380    4,812    13,268    20,828     4,419    7,289
 Sales and marketing....            47        1,218    7,540    20,124    32,451     6,830   10,215
 General and
  administrative........           296          747    3,491     6,024     9,841     2,100    2,913
 Goodwill amortization..           --           --       --        --      1,596       --       532
 Acquisition charges....           --           --       --        --      8,723     8,723      --
                               -------      -------  -------  --------  --------  --------  -------
 Total operating
  expenses..............           545        3,345   15,843    39,416    73,439    22,072   20,949
                               -------      -------  -------  --------  --------  --------  -------
 Operating loss.........          (545)      (1,595)  (4,016)  (13,161)  (20,990)  (12,009)  (1,705)
                               -------      -------  -------  --------  --------  --------  -------
Other income (expense):
 Interest income........           --            94      296     2,225     5,325     1,266    1,308
 Other expense..........           --           --       (69)     (233)     (749)     (189)    (339)
                               -------      -------  -------  --------  --------  --------  -------
 Other income, net......           --            94      227     1,992     4,576     1,077      969
                               -------      -------  -------  --------  --------  --------  -------
 Net loss...............       $  (545)     $(1,501) $(3,789) $(11,169) $(16,414) $(10,932) $  (736)
                               =======      =======  =======  ========  ========  ========  =======
Basic and diluted net
 loss per share.........       $(27.26)     $(29.95) $ (5.95) $  (1.44) $  (0.25) $  (0.18) $ (0.01)
                               =======      =======  =======  ========  ========  ========  =======
Shares used to compute
 basic and diluted net
 loss per share.........            20           50      642     8,081    64,646    62,084   67,457





                                       December 31,
                         -------------------------------------------  March 31,
                          1994    1995     1996      1997     1998      1999
                         ------  -------  -------  -------- -------- -----------
                                                                     (unaudited)
                                                   
Consolidated Balance
 Sheet Data:
Cash, cash equivalents
 and short-term
 investments............ $  --   $ 6,116  $19,595  $ 92,537 $ 89,777  $ 89,120
Working capital
 (deficit)..............    (49)   5,948   16,893    87,520   60,207    50,216
Total assets............     64    7,574   26,468   116,704  128,059   133,739
Redeemable, convertible
 preferred stock........    --     7,655   23,153       --       --        --
Shareholders' equity
 (deficit)..............     15   (1,111)  (3,320)   77,902   83,516    82,917


                                       27


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

Overview

    We are 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 60 million registered users of our RealPlayer product and
believe that 85% of all Web pages using streaming media 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 recently 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.

    We were incorporated in February 1994 and were in the development stage
until July 1995, when we released the commercial version of RealAudio Version
1.0. From inception through December 31, 1995, our operating activities related
primarily to recruiting personnel, raising capital, purchasing operating
assets, conducting research and development, building the RealAudio brand and
establishing the market for streaming audio. During 1996, we continued to
invest heavily in research and development and marketing and in building our
domestic and international sales channels and our general and administrative
infrastructure. In August 1996, we began selling RealPlayer Plus, a premium
version of our RealPlayer product. RealPlayer continues to be available for
download free of charge from our websites. In June 1997, we released the
commercial version of RealVideo Version 4.0. In December 1997, we released the
commercial version of RealSystem Version 5.0, a streaming media solution that
includes RealAudio and RealVideo technology. In November 1998, we released the
commercial version of RealSystem G2, our latest generation media delivery
system. In May 1999, we released RealSystem MP, as well as a beta version of
RealJukebox.

    Our revenues are reported in the following three categories:

  .   Software license fees include revenues from sales of our RealPlayer
      Plus, RealServers and related authoring and publishing tools, OEM
      sales of our products and sales of third-party products.

  .   Service revenues include support and maintenance services that we sell
      to customers who purchase our RealPlayer Plus, RealServers and tools
      products. We also provide broadcast hosting services through our Real
      Broadcast Network and offer consulting services.

  .   Advertising revenues are derived from the sale of advertising on our
      websites.

    In March 1998, we acquired Vivo Software, a leading developer of streaming
media creation tools, in an acquisition accounted for using the purchase method
of accounting. On April 13, 1999, we entered into a definitive agreement to
acquire privately held Xing Technology, an MP3 software developer, in exchange
for shares of our common stock having a maximum value of $75 million. The
acquisition, which we expect to account for as a pooling of interests, is
subject to certain customary conditions. It is expected to be completed no
later than the third quarter of 1999.

                                       28


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



                                                                Quarter
                              Year Ended December 31,       Ended March 31,
                              ---------------------------   -----------------
                               1996      1997      1998      1998      1999
                              -------   -------   -------   -------   -------
                                                       
Net revenues:
  Software license fees......    84.8 %    77.9 %    72.4 %    75.3 %    72.3 %
  Service revenues...........     8.0      15.2      22.7      21.0      22.3
  Advertising................     7.2       6.9       4.9       3.7       5.4
                              -------   -------   -------   -------   -------
    Total net revenues.......   100.0     100.0     100.0     100.0     100.0
                              -------   -------   -------   -------   -------
Cost of revenues:
  Software license fees......     9.6       9.6      12.4      12.7      12.0
  Service revenues...........     4.0       7.3       4.0       4.2       3.9
  Advertising................     2.0       2.8       2.7       2.6       2.3
                              -------   -------   -------   -------   -------
    Total cost of revenues...    15.6      19.7      19.1      19.5      18.2
                              -------   -------   -------   -------   -------
    Gross profit.............    84.4      80.3      80.9      80.5      81.8
                              -------   -------   -------   -------   -------
Operating expenses:
  Research and development...    34.3      40.6      32.1      35.3      31.0
  Sales and marketing........    53.8      61.5      50.0      54.6      43.4
  General and
   administrative............    24.9      18.4      15.2      16.8      12.4
  Goodwill amortization......     --        --        2.5       --        2.2
  Acquisition charges........     --        --       13.5      69.8       --
                              -------   -------   -------   -------   -------
    Total operating
     expenses................   113.0     120.5     113.3     176.5      89.0
                              -------   -------   -------   -------   -------
    Operating loss...........   (28.6)    (40.2)    (32.4)    (96.0)     (7.2)
                              -------   -------   -------   -------   -------
Other income (expense):
  Interest income............     2.1       6.8       8.2      10.1       5.5
  Other expense..............    (0.5)     (0.7)     (1.1)     (1.5)     (1.4)
                              -------   -------   -------   -------   -------
    Other income, net........     1.6       6.1       7.1       8.6       4.1
                              -------   -------   -------   -------   -------
    Net loss.................   (27.0)%   (34.1)%   (25.3)%   (87.4)%    (3.1)%
                              =======   =======   =======   =======   =======


Quarterly Results of Operations

 Revenues

    Software License Fees. Software license fees were $17.0 million for the
quarter ended March 31, 1999, an increase of 81% from $9.4 million in the
comparable quarter of the prior year. The increase was due primarily to a
greater volume of products sold, which resulted from growth in the demand for
streaming media on the Internet, the introduction of the RealSystem G2 in
November 1998, successful product promotions and increased sales of third-party
products. Software license fees for each of the quarters ended March 31, 1999
and 1998 included $2.4 million related to the Microsoft license agreement we
entered into in June 1997.

    Service Revenues. Service revenues were $5.2 million for the quarter ended
March 31, 1999, an increase of 100% from $2.6 million in the comparable quarter
of the prior year. The increase was primarily due to a larger installed base of
our products from which we derive support and maintenance revenues and
increases in revenues from our consulting and streaming media hosting services.

    Advertising. Advertising revenues were $1.3 million for the quarter ended
March 31, 1999, an increase of 174% from $0.5 million in the comparable quarter
of the prior year. The increase in

                                       29


advertising revenues was due to increased traffic on websites and increased
effectiveness of our advertising sales force.

