UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

RealNetworks, Inc.

Washington		91-1628146
(State of incorporation)		(I.R.S. Employer Identification Number)
2601 Elliott Avenue, Suite 1000
Seattle, Washington		98121
(Address of principal executive offices)		(Zip Code)

(206) 674-2700
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

þ Large accelerated filer		o Accelerated filer		o Non-accelerated filer (Do not check if a smaller reporting company)		o Smaller reporting company

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The number of shares of the registrant’s Common Stock outstanding as of April 30, 2008 was 142,675,706.

 

 

TABLE OF CONTENTS

		Page
Part I. Financial Information
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			33
Part II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Default Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			43
Signature			44
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

		March 31,				December 31,
		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	478,737			$	476,697
Short-term investments			60,892				79,932
Trade accounts receivable, net of allowances for doubtful accounts and sales returns			72,718				84,674
Deferred costs, current portion			7,149				6,408
Prepaid expenses and other current assets			29,760				33,845
Total current assets			649,256				681,556
Equipment, software, and leasehold improvements, at cost:
Equipment and software			116,899				109,621
Leasehold improvements			30,789				30,632
Total equipment, software, and leasehold improvements, at cost			147,688				140,253
Less accumulated depreciation and amortization			89,401				83,756
Net equipment, software, and leasehold improvements			58,287				56,497
Restricted cash equivalents			15,518				15,509
Equity investments			9,125				9,976
Other assets			13,909				10,161
Deferred tax assets, net			41,176				40,913
Other intangible assets, net			97,904				107,677
Goodwill			347,848				353,153
Total assets		$	1,233,023			$	1,275,442
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	46,228			$	56,160
Accrued and other liabilities			100,800				114,136
Deferred revenue, current portion			40,308				39,564
Related party payable			8,299				17,241
Convertible debt			100,000				100,000
Accrued loss on excess office facilities, current portion			4,171				3,389
Total current liabilities			299,806				330,490
Deferred revenue, non-current portion			1,874				2,663
Accrued loss on excess office facilities, non-current portion			5,688				7,311
Deferred rent			4,637				4,518
Deferred tax liabilities, net, non-current portion			20,227				22,060
Other long-term liabilities			10,402				13,683
Total liabilities			342,634				380,725
Minority interest in Rhapsody America ($67.1 million redemption value at March 31, 2008)			14,678				19,613
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 1,000,000 shares; issued and outstanding 142,562 shares in 2008 and 142,298 shares in 2007			142				142
Additional paid-in capital			660,581				653,904
Accumulated other comprehensive income			9,236				17,732
Retained earnings			205,752				203,326
Total shareholders’ equity			875,711				875,104
Total liabilities and shareholders’ equity		$	1,233,023			$	1,275,442

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)

		Quarters ended
		March 31,
		2008				2007
Net revenue (A)		$	147,563			$	129,472
Cost of revenue (B)			55,393				45,943
Gross profit			92,170				83,529
Operating expenses:
Research and development			25,006				23,479
Sales and marketing			53,596				49,700
Advertising with related party			7,340				—
General and administrative			17,084				17,354
Restructuring costs			686				—
Subtotal operating expenses			103,712				90,533
Antitrust litigation benefit, net			—				(60,747	)
Total operating expenses, net			103,712				29,786
Operating (loss) income			(11,542	)			53,743
Other income (expenses):
Interest income, net			4,958				9,102
Equity in net loss of investments			(91	)			(132	)
Minority interest in Rhapsody America			8,615				—
Gain on sale of interest in Rhapsody America			3,726				—
Other income, net			768				467
Other income, net			17,976				9,437
Income before income taxes			6,434				63,180
Income taxes			(4,008	)			(23,219	)
Net income		$	2,426			$	39,961
Basic net income per share		$	0.02			$	0.25
Diluted net income per share		$	0.02			$	0.22
Shares used to compute basic net income per share			142,491				161,350
Shares used to compute diluted net income per share			154,736				178,053
Comprehensive (loss) income:
Net income		$	2,426			$	39,961
Unrealized holding losses on short-term and equity investments, net of income taxes			(434	)			(3,056	)
Foreign currency translation losses			(8,062	)			(2,927	)
Comprehensive (loss) income		$	(6,070	)		$	33,978