    Geographic Revenues. Excluding revenues from the Microsoft license
agreement, international revenues represented 21% of total net revenues in the
quarter ended March 31, 1998 and 24% of total net revenues in the quarter ended
March 31, 1999. Revenues generated in Europe were 10% and 13% of total net
revenues (excluding revenues from the Microsoft license agreement) in the
quarters ended March 31, 1998 and 1999, respectively, and revenues generated in
Japan/Asia Pacific were 9% of total net revenues (excluding revenues from the
Microsoft license agreement) in each of the quarters ended March 31, 1998 and
1999.

 Cost of Revenues

    Cost of Software License Fees. Cost of software license fees includes costs
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology and fees paid to third-party vendors for order fulfillment.
Cost of software license fees was $2.8 million for the quarter ended March 31,
1999, an increase of 77% from $1.6 million in the comparable quarter of the
prior year, and remained a constant 17% of software license fees. The increase
in absolute dollars was due primarily to higher sales volumes.

    Cost of Service Revenues. Cost of service revenues includes the cost of in-
house and contract personnel providing support and other services and bandwidth
expenses for streaming media hosting services. Cost of service revenues was
$0.9 million for the quarter ended March 31, 1999, an increase of 77% from $0.5
million in the comparable quarter of the prior year, but decreased as a
percentage of service revenues to 18% from 20%. The increase in absolute
dollars was primarily due to increased staff and contract personnel needed to
provide services to a greater number of customers. The decrease as a percentage
of service revenues was primarily due to economies of scale in providing
support services to a larger customer base.

    Cost of Advertising. Cost of advertising includes the cost of personnel
associated with content creation and maintenance and fees paid to third parties
for content included in our websites. Cost of advertising was $0.6 million for
the quarter ended March 31, 1999, an increase of 66% from $0.3 million in the
comparable quarter of the prior year, but decreased as a percentage of
advertising revenues to 43% from 72%. The increase in absolute dollars was
primarily due to increases in the quality and quantity of content available on
our websites, the addition of new websites and higher bandwidth costs. The
decrease as a percentage of advertising revenues was due to greater economies
of scale.

    Our gross margins may fluctuate based on the mix of distribution channels
used and the mix of products sold.

 Operating Expenses

    Research and Development. Research and development expenses consist
primarily of salaries and consulting fees associated with product development
and costs of technology acquired from third parties to be incorporated into
products currently under development. To date, all research and development
costs have been expensed as incurred because technological feasibility is
generally not established until substantially all development is complete. We
believe that significant investment in research and development is a critical
factor in attaining our strategic objectives and, as a result, we expect to
increase research and development expenditures in future periods. Research and
development expenses were $7.3 million for the quarter ended March 31, 1999, an
increase of 65% from $4.4 million in the comparable quarter of the prior year,
but decreased as a percentage of total net revenues to 31% from 35%. The
increase in absolute dollars was primarily

                                       30


due to increases in internal development personnel, consulting expenses and
contract labor. Research and development expenses were primarily related to the
development of new technology and products, including RealSystem MP and
RealJukebox, and enhancements made to existing products. The decrease in
percentage terms was a result of revenues growing at a faster rate than
expenses.

    Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, consulting fees, trade show expenses, advertising
costs and cost of marketing collateral. We intend to increase our branding and
marketing efforts and therefore expect sales and marketing expenses to increase
significantly in future periods. Sales and marketing expenses were $10.2
million for the quarter ended March 31, 1999, an increase of 50% from $6.8
million in the comparable quarter of the prior year, but decreased as a
percentage of total net revenues to 43% from 55%. The increase in absolute
dollars was due to the expansion of our direct sales and marketing
organization, the creation of additional sales offices, promotions and other
expenses related to the continued development of the "Real" brand. The decrease
in percentage terms was a result of revenues growing at a faster rate than
expenses.

    General and Administrative. General and administrative expenses consist
primarily of salaries, fees for professional services and bad debt expense. We
expect general and administrative expenses to increase as we expand our staff
and incur additional costs related to growth of our business. General and
administrative expenses were $2.9 million for the quarter ended March 31, 1999,
an increase of 39% from $2.1 million in the comparable quarter of the prior
year, but decreased as a percentage of total net revenues to 12% from 17%. The
increase in absolute dollars was primarily a result of increased personnel and
facility expenses necessary to support our growth. The decrease in percentage
terms was due to revenues growing at a faster rate than expenses.

 Other Income, Net

    Other income, net consists primarily of earnings on our cash, cash
equivalents and short-term investments. Other income, net was $1.0 million for
the quarter ended March 31, 1999 and $1.1 million for the quarter ended March
31, 1998.

Annual Results of Operations

 Revenues



                                            1996   Change  1997   Change  1998
                                           ------- ------ ------- ------ -------
                                                  (dollars in thousands)
                                                          
Software license fees..................... $11,876  115%  $25,494   84%  $46,949
Service revenues..........................   1,120  344     4,972  197    14,742
Advertising...............................   1,016  122     2,254   40     3,148
                                           -------        -------        -------
  Total net revenues...................... $14,012  134%  $32,720   98%  $64,839
                                           =======        =======        =======


    Software License Fees. Software license fees were $46.9 million in 1998, an
increase of 84% from $25.5 million in 1997. Software license fees increased
115% in 1997 from $11.9 million in 1996. The increases during 1998 and 1997
were due primarily to a greater volume of products sold as a result of growth
in the demand for streaming media on the Internet, the introduction of new
products, including RealSystem G2 in November 1998, RealSystem Version 5.0 in
December 1997, and RealVideo Version 4.0 in June 1997, successful product
promotions, increased sales from electronic distribution and the sale of third-
party products. We have used price and other promotions to increase the trial,
purchase and use of our software products. In June 1997, we entered into a
$30.0 million license agreement with Microsoft, which is being recognized over
the three-year term of our ongoing support obligations. Software license fees
for 1997 and 1998 included $4.8 million and $9.7 million, respectively, related
to the Microsoft license agreement.


                                       31


    Service Revenues. Service revenues were $14.7 million in 1998, an increase
of 197% from $5.0 million in 1997. The increase during 1998 was primarily
attributable to revenues from sales of support and upgrade contracts on
RealPlayer Plus, which we began selling during the fourth quarter of 1997, a
larger installed base of our server products and increases in consulting and
streaming media hosting services. Service revenues were $5.0 million in 1997,
an increase of 344% from $1.1 million in 1996. The 1997 increase was primarily
due to a greater installed base of our server products. This larger installed
base leads to increased revenues from the sale of support and maintenance
contracts and other services we perform.

    Advertising. Advertising revenues were $3.1 million in 1998, an increase of
40% from $2.3 million in 1997. The increase in advertising revenues for 1998
was due to a larger sales force and more traffic to our websites. Advertising
revenues were $2.3 million in 1997, an increase of 122% from $1.0 million in
1996. We began selling advertising space on our websites in March 1996.
Increased revenues in 1997 were due in part to a full year of advertising sales
and our success in attracting more advertisers.

  Geographic Revenues



                                           1996   Change  1997   Change  1998
                                          ------- ------ ------- ------ -------
                                                 (dollars in thousands)
                                                         
North America............................ $11,308   80%  $20,346  109%  $42,611
Europe...................................   1,037  230     3,425  109     7,144
Japan/Asia Pacific.......................   1,013  218     3,225   37     4,429
Rest of world............................     654   36       890   11       987
                                          -------        -------        -------
  Subtotal...............................  14,012   99    27,886   98    55,171
Microsoft license agreement..............     --   n/a     4,834  100     9,668
                                          -------        -------        -------
  Total.................................. $14,012  134%  $32,720   98%  $64,839
                                          =======        =======        =======


    Excluding revenues from the Microsoft license agreement, international
revenues represented 23% of total net revenues in 1998 and 27% in 1997.
Revenues generated in Europe were 13% and 12% of total net revenues (excluding
revenues from the Microsoft license agreement) in 1998 and 1997, respectively,
and revenues generated in Japan/Asia Pacific were 8% and 12% of total net
revenues (excluding revenues from the Microsoft license agreement) in 1998 and
1997, respectively. At December 31, 1998, accounts receivable due from European
and Asian customers were not significant. The functional currency of our
foreign subsidiaries is the local currency of the country in which the
subsidiary is incorporated. Results of operations of our foreign subsidiaries
are translated from local currency into U.S. dollars based on average monthly
exchange rates. We currently do not hedge our foreign currency exposures and
therefore are subject to the risk of changes in exchange rates. We expect that
international revenues will increase over time in both absolute dollars and as
a percentage of total net revenues. The cost structures of both domestic and
international revenues are substantially the same.

  Cost of Revenues



                                          1996   Change  1997   Change  1998
                                         ------  ------ ------  ------ -------
                                               (dollars in thousands)
                                                        
Software license fees................... $1,343   135%  $3,153   155%  $ 8,032
Service revenues........................    554   332    2,392    10     2,631
Advertising.............................    288   219      920    88     1,727
                                         ------         ------         -------
  Total cost of revenues................ $2,185   196%  $6,465    92%  $12,390
                                         ======         ======         =======
As a percentage of total net revenues...     16%            20%             19%



                                       32


    Cost of Software License Fees. Cost of software license fees was $8.0
million for 1998, an increase of 155% from $3.2 million in 1997, and increased
as a percentage of software license fees to 17% from 12% in 1997. Cost of
software license fees was $3.2 million in 1997, an increase of 135% from $1.3
million in 1996, and increased as a percentage of software license fees to 12%
from 11% in 1996. The increases in absolute dollars were due primarily to
higher sales volume. The increases in percentage terms were due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels and the utilization of a third-party order
fulfillment agency.

    Cost of Service Revenues. Cost of service revenues was $2.6 million for
1998, an increase of 10% from $2.4 million in 1997, but decreased as a
percentage of service revenues to 18% from 48% in 1997. Cost of service
revenues was $2.4 million for 1997, an increase of 332% from $0.6 million in
1996, but decreased as a percentage of service revenues to 48% from 49% in
1996. Cost of service revenues for 1997 includes $1.0 million of costs
associated with the RealNetworks Conference. Excluding the impact of the
RealNetworks Conference, cost of service revenues was $1.4 million in 1997, or
31% of service revenues. The 1998 and 1997 increases in absolute dollars,
excluding the RealNetworks Conference, were primarily due to increased staff
and contract personnel to provide services to a greater number of customers and
increases in bandwidth expenses. The cost decreases as a percentage of service
revenues were primarily due to greater economies of scale in providing support
services to a larger customer base. The net costs of the 1998 RealNetworks
Conference are included in sales and marketing expenses.

    Cost of Advertising. Cost of advertising was $1.7 million for 1998, an
increase of 88% from $0.9 million in 1997, and increased as a percentage of
advertising revenues to 55% from 41% in 1997. Cost of advertising was $0.9
million for 1997, an increase of 219% from $0.3 million in 1996, and increased
as a percentage of advertising revenues to 41% from 28% in 1996. The increases
were primarily due to increases in the quality and quantity of content
available on our websites and higher bandwidth costs.

    Our gross margins may fluctuate based on the mix of distribution channels
we use and the mix of products we sell.

 Operating Expenses

  Research and Development



                           1996   Change  1997    Change  1998
                          ------  ------ -------  ------ -------
                                 (dollars in thousands)
                                          
Research and
 development............  $4,812   176%  $13,268    57%  $20,828
As a percentage of total
 net revenues...........      34%             41%             32%


    Research and development expenses were $20.8 million in 1998, an increase
of 57% from $13.3 million in 1997, but decreased as a percentage of total net
revenues to 32% from 41% in 1997. The 1998 increase in absolute dollars was
primarily due to increases in internal development personnel, consulting
expenses and contract labor. The 1998 decrease in percentage terms was a result
of revenues growing at a faster rate than expenses. Research and development
expenses were primarily related to the development of new technology and
products, including RealSystem G2, the commercial version of which we released
in November 1998, and enhancements made to existing products. Research and
development expenses were $13.3 million in 1997, an increase of 176% from $4.8
million in 1996, and increased as a percentage of total net revenues to 41%
from 34% in 1996. The 1997 increase was due primarily to increases in internal
development personnel, travel and consulting expenses. Research and development
expenses incurred in 1997 were primarily related to development of new
technology and products, including RealVideo and RealSystem 5.0, and
enhancements made to existing products.


                                       33


  Sales and Marketing



                           1996   Change  1997    Change  1998
                          ------  ------ -------  ------ -------
                                 (dollars in thousands)
                                          
Sales and marketing.....  $7,540   167%  $20,124    61%  $32,451
As a percentage of total
 net revenues...........      54%             62%             50%


    Sales and marketing expenses were $32.5 million in 1998, an increase of 61%
from $20.1 million in 1997, but decreased as a percentage of total net revenues
to 50% from 62% in 1997. Sales and marketing expenses were $20.1 million in
1997, an increase of 167% from $7.5 million in 1996, and increased as a
percentage of total net revenues to 62% from 54% in 1996. The increases in
absolute dollars were due to the expansion of our direct sales and marketing
organization, the creation of additional foreign and domestic sales offices,
promotions and expenses related to the continued development of the "Real"
brand. Sales and marketing expenses in 1998 also include net costs associated
with the 1998 RealNetworks Conference. The decrease in percentage terms in 1998
was a result of revenues growing at a faster rate than expenses.

  General and Administrative



                                           1996   Change  1997   Change  1998
                                          ------  ------ ------  ------ ------
                                                (dollars in thousands)
                                                         
General and administrative............... $3,491    73%  $6,024    63%  $9,841
As a percentage of total net revenues....     25%            18%            15%


    General and administrative expenses were $9.8 million in 1998, an increase
of 63% from $6.0 million in 1997, but decreased as a percentage of total net
revenues to 15% from 18% in 1997. General and administrative expenses were $6.0
million in 1997, an increase of 73% from $3.5 million in 1996, but decreased as
a percentage of total net revenues to 18% from 25% in 1996. The increases in
absolute dollars for 1998 and 1997 were primarily due to increased personnel
and facility expenses necessary to support our growth and costs associated with
operating as a public company. The decreases in percentage terms were due to
revenues growing at a faster rate than expenses.

  Goodwill Amortization and Acquisition Charges

    In March 1998, we acquired Vivo Software, a developer of streaming media
creation tools. We issued approximately 2.2 million shares of our common stock
in exchange for all outstanding shares of Vivo common stock and assumed options
to purchase approximately 95,000 shares of our common stock. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
results of Vivo's operations are included in our financial statements since the
date of acquisition.

    The purchase price was allocated to the fair value of the acquired assets
and assumed liabilities based on their fair values at the date of the
acquisition. A portion of the purchase price represents acquired in-process
research and development that has not yet reached technological feasibility and
has no alternative future use. Of the total purchase price, $8.6 million was
allocated to in-process research and development expense, $10.6 million was
allocated to goodwill, and $0.5 million was allocated to tangible assets.
Goodwill is amortized over its estimated life of five years.

    In light of the SEC's recent interpretation of accounting for acquired in-
process research and development, we have voluntarily restated the amount of
the charge taken in connection with the acquisition of Vivo. Although we had
reported our results for the quarter ended March 31, 1998 in accordance with
established accounting practices and the valuation provided by an independent
third party, we voluntarily responded to new guidance from the SEC revising the
valuation methodology

                                       34


used in determining charges associated with acquired in-process research and
development. As a result, we reduced the in-process research and development
charge previously recognized in the first quarter of 1998 from $17.7 million to
$8.6 million and increased the amount of goodwill from $1.5 million to $10.6
million.

    The in-process research and development projects acquired in the
acquisition of Vivo consisted of the development of encoder tools and server
and client codecs. The encoder tools allow users to create media content to be
streamed over the Internet or intranets. The server and client codecs enhance
the compression and decompression of multimedia content streamed over the
Internet or intranets.