4

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Quarters Ended
		March 31,
		2008				2007
Cash flows from operating activities:
Net income		$	2,426			$	39,961
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			12,971				9,933
Stock-based compensation			5,489				5,685
Loss on disposal of equipment, software, and leasehold improvements			75				41
Equity in net loss of investments			91				132
Excess tax benefit from stock option exercises			(50	)			(294	)
Accrued loss on excess office facilities			(841	)			(943	)
Deferred income taxes			(939	)			(3,944	)
Minority interest			(8,615	)			—
Gain on sale of interest in Rhapsody America			(3,726	)			—
Other			32				26
Net change in certain operating assets and liabilities			(18,202	)			11,492
Net cash (used in) provided by operating activities			(11,289	)			62,089
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements			(7,203	)			(3,839	)
Purchases of short-term investments			(49,798	)			(55,432	)
Proceeds from sales and maturities of short-term investments			68,838				57,124
Purchases of other intangibles assets			—				(2,038	)
Decrease (increase) in restricted cash equivalents			(9	)			1,800
Payment of acquisition costs, net of cash acquired			(6,011	)			—
Proceeds from sales of equity investments			350				—
Net cash (used in) provided by investing activities			6,167				(2,385	)
Cash flows from financing activities:
Net proceeds from sale of common stock under employee stock purchase plan and exercise of stock options			1,072				3,776
Excess tax benefit from stock option exercises			50				294
Net proceeds from sales of interest in Rhapsody America			7,406				—
Repurchase of common stock			—				(78,481	)
Net cash (used in) provided by financing activities			8,528				(74,411	)
Effect of exchange rate changes on cash and cash equivalents			(1,366	)			687
Net increase (decrease) in cash and cash equivalents			2,040				(14,020	)
Cash and cash equivalents, beginning of period			476,697				525,232
Cash and cash equivalents, end of period		$	478,737			$	511,212
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	1,336			$	4,526
Supplemental disclosure of non-cash investing and financing activities:
Accrued acquisition consideration		$	—			$	4,364

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended March 31, 2008 and 2007

Note 1. Summary of Significant Accounting Policies

     Description of Business. RealNetworks, Inc. and subsidiaries (RealNetworks or Company) is a leading global provider of network-delivered digital media products and services. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.

     Inherent in the Company’s business are various risks and uncertainties, including limited history of certain of its product and service offerings and its limited history of offering premium subscription services on the Internet. The Company’s success will depend on the acceptance of the Company’s technology, products, and services and the ability to generate related revenue.

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

     On August 20, 2007, RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), created Rhapsody America LLC (Rhapsody America) to jointly own and operate a business-to-consumer digital audio music service. RealNetworks held a 51% interest in Rhapsody America as of March 31, 2008. Rhapsody America’s financial position and operating results have been consolidated into RealNetworks’ financial statements since its formation in August 2007. The minority interest’s proportionate share of income (loss) is included in Minority interest in Rhapsody America in the unaudited condensed consolidated statements of operations and comprehensive income. MTVN’s proportionate share of equity is included in Minority interest in Rhapsody America in the unaudited condensed consolidated balance sheet.

     The Company acquired 99.7% of WiderThan Co., Ltd. (WiderThan) during the quarter ended December 31, 2006. The Company acquired substantially all of the remaining shares of WiderThan during the quarter ended June 30, 2007. The accompanying unaudited condensed consolidated financial statements include 100% of the financial results of WiderThan from the date of acquisition. The minority interest in the earnings of WiderThan for the quarter ended March 31, 2007 was nominal.

     The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Company’s management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter ended March 31, 2008 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2008. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

     These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     Revenue Recognition. The Company recognizes revenue in accordance with the following authoritative literature: AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition; SOP No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements; SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts; SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements; Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent; and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Generally the Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the product or services have been delivered and collectibility of the resulting receivable is reasonably assured.

     Consumer subscription products are paid in advance, typically for monthly, quarterly or annual periods. Subscription revenue is recognized ratably over the related subscription period. Revenue from sales of downloaded individual tracks, albums and games are recognized at the time the music or game is made available, digitally, to the end user.

     The Company recognizes revenue under the residual method for multiple element software arrangements when vendor specific objective evidence (VSOE) exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the

delivered elements in the arrangement, under SOP No. 97-2. Under the residual method, at the outset of the arrangement with a customer, the Company defers revenue for the fair value of the arrangement’s undelivered elements such as post contract support (PCS), and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered, such as software licenses. VSOE for PCS is established on standard products for which no installation or customization is required based upon amount charged when PCS is sold separately. For multiple element software arrangements involving significant production, modification, or customization of the software, which are accounted for in accordance with the provisions of SOP No. 81-1, VSOE for PCS is established if customers have an optional renewal rate specified in the arrangement and the rate is substantive.