    The percentage completion of the projects at the time of acquisition was as
follows:

                                                                
      Encoder tools..................................................... 40%-70%
      Server codec......................................................   30%
      Client codec......................................................   30%

      

    We completed the development of the encoder tools in 1998. The total cost
to complete development of the encoder tools was approximately $1.0 million.
The server and client codec projects are expected to be complete in 1999. The
expected aggregate cost to complete the server and client codecs is
approximately $0.7 million.

    The fair value of the in-process technology was based on projected cash
flows that were discounted based on the risks associated with achieving such
projected cash flows upon successful completion of the acquired projects.
Associated risks include the inherent difficulties and uncertainties in
completing each project and achieving technological feasibility and risks
related to the impact of potential changes in market conditions and technology.
In developing cash flow projections, revenues were forecasted based on relevant
factors, including aggregate revenue growth rates for the business as a whole,
characteristics of the potential market for the technology and the anticipated
life of the underlying technology. Operating expenses and resulting profit
margins were forecasted based on the characteristics and cash-flow-generating
potential of the acquired in-process technology.

    The fair value of the in-process research and development was allocated to
the projects as follows (in thousands):

                                                                 
      Encoder tools...................................................... $6,500
      Server codec.......................................................  1,500
      Client codec.......................................................    600
                                                                          ------
                                                                          $8,600
                                                                          ======

      

    Projected annual revenues for each of the in-process development projects
were assumed to increase from product release through 2001, decline slightly in
2002 and decline significantly in 2003 and 2004. An insignificant amount of
revenues was projected for in-process technology in the first quarter of 2005,
which is estimated to be the end of the in-process technology's economic life.

    Gross profit was assumed to be 80% for the encoder tools and client codec
and 94% for the server codec. The projected gross profit percentages were based
on estimated costs of revenues, which include duplication, manuals, packaging
materials and third-party order fulfillment costs. Gross profit projections
were based on our experience with similar products.


                                       35


    Estimated operating expenses, income taxes and capital charges to provide a
return on other acquired assets were deducted from gross profit to arrive at
net operating income for each of the in-process development projects. Operating
expenses were estimated as a percentage of total net revenues and included
sales and marketing expenses and development costs to maintain the technology
once it has achieved technological feasibility.

    We discounted the net cash flows of the in-process research and development
projects to their present values using a discount rate of 42%. This discount
rate approximates the overall rate of return for the acquisition of Vivo as a
whole and reflects the inherent uncertainties surrounding the successful
development of the in-process research and development projects and the
uncertainty of technological advances that may occur in the future.

    Since the acquisition, we have continued to market and support Vivo's
existing products on a limited basis and will continue to do so until the in-
process projects are completed.

    The acquisition of Vivo was a tax-free reorganization under the Internal
Revenue Code. Therefore, the charge for in-process research and development and
amortization of acquired intangible assets is not deductible for income tax
purposes.

 Other Income, Net



                                                1996 Change  1997  Change  1998
                                                ---- ------ ------ ------ ------
                                                     (dollars in thousands)
                                                           
Other income, net.............................. $227  778%  $1,992  130%  $4,576


    Other income, net consists primarily of earnings on our cash, cash
equivalents and short-term investments. The increases in 1998 and 1997 were due
primarily to investment earnings on higher average cash balances.

 Income Taxes

    We have incurred net operating losses in each period from inception through
December 31, 1998. At December 31, 1998, we had provided a full valuation
allowance on our deferred tax assets because of uncertainties regarding
recoverability. See Note 6 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

    Net cash provided by operating activities was $6.7 million in the quarter
ended March 31, 1999, $9.5 million in 1998 and $8.6 million in 1997. Net cash
used in operating activities was $0.6 million in 1996. Net cash provided by
operating activities in the quarter ended March 31, 1999 resulted primarily
from an increase in current liabilities of $9.5 million and from noncash
charges associated with depreciation and amortization of $1.3 million,
partially offset by the reported net loss of $0.7 million. Net cash provided by
operating activities in 1998 resulted primarily from a decrease in license fee
receivable of $10.0 million, partially offset by a net loss of $16.4 million,
which was offset by a noncash acquisition charge of $8.7 million. Net cash
provided by operating activities in 1997 was primarily attributable to an
increase of $29.2 million in deferred revenue, related primarily to the
Microsoft license agreement, partially offset by a net loss of $11.2 million,
an increase of $1.9 million in trade accounts receivable and an increase in
license fee receivable of $10.0 million. Net cash used in operating activities
in 1996 was primarily due to a net loss of $3.8 million and an increase in
trade accounts receivable of $2.7 million, offset by increases in accounts
payable of $2.2 million and deferred revenue of $2.3 million.


                                       36


    Net cash used in investing activities was $24.6 million for the quarter
ended March 31, 1999, and $25.5 million, $31.3 million and $4.8 million in
1998, 1997 and 1996, respectively. Net cash used in investing activities
resulted primarily from net purchases of short-term investments and purchases
of equipment and leasehold improvements.

    Net cash provided by financing activities was $0.3 million for the quarter
ended March 31, 1999, and was a result of net proceeds from the exercise of
stock options. Net cash provided by financing activities was $5.7 million in
1998, and consisted primarily of proceeds from the exercise of stock options
and warrants. Net cash provided by financing activities of $70.3 million in
1997 was primarily from net proceeds of $29.9 million from sales of preferred
stock and $38.5 million in net proceeds from the sale of common stock
associated with our initial public offering. Net cash provided by financing
activities of $17.1 million in 1996 was primarily due to net proceeds from
sales of preferred stock.

    At March 31, 1999, we had $89.1 million in cash, cash equivalents and
short-term investments. As of March 31, 1999, our principal commitments
consisted of obligations under operating leases and a $1.0 million note
payable. Since our inception, we have experienced a substantial increase in our
capital expenditures to support expansion of our operations and information
systems.

    In January 1998, we entered into a lease agreement for our new corporate
headquarters. The lease commenced on April 1, 1999 and expires on April 1,
2011, with an option to renew the lease for either a three- or ten-year period.
We relocated to the new facilities in May 1999. We are funding the tenant
improvements, a portion of which may be financed through equipment leases. In
addition, we are in the process of upgrading and replacing our existing
internal information systems. We anticipate that the costs of the tenant
improvements and information systems will total approximately $14.0 million in
1999.

    We do not hold derivative financial instruments or equity securities in our
investment portfolio. Our cash equivalents and short-term investments consist
of high-quality securities, as specified in our investment policy guidelines.
The policy limits the amount of credit exposure to any one issue or issuer to a
maximum of 5% of the total portfolio and requires that all short-term
investments mature in two years or less, with the average maturity being one
year or less. These securities are subject to interest rate risk and will
decrease in value if interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels at March 31, 1999, the
fair value of the portfolio would decline by an immaterial amount. Because we
have historically held our fixed-income investments until maturity, we would
not expect our operating results or cash flows to be significantly affected by
a sudden change in market interest rates on our securities portfolio.

    We conduct our operations in five primary functional currencies: the United
States dollar, the Japanese yen, the British pound, the French franc and the
German mark. Historically, neither fluctuations in foreign exchange rates nor
changes in foreign economic conditions have had a significant impact on our
financial condition or results of operations. We currently do not hedge our
foreign currency exposures and are therefore subject to the risk of exchange
rates. We invoice the customers of our international subsidiaries primarily in
U.S. dollars, except in Japan, where we invoice our customers primarily in yen.
We are exposed to foreign exchange rate fluctuations as the financial results
of foreign subsidiaries are translated into U.S. dollars in consolidation. Our
exposure to foreign exchange rate fluctuations also arises from intercompany
payables and receivables to and from our foreign subsidiaries. Foreign exchange
rate fluctuations did not have a material impact in 1998 and 1997.

    On January 1, 1999, the participating member countries of the European
Union converted to a common currency, the euro. On that same date they
established fixed conversion rates between their existing sovereign currencies
and the euro. Even though legacy currencies are scheduled to remain

                                       37


legal tender in the participating countries as denominations of the euro until
January 1, 2002, the participating countries will no longer be able to direct
independent interest rates for the legacy currencies. The authority to set
monetary policy will now reside with the new European Central Bank. We do not
anticipate any material impact from the euro conversion on our financial
information systems, which currently accommodate multiple currencies. Due to
numerous uncertainties, we cannot reasonably estimate the effect that the euro
conversion issue will have on our pricing or market strategies or the impact,
if any, it will have on our financial condition and results of operations.

    Since our inception, we have significantly increased our operating
expenses. We currently anticipate that we will continue to experience
significant growth in our operating expenses and that such expenses will be a
material use of our cash resources. Not including the estimated net proceeds we
expect to receive from this offering, we believe that our current cash, cash
equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. In the future, we may seek to raise additional funds
through public or private equity financing, or through other sources such as
credit facilities. The sale of additional equity securities could result in
dilution to our shareholders.

Microsoft Relationship

    In June 1997, we entered into a strategic agreement with Microsoft pursuant
to which we granted Microsoft a nonexclusive license to certain substantial
elements of the source code of our RealAudio/RealVideo Version 4.0 technology
and related RealNetworks trademarks for a license fee of $30.0 million. We are
recognizing revenue related to the agreement ratably over the three-year term
of our ongoing obligations.

    Microsoft may sublicense its rights to the licensed source code to third
parties under certain conditions without further compensation to RealNetworks.
In addition, Microsoft was granted an option to receive two additional
deliveries of updated versions of the source code. Microsoft's right to receive
the first delivery expired unexercised in July 1998. Microsoft may elect to
acquire an updated version of the source code once before July 1999, upon
payment of a license fee of $35.0 million. Under certain conditions, if we
license our source code to a third party, the agreement provides for a partial
refund of the license fee paid by Microsoft, based on a declining scale over
the three-year term of the agreement.

    In connection with the agreement, Microsoft made a $30.0 million minority
investment in RealNetworks in the form of 3.3 million shares of nonvoting
preferred stock. These shares were converted into nonvoting special common
stock concurrent with our initial public offering in November 1997. All shares
of special common stock automatically convert into two shares of common stock
upon sale or transfer by Microsoft to a third party not otherwise affiliated
with Microsoft. As of May 6, 1999, Microsoft had sold all 3.3 million shares of
its special common stock.

    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 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

                                       38


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.

Year 2000 Compliance

    The "Year 2000" problem exists because many existing computer programs use
only the last two digits to refer to a year. As a result, date-sensitive
computer programs may not be able to distinguish whether a two-digit date
designated as "00" refers to 1900 or 2000. This problem could cause system
failures or the creation of wrong information and disrupt our operations.

    We have developed a phased plan to achieve Year 2000 compliance for our
internal processing and operational systems and the current versions of our
software products. During the first quarter of 1999, we assessed the state of
our internal and external Year 2000 compliance. Currently, a plan to correct
problems found during the assessment is being developed and tested. During the
third quarter of 1999, we will implement this remediation plan, consisting of
upgrading and replacement of certain product versions, if necessary, and test
them for compliance.

    We have publicly made Year 2000 readiness disclosures stating that the
current versions of our products are "Year 2000 compliant." "Year 2000
compliant" means that software products and systems are able to function
properly before, during and after the year 2000 without loss of functionality
due to date changes. This assurance assumes that:

  .   our products are configured and used in accordance with the related
      documentation;

  .   the underlying operating system of the host machine for our products
      and any other software used with or in such host machine are also Year
      2000 compliant; and

  .   all other products, whether hardware, software, or firmware, used with
      one of our products properly exchange data with it.

    We are currently testing and will continue to test our products and systems
and may find errors or defects associated with Year 2000 date functions. We
have not tested our products on all platforms or all versions of operating
systems that we currently support. We believe that all of the current versions
of our products will be Year 2000 compliant by the end of 1999. We have not
specifically tested software obtained from third parties, such as licensed
software, shareware and freeware, that is incorporated into our products, but
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite our testing, testing by our current and potential customers,
and whatever assurances, if any, we may receive from developers of technology
incorporated into our products, our products and those of our vendors may
contain undetected errors or defects associated with Year 2000 date functions.

    We rely on third parties for services and supplies such as
telecommunications, Internet service and utilities. We are seeking confirmation
from such service providers that their systems are Year 2000 compliant.
Interruption of those services or supplies due to Year 2000 issues could
adversely affect our operations. We are also subject to external forces that
might generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions. We are
in the process of updating and upgrading our internal information systems.
Although the replacement of information systems is not in direct response to
Year 2000 concerns, we expect that all new internal information systems
implemented in 1999 will be Year 2000 compliant.

                                       39


    Known or unknown Year 2000 errors or defects in our internal systems and
products, lack of Year 2000 compliance by third-party software incorporated in
our products and/or interruption of services from our external service
providers due to Year 2000 problems could result in failure or disruption of
our products and operations, delay or loss of revenue, diversion of development
resources, damage to our reputation, claims or litigation and increased service
and warranty costs, any of which could impair our finances or business
prospects. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, we
are uncertain whether or to what extent we may be affected by it.

    We currently respond to customer concerns about our products on a case-by-
case basis. In addition, we have posted a web page on our primary website
indicating the Year 2000 status of our products. We believe that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues in a variety of ways, including the decision to delay purchasing our
products until the Year 2000. We believe that it is not possible to predict the
overall impact of these decisions.

    At this stage in our analysis and remediation process, it is difficult to
specifically identify the cause and the magnitude of any adverse economic
impact of the most reasonably likely worst case Year 2000 scenario. Our
reasonably likely worst case scenario would include the unavailability of our
major internal systems to our employees and the failure of our products to
operate properly, causing customers' systems and/or operations to fail or be
disrupted. This worst case scenario also would include the failure of key
vendors and/or suppliers to correct their own Year 2000 issues, which could
cause failure or disruption of our operations or products. If a worst case
scenario occurs, we may incur expenses to repair our systems or upgrade our
products, face interruptions in the work of our employees, lose advertising,
service and product license revenue, be unable to support the broadcast of
other companies' content over the Internet, be unable to deliver downloads of
our products, incur increased warranty and service expenses and suffer damage
to our reputation. In addition, customers may sue us or otherwise seek
compensation for their losses. We have agreed to indemnify certain customers
for claims and losses if our products are not Year 2000 compliant. Any or all
of the above events could harm our business.

    We have not yet fully developed a comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan
may itself be material. To date, we have not incurred significant expenditures
for our Year 2000 remediation efforts. Although we do not anticipate the costs
to address our Year 2000 issues to be material, the costs of Year 2000
remediation work and the date on which we plan to complete such work are based
on management's best estimates. These estimates are derived from assumptions
about future events, including the availability of certain resources, third-
party remediation plans and other factors. In addition, undetected errors or
the failure of such systems to be Year 2000 compliant could create significant
record-keeping and operational deficiencies. Accordingly, if Year 2000
modifications, evaluations, assessments and conversions are not made or are not
completed in time, the Year 2000 problem could harm our business.

                                       40


                                    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 60 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 60 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

                                       41


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.

                                       42


  .   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 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

    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. Our products
and services are designed to address the technological and market development
challenges that confront multimedia content providers and service providers and
enhance the experience of users by offering:

    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 60 million registered users of RealPlayer are
      registered users of our latest generation RealPlayer G2.

  .   Since its beta release on May 3, 1999, more than one 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.

                                       43


    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:

  .   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 60 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.

                                       44


  .   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.

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 60
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

                                       45


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 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.

                                       46


    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.

    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

                                       47


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.

 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.

                                       48


  .   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.

  .   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

                                       49


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.

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 quarter ended March 31,
1999, we expended approximately 34%, 41%, 32% and 31% 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 March 31, 1999, RealNetworks had 202 full-time employees, or
approximately 41% 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 March 31, 1999, we had 181 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.

                                       50


    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.