     The Company has arrangements whereby customers pay one price for multiple products and services and in some cases, involve a combination of products and services. For arrangements with multiple deliverables, revenue is recognized upon the delivery of the individual deliverables in accordance with EITF Issue No. 00-21. In the event that there is no objective and reliable evidence of fair value of the delivered items, the revenue recognized upon delivery is the total arrangement consideration less the fair value of the undelivered items. The Company applies significant judgment in establishing the fair value of multiple elements within revenue arrangements.

     The Company recognizes revenue on a gross or net basis in accordance with EITF Issue No. 99-19. In most arrangements, the Company contracts directly with end user customers, is the primary obligor and carries all collectibility risk. In such arrangements the Company reports revenue on a gross basis. In some cases, the Company utilizes third-party distributors to sell products or services directly to end user customers and carries no collectibility risk. In such instances the Company reports revenue on a net basis.

     Revenue generated from advertising on the Company’s websites and from advertising included in its products is recognized as revenue as the delivery of the advertising occurs.

     Accounting for Taxes Collected From Customers. The Company collects various types of taxes from its customers, assessed by governmental authorities, that are imposed on and concurrent with revenue-producing transactions. Such taxes are recorded on a net basis and are not included in net revenue of the Company.

     Accounting for Gains on Sale of Subsidiary Stock. The effects of any changes in the Company’s ownership interest resulting from the issuance of equity capital by consolidated subsidiaries are accounted for as either a gain or loss in the statement of operations pursuant to SAB No. 51, Accounting for the Sales of Stock of a Subsidiary. SAB No. 51 requires that the difference between the carrying amount of the parent’s investment in a subsidiary and the underlying net book value of the subsidiary after the issuance of stock by the subsidiary be reflected as either a gain or loss in the statement of operations if the appropriate recognition criteria has been met or reflected as an equity transaction. RealNetworks has elected to reflect SAB No. 51 gains or losses in its unaudited condensed statement of operations.

Note 2. Recent Accounting Pronouncements

     In December 2007, the Financial Accounting Standards Board defined above in Note 1 issued SFAS No. 141R, Business Combinations (SFAS 141R), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements of SFAS 141R are effective for the Company for periods beginning after December 15, 2008. The Company is in the process of evaluating this guidance and therefore has not yet determined the impact that SFAS 141R will have on the Company’s financial position or results of operations upon adoption.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160), which will change the accounting and reporting for minority interests and which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. The requirements of SFAS 160 are effective for the Company for periods beginning after December 15, 2008. The Company is in the process of evaluating this guidance and therefore has not yet determined the impact that SFAS 160 will have on the Company’s financial position or results of operations upon adoption.

Note 3. Stock-Based Compensation

     The Company accounts for stock-based compensation in accordance with SFAS No. 123R – revised 2004, Share-Based Payment (SFAS 123R). Under the fair value provisions of the statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under SFAS 123R. The Company recognizes compensation cost related to stock options granted prior to the adoption of SFAS 123R on an accelerated basis over the applicable

vesting period using the methodology described in FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The Company recognizes compensation cost related to options granted subsequent to the adoption of SFAS 123R on a straight-line basis over the applicable vesting period.

     The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, including the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock for the related expected term and the implied volatility of its traded options. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected term of the stock options. The Company has not paid dividends in the past.

     The fair value of options granted was determined using the Black-Scholes model and the following weighted average assumptions:

		Quarters Ended
		March 31,
		2008				2007
Expected dividend yield			0	%			0	%
Risk-free interest rate			2.45	%			4.7	%
Expected life (years)			4.2				4.1
Volatility			45	%			42	%

     Recognized stock-based compensation expense is as follows (in thousands):

		Quarters Ended
		March 31,
		2008				2007
Cost of service revenue		$	234			$	159
Research and development			1,913				1,772
Sales and marketing			1,908				2,387
General and administrative			1,434				1,367
Total stock-based compensation expense		$	5,489			$	5,685

     No stock-based compensation was capitalized as part of the cost of an asset during the quarters ended March 31, 2008 and 2007. As of March 31, 2008, $44.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options is expected to be recognized over a weighted-average period of 2.8 years.