  .   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 quarter ended March 31, 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 quarter ended March 31, 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 March 31, 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

    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. 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

                                       51


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.

    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

    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

                                       52


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;

  .   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.

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 March 31, 1999, we had 490 full-time employees, 421 of whom were
based at our executive offices in Seattle, Washington, 43 of whom were based in
our foreign offices and 26 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.


                                       53


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 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.

                                       54


                                   MANAGEMENT

    The following are our current executive officers, corporate officers and
directors and their ages as of May 15, 1999:



Name                               Age                  Position
- ----                               ---                  --------
                                 
Executive Officers
  Robert Glaser...................  37 Chairman of the Board, Chief Executive
                                       Officer and Treasurer
  Phillip Barrett.................  46 Senior Vice President--Media Technologies
  Paul Bialek.....................  39 Senior Vice President--Finance and
                                       Operations and Chief Financial Officer
  Maria Cantwell..................  40 Senior Vice President--Consumer and
                                       E-Commerce
  Thomas Frank....................  35 Senior Vice President--Programming and
                                       Media Publishing
  Len Jordan......................  33 Senior Vice President--Media Systems

Corporate Officers
  Brian Aiken.....................  46 Vice President--Europe
  Alex Alben......................  40 Vice President--Music Group
  Mark Bretl......................  40 Vice President--Media Systems
  Steve Haworth...................  52 Vice President--Communications
  James Higa......................  41 Vice President--Asia/Rest of World
  Mark Klebanoff..................  37 Vice President--Business Development
  Kelly Jo MacArthur..............  34 Vice President--General Counsel and
                                       Secretary
  Jeff Mandelbaum.................  39 Vice President--North American Sales
  Shelley Morrison................  49 Vice President--Advertising Sales
  David Richards..................  34 Vice President--Consumer Products

Directors
  Edward Bleier...................  69 Director
  James Breyer....................  37 Director
  Bruce Jacobsen..................  39 Director
  Mitchell Kapor..................  48 Director


Executive Officers

    Robert Glaser has served as Chairman of the Board, Chief Executive Officer
and Treasurer of RealNetworks since its inception in February 1994. He also
serves as RealNetworks' Policy Ombudsman, with the exclusive authority to adopt
or change the editorial policies of RealNetworks as reflected on our websites
or in other communications or media in which RealNetworks has a significant
editorial or media voice. From 1983 to 1993, Mr. Glaser was employed at
Microsoft, most recently as Vice President of multimedia and consumer systems,
where he focused on the development of new businesses related to the
convergence of the computer, consumer electronics and media industries. Mr.
Glaser holds a B.A. and an M.A. in Economics and a B.S. in Computer Science
from Yale University.

    Phillip Barrett has served as Senior Vice President--Media Technologies of
RealNetworks since July 1998. From January 1997 to July 1998, Mr. Barrett
served as Senior Vice President--Media Systems of RealNetworks, and from
November 1994 to January 1997 he served as Vice President--Software
Development. From March 1986 to October 1994, Mr. Barrett served as a
Development

                                       55


Group Manager at Microsoft, where he led development efforts for Windows 386,
Windows 3.0 and Windows 3.1. Mr. Barrett holds an A.B. in Mathematics from
Rutgers University and an M.S. in Computer Sciences from the University of
Wisconsin, Madison.

    Paul Bialek has served as Senior Vice President--Finance and Operations and
Chief Financial Officer of RealNetworks since June 1998. From March 1997 to
June 1998, Mr. Bialek served as Chief Financial Officer and Vice President of
Finance and Operations of Metapath Software Corporation, a provider of
operational support systems for telecommunications companies. From 1993 to
March 1997, Mr. Bialek served in a variety of positions at Edmark Corporation,
a developer and publisher of multimedia educational software products, most
recently as Chief Financial Officer and Vice President of Finance and
Administration. Mr. Bialek started his career at KPMG LLP, where he was
employed in a variety of positions for 11 years. Mr. Bialek holds a B.A. in
Business Administration from Seattle University and is a certified public
accountant.

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

    Thomas Frank has served as Senior Vice President--Programming and Media
Publishing of RealNetworks since January 1999. From January 1995 to December
1998, Mr. Frank served as Senior Vice President of Dick Clark Productions,
responsible for television program development and production. From 1992 to
December 1995, Mr. Frank served as Vice President, Television Programming of
The Leo Burnett Company, and was responsible for client-sponsored programming.
Mr. Frank previously held positions with Carolco Television and Proctor &
Gamble Company. Mr. Frank holds a B.A. in English Literature from the
University of Cincinnati.

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

Corporate Officers

    Brian Aiken has served as Vice President--Europe of RealNetworks since June
1998. From February 1997 to June 1998, Mr. Aiken served as General Manager,
Europe of Intuit, Inc., a provider of personal finance, small business
accounting and tax preparation software. From June 1995 to January 1997, Mr.
Aiken served as General Manager, Central Europe of Continuous Software, Inc., a
maker of software configuration management solutions. From February 1993 to
June 1995, Mr. Aiken served as General Manager, Central Europe of Sunsoft, a
subsidiary of Sun Microsystems, Inc. Mr. Aiken holds a B.A. with First Class
Honours from Trinity College, University of Oxford.

    Alex Alben has served as Vice President--Music Group of RealNetworks since
August 1998 and Vice President--Media Publishing of RealNetworks from February
1998 to August 1998, with responsibility for our music and entertainment web
products. From March 1997 to February 1998, Mr. Alben was a consultant to
RealNetworks and to Film.com, Inc. From October 1993 to June 1995, Mr. Alben
served as Director of Business Affairs, and from June 1995 to February 1997,
Vice President of Business Affairs of Starwave Corporation, a creator and
producer of online sports, news and

                                       56


entertainment services. Mr. Alben served as Associate General Counsel in the
feature film division of Warner Bros. from 1992 to 1993, and previously served
as Director of Business Affairs of Orion Pictures. Mr. Alben graduated with
distinction from Stanford University and holds a J.D. from Stanford Law School.

    Mark Bretl joined RealNetworks in March 1998 and has served as Vice
President--Media Systems since June 1998. From 1994 to March 1998, Mr. Bretl
served as Chief Operating Officer of Vivo Software, Inc., a developer of
software based video conferencing systems and streaming media. From 1991 to
1994, Mr. Bretl was self-employed as a business consultant. From 1983 to 1991,
Mr. Bretl held a variety of positions with Tecmar, Inc., a developer and
manufacturer of PC and Macintosh computer peripherals, where he most recently
served as President and Chief Operating Officer. Mr. Bretl graduated magna cum
laude from the University of Wisconsin, Platteville, with a B.S. in Physics and
Computer Science.

    Steve Haworth has served as Vice President--Communications of RealNetworks
since January 1999. From 1987 to January 1999, Mr. Haworth served first as
Director, then as Vice President of Public Relations of the CNN News Group.
Previously, Mr. Haworth served as Vice President of A. Brown-Olmstead
Associates, an Atlanta public relations firm, taught political science at Agnes
Scott College in Decatur, GA and Emory University in Atlanta, Georgia, and was
an economist at the World Bank in Washington, DC. Mr. Haworth holds a B.A. in
economics from Yale University, an M.A. in International Affairs from George
Washington University and a Ph.D. in Government and Foreign Affairs from the
University of Virginia.

    James Higa has served as Vice President--Asia/Rest of World of RealNetworks
since September 1996. From January 1989 to August 1996, Mr. Higa served as the
Director for Asia/Pacific of NeXT Software, Inc. From 1986 to 1989, Mr. Higa
served as Director of Product Marketing of Apple Japan, Inc. Mr. Higa holds a
B.A. in Political Science from Stanford University.

    Mark Klebanoff has served as Vice President--Business Development of
RealNetworks since June 1998. Mr. Klebanoff joined RealNetworks in June 1996
and served as Vice President--Chief Financial Officer until June 1998. From May
1992 to June 1996, Mr. Klebanoff served as Vice President of Finance and
Operations of Industrial Systems, Inc., a client/server process information
management software vendor, which merged with Aspen Technology, Inc. in 1995.
From 1989 to 1992, Mr. Klebanoff worked in a number of general management
capacities for the Japanese trading company Itochu Corporation. Mr. Klebanoff
holds a Masters degree from the Yale School of Management and a B.A. with
Honors from Yale University.

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

    Jeff Mandelbaum has served as Vice President--North American Sales of
RealNetworks since April 1998. Mr. Mandelbaum is responsible for commercial,
government, channel and OEM sales in North America. From February 1987 to March
1998, Mr. Mandelbaum held a variety of positions with Sybase, Inc., a provider
of software products and consulting services for the delivery of integrated
business solutions. He served in various sales and sales management positions
at Sybase, and he most recently served as Chief Executive Officer and President
of Sybase Financial Services, Inc., a subsidiary of Sybase, prior to joining
RealNetworks. Mr. Mandelbaum is a graduate of the Executive Program in Business
Administration from the Columbia University School of Business.


                                       57


    Shelley Morrison has served as Vice President--Advertising Sales of
RealNetworks since January 1999. From 1995 to 1998, Ms. Morrison served as Vice
President of Advertising of Buena Vista Internet Group, a division of Disney,
where she was responsible for managing the advertising operations, client
services and the creative departments. From 1990 to 1995, Ms. Morrison served
as President of Shelley Morrison & Associates, an advertising and marketing
firm. From 1984 to 1990, Ms. Morrison served as the Director of Marketing of
the Seattle Supersonics in the NBA. Ms. Morrison holds a B.A. in Communications
from the University of Washington.

    David Richards joined RealNetworks in January 1997 and has served as Vice
President--Consumer Products since April 1999. From January 1992 to December
1996, Mr. Richards served as Group Product Manager, Client/Server Tools and
Group Manager, Internet Marketing of Sybase, Inc., a provider of software
products and consulting services for the delivery of integrated business
solutions. From April 1989 to December 1991, Mr. Richards served as Business
Development Manager and Director, Product Management of Symantec Corporation, a
utility software company. Mr. Richards holds a Bachelor of Commerce from the
University of British Columbia.

Directors

    Edward Bleier has been a director since April 1999. Since 1987, Mr. Bleier
has been President of Domestic PayTV, Cable and Network Features for Warner
Bros. Inc., a leading producer and distributor of movies, television
programming and animation. Mr. Bleier has held a variety of positions since
joining Warner Bros. in 1969, including Executive Vice President of Warner
Bros. Television. Mr. Bleier is the Chairman of the Steering Committee of the
bi-annual Aspen Institute Communications conferences for leaders of the
television, film and cable industries, a past President of the International
Radio & Television Society and a member of the Council on Foreign Relations.
Mr. Bleier holds a B.S. from Syracuse University and served in the U.S. Army,
specializing in psychological warfare and public information.

    James Breyer has been a director since October 1995. Mr. Breyer has served
as the Managing Partner of Accel Partners L.P. in Palo Alto/San Francisco since
1997 and as a general partner since 1990. At Accel Partners L.P., Mr. Breyer
has sponsored investments in over a dozen companies that have completed public
offerings or successful mergers. Previously, Mr. Breyer was a management
consultant at McKinsey & Company, Inc. and worked in product management and
marketing at Apple Computer, Inc. and Hewlett-Packard Company. Mr. Breyer is
also a director of Actuate Software Corporation and Mpath Interactive, Inc. Mr.
Breyer holds a B.S. from Stanford University and an M.B.A. from Harvard
University, where he was named a Baker Scholar.

    Bruce Jacobsen has served as a director since August 1997, and served as
President and Chief Operating Officer of RealNetworks from February 1996 to
November 1998. From April 1995 to February 1996, Mr. Jacobsen served as Chief
Operating Officer of Dreamworks Interactive, a joint venture between Microsoft
and Dreamworks SKG, a partnership among Steven Spielberg, Jeffery Katzenberg
and David Geffen. From August 1986 to April 1995, Mr. Jacobsen was employed at
Microsoft in a number of capacities, including General Manager of the
Kids/Games business unit. Mr. Jacobsen graduated summa cum laude with Honors
from Yale University and holds an M.B.A. from Stanford University.

    Mitchell Kapor has been a director since October 1995. Mr. Kapor has served
as a partner of Accel Partners L.P. since January 1999. From 1990 to 1993, Mr.
Kapor was President, from 1993 to 1995 he was Chairman and from 1995 to 1996 he
was a director of the Electronic Frontier Foundation, a nonprofit public
Internet organization that he cofounded in 1990. Mr. Kapor designed Lotus 123,
and founded Lotus Development Corporation in 1982, serving as its President and
Chief Executive Officer from April 1982 to July 1986. Mr. Kapor holds a B.A. in
Cybernetics from Yale University and an M.A. in Psychology from Beacon College.

                                       58


                              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
May 1, 1999, and as adjusted to reflect the sale of common stock offered by
such shareholder. As of May 1, 1999, there were 67,965,612 shares of common
stock outstanding, which includes 80,000 shares of common stock issuable upon
conversion of the 40,000 shares of special common stock outstanding on May 1,
1999. Beneficial ownership is determined in accordance with the rules of the
SEC. The number of shares beneficially owned by a person includes shares of
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of May 1, 1999. Such shares issuable
pursuant to such options are deemed outstanding for computing the percentage
ownership of the person holding such options but are not deemed outstanding for
the purposes of computing the percentage ownership of any other person.



                          Ownership Prior to                   Ownership After
                               Offering                           Offering
                         ---------------------              ---------------------
                         Number of             Shares Being Number of
    Beneficial Owner       Shares   Percentage   Offered      Shares   Percentage
    ----------------     ---------- ---------- ------------ ---------- ----------
                                                        
Robert Glaser(1)........ 28,071,042    41.3%     310,000    27,686,042    38.7%

Phillip Barrett(2)......  1,966,268     2.9       50,000     1,916,268     2.7

Glaser Family
 Foundation.............  1,280,320     1.9       75,000     1,205,320     1.7

Bruce Jacobsen(3).......  1,157,312     1.7       20,000     1,137,312     1.6

Maria Cantwell(4).......    337,800       *       20,000       317,800       *


- --------
 *   Less than 1% of the outstanding shares of common stock.
(1)  Includes 1,280,320 and 1,205,320 shares of common stock beneficially owned
     by the Glaser Family Foundation prior to this offering and after this
     offering, respectively. Mr. Glaser disclaims beneficial ownership of these
     shares.
(2)  Includes 560,000 shares subject to options currently exercisable or
     exercisable within 60 days of May 1, 1999.
(3)  Includes 992,912 shares subject to options currently exercisable or
     exercisable within 60 days of May 1, 1999.
(4)  Includes 197,800 shares subject to options currently exercisable or
     exercisable within 60 days of May 1, 1999.

                                 LEGAL MATTERS

    The validity of the securities offered by this prospectus will be passed
upon for RealNetworks by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Kirkland, Washington and Palo Alto, California. Certain legal
matters will be passed upon for the underwriters 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 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.

                                       59


                      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 this 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

                                       60


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                            Page
                                                                            ----
                                                                         
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




                                      F-1


                          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


                      REALNETWORKS, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS



                                                              Quarter Ended
                                 Year Ended December 31,        March 31,
                                ---------------------------  -----------------
                                 1996      1997      1998      1998     1999
                                -------  --------  --------  --------  -------
                                                               (unaudited)
                                  (in thousands, except per share data)
                                                        
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)
                                =======  ========  ========  ========  =======


          See accompanying notes to consolidated financial statements.

                                      F-3


                      REALNETWORKS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS



                                          December 31,
                                     --------------------------    March 31,
                                        1997          1998            1999
                                     ------------  ------------  -----------------
                                                                  (unaudited)
                                     (in thousands, except per share data)
                                                        
              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
                                     ============  ============   ============


          See accompanying notes to consolidated financial statements.