Note 4. Rhapsody America

Formation

     On August 20, 2007, RealNetworks and MTVN created Rhapsody America to jointly own and operate a business-to-consumer digital audio music service. Under the Rhapsody America venture agreements:

	•		RealNetworks contributed its Rhapsody service subscribers, RadioPass subscribers, cash of $16.4 million, contracts, revenue from existing Rhapsody subscribers, marketing materials, player hardware, rhapsody.com and related URLs, certain liabilities, and distribution arrangements in exchange for a 51% equity interest in Rhapsody America. RealNetworks also licensed certain assets to Rhapsody America, including Rhapsody content, Rhapsody technology, the Rhapsody brands and related materials.
	•		MTVN contributed its URGE service subscribers, cash, contracts, marketing materials, and revenue from existing URGE subscribers, certain liabilities, plus the note payable described below, in exchange for a 49% equity interest in Rhapsody America. MTVN has also licensed certain assets to Rhapsody America, including URGE content, brands and related materials.
	•		In addition to the assets described above, MTVN also contributed a $230 million five-year note payable in consideration for acquiring MTVN’s interest in the venture. Rhapsody America must use the proceeds from the note solely to purchase advertising from MTVN. As MTVN makes payments on the note, Rhapsody America records equity and RealNetworks realizes an immediate appreciation in the carrying value of the Company’s interests in the venture and recognizes a gain if the gain is reasonably assured in accordance with SAB 51. MTVN made payments of $7.2 million during the quarter ended March 31, 2008 and RealNetworks realized and recorded a gain of $3.7 million as a result as all of the SAB 51 gain criteria were met. As of March 31, 2008, $32.2 million in payments were made on the note since the formation of Rhapsody America.

     The assets and liabilities contributed by RealNetworks to Rhapsody America have been recorded at their historical cost basis as RealNetworks maintained a controlling interest in the assets and liabilities. The assets and liabilities contributed by MTVN to Rhapsody America have been recorded at their estimated fair values in the unaudited condensed consolidated balance sheet as of March 31, 2008. MTVN’s contribution included identifiable intangible assets with estimated fair values of $7.6 million. The respective estimated fair values were determined by management as of the date of the acquisition. RealNetworks realized an immediate appreciation in the carrying value of its interests in Rhapsody America and recognized a gain on sale of music interests upon formation of $3.9 million under SAB 51 as all of the gain criteria were met.

     A summary of the intangible assets contributed by MTVN is as follows (in thousands):

Trade Name and Trademarks		$	4,000
Existing Technology			1,900
Existing Subscribers			1,680
Total Identifiable Intangible Assets		$	7,580

     The identified intangible assets have a weighted average estimated useful life of 4.1 years. All of the intangible assets are being amortized over their estimated useful lives on a straight line basis.

     As agreed to during the initial formation of Rhapsody America, RealNetworks and MTVN provided additional funding in the quarter ended December 31, 2007, for future operations of $17.4 and $16.7 million, respectively.

Call/Put Rights

     Pursuant to the terms of the Rhapsody America limited liability company agreement, RealNetworks has the right to purchase from MTVN, and MTVN has a right to require RealNetworks to purchase, MTVN’s interest in Rhapsody America. The Company has evaluated the terms of the call and put rights under applicable accounting literature, including SFAS No. 133, Accounting for Derivatives and Hedging Activities, and SFAS No. 150, Accounting for Certain financial Instruments with Characteristics of Both Liabilities and Equity, and concluded that neither of these rights represent freestanding financial instruments or derivatives that should be accounted for separately.

     These call and put rights are exercisable upon the occurrence of certain events any time after January 1, 2011 and during certain periods in each of 2012, 2013 and 2014 and every two years thereafter and are not exercisable any time prior to January 1, 2011. If MTVN exercises its put right, RealNetworks has the right to pay a portion of the purchase price for MTVN’s interest in cash and shares of RealNetworks capital stock, subject to certain maximum amounts with the balance (if any) paid with a note. If RealNetworks exercises its call right, MTVN has the right to demand payment of part of the purchase price for its membership interest in shares of RealNetworks’ capital stock. If a portion of the purchase price for MTVN’s interest is payable in shares of RealNetworks’ capital stock, such shares could consist of our common stock representing up to 15% of the outstanding shares of RealNetworks’ common stock immediately prior to the transaction, and shares of our non-voting stock representing up to an additional 4.9% of the outstanding shares of RealNetworks’ common stock immediately prior to the transaction representing a maximum of 19.9% of RealNetworks’ capital stock. If RealNetworks pays a portion of the purchase price for MTVN’s membership interest in shares of RealNetworks’ common stock and non-voting stock, RealNetworks other shareholders’ voting and economic interests in RealNetworks could be diluted and MTVN will become one of RealNetworks’ significant shareholders.

     The redemption prices of MTVN’s interest in Rhapsody America under both the call and put rights are calculated based on the provisions within the limited liability agreement and are impacted by the total appraised value of Rhapsody America and assume repayment of the $230 million five-year note payable from MTVN. Once the call right becomes exercisable, the redemption price of MTVN’s interest in Rhapsody America under the call right will be equal to the greater of $230 million or the appraised value of MTVN’s interest in Rhapsody America at the redemption date. Once the put right becomes exercisable, the redemption price of MTVN’s interest in Rhapsody America under the put right will be equal to, upon the occurrence of certain events, the appraised value of MTVN’s interest in Rhapsody America at the redemption date or will be based on a formula that is intended to approximate the appraised value at the redemption date. The hypothetical current redemption price of MTVN’s interest in Rhapsody America under the put right at March 31, 2008 is $67.1 million. The current redemption price has been adjusted under the formula in the limited liability agreement for the remaining outstanding amounts due of $197.8 million on the note payable as of March 31, 2008.

Note 5. Fair Value Measurements

     Effective January 1, 2008, the Company implemented SFAS No. 157, Fair Value Measurement (SFAS 157), for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.  In accordance with the provisions of FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, the Company elected to defer implementation of SFAS 157 as it relates to its non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. The Company is evaluating the impact, if any, this Standard will have on its non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis.

     The adoption of SFAS 157 with respect to financial assets and liabilities and non-financial assets and liabilities that are re-measured and reported at fair value at least annually did not have an impact on the financial results of the Company in the first quarter of 2008.  The Company will continue to evaluate the impact, if any, that the implementation of this standard will have on its financial statements as it relates to its non-financial assets and liabilities.

     SFAS No. 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:

	•		Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities
	•		Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
	•		Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions

The following table presents information about the Company’s financial assets that have been measured at fair value as of March 31, 2008 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value. 

						Fair Value Measurements as of March 31, 2008
(in thousands)		Total				Level 1				Level 2				Level 3
Cash equivalents
Money market funds		$	393,484			$	393,484			$	—			$	—
Short-term investments
Corporate notes and bonds			33,074				33,074				—				—
U.S. government agency securities			27,818				27,818				—				—
Equity investments
Publicly traded investments			7,249				7,249				—				—
		$	461,625			$	461,625			$	—			$	—

Investments in marketable securities classified as short-term investments and equity investments of public companies are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The Company carries its equity investments in private companies at cost and are excluded from the provisions of SFAS 157. The Company has consistently applied these valuation techniques in all periods presented.

Note 6.		Cash, Cash Equivalents, Trading Securities, Short-Term Investments, and Restricted Cash Equivalents

     Cash, cash equivalents, trading securities, short-term investments, and restricted cash equivalents as of March 31, 2008 consist of the following (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Cash and cash equivalents:
Cash		$	85,253			$	—			$	—			$	85,253
Money market mutual funds			393,484				—				—				393,484
Total cash and cash equivalents:			478,737				—				—				478,737
Short-term investments:
Corporate notes and bonds			34,058				41				(1,025	)			33,074
U.S. Government agency securities			27,588				230				—				27,818
Total short-term investments:			61,646				271				(1,025	)			60,892
Total cash, cash equivalents and short-term investments		$	540,383			$	271			$	(1,025	)		$	539,629
Restricted cash equivalents		$	15,518			$	—			$	—			$	15,518

     Cash, cash equivalents, short-term investments, and restricted cash equivalents as of December 31, 2007 consist of the following (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Cash and cash equivalents:
Cash		$	105,615			$	—			$	—			$	105,615
Money market mutual funds			198,148				—				—				198,148
Corporate notes and bonds			172,934				—				—				172,934
Total cash and cash equivalents			476,697				—				—				476,697
Short-term investments:
Corporate notes and bonds			43,552				—				(981	)			42,571
U.S. Government agency securities			37,296				65				—				37,361
Total short-term investments			80,848				65				(981	)			79,932
Total cash, cash equivalents, and short-term investments		$	557,545			$	65			$	(981	)		$	556,629
Restricted cash equivalents		$	15,509			$	—			$	—			$	15,509

     At March 31, 2008 and December 31, 2007, restricted cash equivalents represent cash equivalents pledged as collateral against two letters of credit for a total of $15.5 million in connection with two lease agreements.

     Realized gains or losses on sales of available-for-sale securities for the quarters ended March 31, 2008 and 2007 were not significant.

     Changes in estimated fair values of short-term investments are primarily related to changes in interest rates and are considered to be temporary in nature.