                                      F-4


                      REALNETWORKS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)



                                                         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)
                                                                            
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
                    =========   ======  ======  ====  ======   ====   ========      =====      ========       ========


         See accompanying notes to consolidated financial statements.

                                      F-5


                      REALNETWORKS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                               Quarter Ended
                                Year Ended December 31,          March 31,
                              -----------------------------  ------------------
                                1996      1997       1998      1998      1999
                              --------  ---------  --------  --------  --------
                                                                (unaudited)
                                             (in thousands)
                                                        
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  $    --


          See accompanying notes to consolidated financial statements.

                                      F-6


                      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.

  (c) Cash, Cash Equivalents and Short-Term Investments

    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


                      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:



                                                       December 31,
                                                      --------------- March 31,
                                                       1997    1998     1999
                                                      ------- ------- ---------
                                                             
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
                                                      ======= =======  =======


    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


                      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)


  (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


                      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)


  (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:



                                                                Quarter Ended
                                    Year Ended December 31,       March 31,
                                   ---------------------------  ---------------
                                    1996      1997      1998      1998    1999
                                   -------  --------  --------  --------  -----
                                                           
   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)
                                   =======  ========  ========  ========  =====



                                      F-10


                      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 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:



                                            Year Ended December  Quarter Ended
                                                    31,            March 31,
                                            -------------------- -------------
                                             1996   1997   1998   1998   1999
                                            ------ ------ ------ ------ ------
                                                         
   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


  (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


                      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)


  (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


                      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)


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

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

       

    The purchase price was allocated as follows:

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

       

    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

                                      F-13


                      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)

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 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.



                                                 Year Ended
                                                December 31,
                                               ----------------  Quarter Ended
                                                1997     1998    March 31, 1998
                                               -------  -------  --------------
                                                        
     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)


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.

  (c) Preferred 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


                      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)


    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


                      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)


    A summary of stock option related activity is as follows:



                                                        Options Outstanding
                                                        ----------------------
                                                                     Weighted
                                               Shares                 Average
                                              Available Number of    Exercise
                                              for Grant   Shares       Price
                                              --------- ----------   ---------
                                                            
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
                                               ======    =========


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



                       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
- ---------------  --------- ------------ -------- ----------  ---------
                                              
 $0.04-$ 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
                  ======                           =========



                                      F-16


                      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)

    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:



                                                    Year Ended December 31,
                                                   ---------------------------
                                                    1996      1997      1998
                                                   -------  --------  --------
                                                             
   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)


    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:



                                                                  Year Ended
                                                                 December 31,
                                                               ----------------
                                                               1996  1997  1998
                                                               ----  ----  ----
                                                                  
   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%


  (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


                      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)

    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:



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


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



                                                                December 31,
                                                              -----------------
                                                              1996 1997   1998
                                                              ---- -----  -----
                                                                 
   Current................................................... $--  $ 777  $(777)
   Deferred..................................................  --   (777)   777
                                                              ---- -----  -----
                                                              $--  $ --   $ --
                                                              ==== =====  =====


    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


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



                                                                  December 31,
                                                                 --------------
                                                                  1997   1998
                                                                 ------ -------
                                                                  
   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 $   --
                                                                 ====== =======


    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


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



                                                                 Quarter Ended
                                        Year Ended December 31,    March 31,
                                        ----------------------- ---------------
                                         1996    1997    1998    1998    1999
                                        ------- ------- ------- ------- -------
                                                         
   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
                                        ======= ======= ======= ======= =======


    Revenue from external customers by product type is as follows:



                                                                Quarter Ended
                                       Year Ended December 31,    March 31,
                                       ----------------------- ---------------
                                        1996    1997    1998    1998    1999
                                       ------- ------- ------- ------- -------
                                                        
   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
                                       ======= ======= ======= ======= =======


    Long-lived assets by geographic location are as follows:



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


                                      F-20


                      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)


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:



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


    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.

  (c) Litigation

    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

                                      F-21


                      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)

Company's 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. 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.



                                             Quarter Ended
                                    -----------------------------------
                                    Mar. 31  June 30  Sept. 30  Dec. 31   Total
                                    -------  -------  --------  -------  -------
                                                          
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)



                                      F-22


                      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)

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


                                  UNDERWRITING

    RealNetworks, the selling shareholders and the underwriters for the
offering named below have entered into an underwriting agreement with respect
to the shares being offered. Subject to certain conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and
Thomas Weisel Partners LLC are the representatives of the underwriters.



                                                                       Number of
              Underwriters                                              Shares
              ------------                                             ---------
                                                                    
      Goldman, Sachs & Co. ........................................... 1,280,000
      BancBoston Robertson Stephens Inc. .............................   484,000
      Donaldson, Lufkin & Jenrette Securities Corporation.............   484,000
      Lehman Brothers Inc. ...........................................   484,000
      Thomas Weisel Partners LLC......................................   484,000
      Bear, Stearns & Co. Inc. .......................................   112,000
      Credit Suisse First Boston Corporation..........................   112,000
      Friedman, Billings, Ramsey & Co., Inc. .........................   112,000
      Pacific Crest Securities........................................   112,000
      Ragen MacKenzie Incorporated....................................   112,000
      Warburg Dillon Read LLC.........................................   112,000
      Wasserstein Perella Securities, Inc. ...........................   112,000
                                                                       ---------
        Total......................................................... 4,000,000
                                                                       =========


    If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from RealNetworks to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.

    The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by RealNetworks and the selling
shareholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase 600,000 additional shares from
RealNetworks.



                                                           Paid by RealNetworks
                                                           ---------------------
                                                               No        Full
                                                            Exercise   Exercise
                                                           ---------- ----------
                                                                
      Per Share........................................... $     2.32 $     2.32
      Total............................................... $8,178,000 $9,570,000

                                                            Paid by the Selling
                                                               Shareholders
                                                           ---------------------
                                                               No        Full
                                                            Exercise   Exercise
                                                           ---------- ----------
                                                                
      Per Share........................................... $     2.32 $     2.32
      Total............................................... $1,102,000 $1,102,000


    Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $1.40 per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $0.10 per share from the initial
price to public. If all the shares are not sold at the initial price to public,
the representatives may change the offering price and the other selling terms.

                                      U-1


    RealNetworks, its executive officers and directors and the selling
shareholders have agreed with the underwriters not to dispose of or hedge any
of their common stock or securities convertible into or exchangeable for shares
of common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of the representatives.

    In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.

    The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

    These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

    RealNetworks estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $700,000.

    RealNetworks and the selling shareholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

    Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
40 filed public offerings of equity securities, of which 17 have been
completed, and has acted as a syndicate member in an additional 18 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with RealNetworks or any of its officers, directors or
other controlling persons, except with respect to its contractual relationship
with us pursuant to the underwriting agreement entered into in connection with
this offering.

                                      U-2


[Inside Back Cover of Prospectus]

Two photographs displaying RealNetworks' RealJukebox product and content
accessible through its "Get Music" feature.



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



                                                                          Page
                                                                          ----
                                                                       
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Special Note Regarding Forward-Looking Statements........................  23
Use of Proceeds..........................................................  24
Price Range of Common Stock..............................................  24
Dividend Policy..........................................................  24
Corporate Information....................................................  25
Capitalization...........................................................  26
Dilution.................................................................  26
Selected Consolidated Financial Data.....................................  27
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  28
Business.................................................................  41
Management...............................................................  55
Selling Shareholders.....................................................  59
Legal Matters............................................................  59
Experts..................................................................  59
Where You Can Find More Information......................................  60
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1


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                                4,000,000 Shares

                               RealNetworks, Inc.

                                  Common Stock

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


                             [LOGO OF REALNETWORKS]

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

                              Goldman, Sachs & Co.

                         BancBoston Robertson Stephens

                          Donaldson, Lufkin & Jenrette

                                Lehman Brothers

                           Thomas Weisel Partners LLC

                      Representatives of the Underwriters

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