     The contractual maturities of available-for-sale investments at March 31, 2008 are as follows (in thousands):

		Amortized				Estimated
		Cost				Fair Value
Within one year		$	41,221			$	41,479
Between one year and five years			20,425				19,413
Total available-for-sale investments		$	61,646			$	60,892

Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns

     Activity in the allowance for doubtful accounts receivable and sales returns is as follows (in thousands):

		Allowance For
		Doubtful
		Accounts				Sales
		Receivable				Returns
Balances, December 31, 2007		$	1,117			$	1,338
Additions charged to expenses/revenue			228				643
Amounts written off			(51	)			(762	)
Balances, March 31, 2008		$	1,294			$	1,219

     As of March 31, 2008 and December 31, 2007 one international customer accounted for 14% and 19%, respectively, of trade accounts receivable. The same international customer accounted for 12% of total revenue during the quarter ended March 31, 2007. No one customer accounted for more than 10% of total revenue during the quarter ended March 31, 2008.

Note 8. Equity Investments

     As of March 31, 2008 and December 31, 2007, the carrying value of equity investments in publicly traded companies primarily relates to J-Stream Inc. (J-Stream), a Japanese media services company, of which the Company owns approximately 10.6% of the outstanding shares. These equity investments are accounted for as available-for-sale and the increase over the cost basis, net of income taxes, is reflected as a component of accumulated other comprehensive income.

     Summary of equity investments is as follows (in thousands):

		March 31, 2008								December 31, 2007
						Carrying								Carrying
		Cost				Value				Cost				Value
Publicly traded investments		$	933			$	7,249			$	933			$	8,085
Privately held investments			2,740				1,876				2,740				1,891
Total equity investments		$	3,673			$	9,125			$	3,673			$	9,976

Note 9. Other Intangible Assets

     Other intangible assets at March 31, 2008 consist of the following (in thousands):

		Gross				Accumulated
		Amount				Amortization				Net
Customer relationships		$	77,553			$	18,169			$	59,384
Developed technology			47,847				20,766				27,081
Patents, trademarks and tradenames			13,728				5,812				7,916
Service contracts and other			6,648				3,125				3,523
Total other intangible assets		$	145,776			$	47,872			$	97,904

     Other intangible assets at December 31, 2007 consist of the following (in thousands):

		Gross				Accumulated
		Amount				Amortization				Net
Customer relationships		$	80,435			$	15,273			$	65,162
Developed technology			48,173				18,539				29,634
Patents, trademarks and tradenames			13,833				5,000				8,833
Service contracts and other			6,815				2,767				4,048
Total other intangible assets		$	149,256			$	41,579			$	107,677

     Amortization expense related to other intangible assets during the quarters ended March 31, 2008 and 2007 was $6.7 million and $5.7 million, respectively.

     As of March 31, 2008, estimated future amortization of other intangible assets is as follows (in thousands):

2008 (remaining nine months)		$	19,547
2009			23,622
2010			18,770
2011			13,135
2012			11,981
Thereafter			10,849
Total		$	97,904

Note 10. Goodwill

     Changes in goodwill are as follows (in thousands):

Balance, December 31, 2007		$	353,153
Decreases for the reduction of liabilities assumed related to the acquisition of Sony NetServices GmbH			(538	)
Effects of foreign currency translation			(4,767	)
Balance, March 31, 2008		$	347,848

Note 11. Accrued and Other Liabilities

     Accrued and other liabilities consist of (in thousands):

		March 31,				December 31,
		2008				2007
Royalties and other fulfillment costs		$	36,750			$	37,554
Employee compensation, commissions and benefits			21,457				21,639
Income taxes payable			892				1,819
Sales, VAT and other taxes payable			15,168				18,156
Legal fees and contingent legal fees			2,739				3,439
Other			23,794				31,529
Other		$	100,800			$	114,136

Note 12. Loss on Excess Office Facilities

     The accrued loss of $9.9 million for estimated future losses on excess office facilities located near the Company’s corporate headquarters in Seattle Washington at March 31, 2008, is shown net of expected future sublease income of $7.1 million, which was committed under sublease contracts at the time of the estimate. The Company regularly evaluates the market for office space in the cities where it has operations. If the market for such space declines further in future periods, the Company may have to revise its estimates further, which may result in additional losses on excess office facilities.

     A summary of activity for accrued loss on excess office facilities is as follows (in thousands):

Accrued loss on excess office facilities, December 31, 2007		$	10,700
Less amounts amortized from the accrued loss on excess office facilities			(841	)
Accrued loss on excess office facilities, March 31, 2008			9,859
Less current portion			4,171
Accrued loss on excess office facilities, non-current portion		$	5,688

Note 13. Repurchase of Common Stock

     No shares were authorized to be repurchased during the quarter ended March 31, 2008. During the quarter ended March 31, 2007, the Company purchased 9.8 million shares at an average cost of $7.99 per share for an aggregate value of $78.5 million.

Note 14. Earnings Per Share

     Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive potential common shares outstanding during the period. Share count used to compute basic and diluted net income per share is calculated as follows (in thousands):

		Quarters Ended
		March 31,
		2008				2007
Weighted average common shares outstanding used to compute basic net income per share			142,491				161,350
Dilutive potential common shares:
Stock options and restricted stock			1,495				5,953
Convertible debt			10,750				10,750
Shares used to compute diluted net income per share			154,736				178,053

     During the quarters ended March 31, 2008 and 2007, 36.8 million and 15.6 million, respectively, shares of common stock potentially issuable from stock options are excluded from the calculation of diluted net income per share because of their antidilutive effect.

Note 15. Commitments and Contingencies

     Borrowing Arrangements. The Company’s subsidiary, WiderThan, has entered into two lines of credit with two Korean domestic banks with an aggregate maximum available limit of $3.3 million at interest rates of approximately 1.6% over the rate earned on the underlying deposits. WiderThan has entered into a separate line of credit with a Korean domestic bank with maximum available limit of $1.1 million bearing interest at 6.0%. During the quarter ended March 31, 2008, the Company did not draw on these lines of credit and there were no balances outstanding as of March 31, 2008 and December 31, 2007.

     The Company’s subsidiary, WiderThan, uses corporate charge cards issued by a Korean domestic bank with an aggregate line of credit of up to $5.0 million. The charged amounts are generally payable in the following month depending on the billing cycle and are included in accounts payable in the accompanying unaudited condensed consolidated balance sheets. In general, the term of the arrangement is one year, with automatic renewal in April of each year. The arrangement may be terminated in writing by mutual agreement between the bank and the Company. The Company is not subject to any financial or other restrictive covenants under the terms of this arrangement.

     The Company’s subsidiary, WiderThan, has a letter of credit of up to $5.0 million with a Korean domestic bank for importing goods, with one-year maturity (renewable every April), which bears interest at 2.5% over the London Inter-Bank Offer Rate (LIBOR). Borrowings under this letter of credit are collateralized by import documents and goods being imported under such documentation. To the extent that the Company has any outstanding balance, the Company is subject to standard covenants and notice requirements under the terms of this facility, such as covenants to consult with the lender prior to engaging in certain events, which include, among others, mergers and acquisitions or sale of material assets or to furnish certain financial and other information. The Company is not, however, subject to any financial covenant requirements or other restrictive covenants that restrict the Company’s ability to utilize this facility or to obtain financing elsewhere. During the quarter ended March 31, 2008 the Company did not draw on the letter of credit and there was no balance outstanding as of March 31, 2008 or December 31, 2007.

     The Company’s subsidiary, WiderThan, has purchased guarantees amounting to $0.6 million from Seoul Guarantee Insurance which guarantees payments for one year under certain supply contracts the Company has with a customer in Korea.

     Litigation. In August 2005, a lawsuit was filed against the Company in the U.S. District Court for the District of Maryland by Ho Keung Tse, an individual residing in Hong Kong. The suit alleges that certain of the Company’s products and services infringe the plaintiff’s patent relating to “the distribution of digital files, including sound tracks, music, video and executable software in a manner which restricts unauthorized use.” The plaintiff seeks to enjoin the Company from the allegedly infringing activity and to recover treble damages for the alleged infringement. The Company’s co-defendants were granted a motion to transfer the lawsuit from the District of Maryland to the Northern District of California in 2006, and on October 4, 2007, the district court for the Northern District of California granted the motion to stay the case pending reexamination of the proceedings. The Company disputes the plaintiff’s allegations in the action and intends to vigorously defend itself.

     In June 2003, a lawsuit was filed against the Company and Listen.com, Inc. (Listen) in federal district court for the Northern District of Illinois by Friskit, Inc. (Friskit), alleging that certain features of the Company’s and Listen’s products and services willfully infringe certain patents relating to allowing users “to search for streaming media files, to create custom playlists, and to listen to the streaming media file sequentially and continuously.” Friskit sought to enjoin the Company from the alleged infringing activity and to recover treble damages from the alleged infringement. The court granted the Company’s motion for summary judgment on July 26, 2007, and invalidated all claims on grounds of obviousness. Friskit has appealed the court’s ruling.

     In December 2003, the Company filed suit against Microsoft Corporation (Microsoft) in the U.S. District Court for the Northern District of California, pursuant to U.S. and California antitrust laws, alleging that Microsoft has illegally used its monopoly power to restrict competition, limit consumer choice, and attempt to monopolize the field of digital media. On October 11, 2005, the Company and Microsoft entered into a settlement agreement pursuant to which the Company agreed to settle all antitrust disputes worldwide with Microsoft, including the U.S. litigation. Upon settlement of the legal disputes, the Company and Microsoft entered into two commercial agreements that provide for collaboration in digital music and casual games. The combined contractual payments related to the settlement agreement and the two commercial agreements to be made by Microsoft to the Company over the terms of the agreements are $761.0 million. The Company had received such payments in full as of March 31, 2007.

     In April 2007, the Copyright Royalty Board (CRB) issued a decision setting new royalty rates for the use of sound recordings in Internet radio from 2006 through 2010. These rates are still under appeal and are subject to industry-wide settlement negotiations, in some of which the Company is a participant. Additionally, the CRB is currently holding hearings that will determine mechanical royalty rates associated with the statutory license for digital phonorecord deliveries, including tethered downloads. These rates are also subject to industry-wide settlement negotiations. Finally, the Company is involved in a proceeding in the Southern District of New York that will determine a royalty rate for the public performance of music contained in the ASCAP catalogue. In April 2008, the district court issued a preliminary ruling that sets forth, among other things, a methodology to be used to calculate the royalties owed to ASCAP. The methodology to be used to calculate the royalties is incomplete and contains elements that require negotiation and agreement by the parties in addition to further hearings and decisions by the district court. Accordingly, it is too soon to tell what ultimate effect the district court's preliminary ruling will have on the Company or what additional royalty amounts, if any, might ultimately be payable to ASCAP. Any of these three proceedings may result in higher rates or other terms that are unfavorable to the Company. Due to the uncertainties previously described, the Company is unable to reasonably estimate the amount of possible additional liabilities associated with the resolution of these matters beyond what has been previously recorded.

     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 employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. These claims, including those described above, even if not meritorious, could force the Company to spend significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that the Company believes will have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition or results of operations. However, the Company may incur substantial expenses in defending against third-party claims and certain pending claims are moving closer to trial. The Company expects that its potential costs of defending these claims may increase as the disputes move into the trial phase of the proceedings. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability, and/or be required to change its business practices. Either of these could have a material adverse effect on the Company’s financial position and results of operations.

Note 16. Segment Information

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way in which public companies disclose certain information about operating segments in their financial reports. After the formation of Rhapsody America in August 2007, the Company has defined three reportable segments consistent with SFAS No. 131, based on factors such as how the Company manages its operations and how its Chief Operating Decision Maker reviews results. The Company’s Chief Operating Decision Maker is considered to be the Company’s CEO Staff (CEOS), which is comprised of the Company’s Chief Executive Officer, Chief Financial Officer, President and Senior Vice Presidents. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis, accompanied by disaggregated information about products and services and geographical regions for purposes of making decisions and assessing financial performance. The CEOS reviews discrete financial information regarding profitability of the Company’s Music, Consumer and Technology Products and Solutions segments and,

therefore, the Company reports these as operating segments as defined by SFAS No. 131. The accounting policies used to derive segment results are generally the same as those described in Note 1.

     The Music segment includes the operations of Rhapsody America as well as the aspects of our music business not included as part of Rhapsody America. The revenue and costs from these businesses include: digital media subscription services such as Rhapsody and RadioPass; and sales of digital music and advertising. These products and services are sold and provided primarily through the Internet and the Company charges customers’ credit cards at the time of sale. Billing periods for subscription services typically occur monthly, quarterly or annually, depending on the service purchased.

     The Consumer segment primarily includes revenue and costs from: the sale of individual games through the Company’s RealArcade service and its Games related websites; the Company’s GamePass and FunPass subscription service; the Company’s SuperPass and stand-alone premium video subscription services; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to the Company’s Music business. These products and services are sold and provided primarily through the Internet and the Company charges customers’ credit cards at the time of sale. Billing periods for subscription services typically occur monthly, quarterly or annually, depending on the service purchased.

     The Technology Products and Solutions segment includes revenue and costs from: sales of ringback tone, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer (OEM) channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers. These products and services are primarily sold to corporate customers.

     Amounts that are not included within the above segment descriptions are shown below as Reconciling Amounts. Included within these amounts are items such as interest income and net antitrust litigation benefit.

     Segment income (loss) before income taxes for the quarter ended March 31, 2008 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	38,079			$	58,207			$	51,277			$	—			$	147,563
Cost of revenue			21,519				12,613				21,261				—				55,393
Gross profit			16,560				45,594				30,016				—				92,170
Operating expenses			32,971				37,632				32,186				923				103,712
Operating income (loss)			(16,411	)			7,962				(2,170	)			(923	)			(11,542	)
Total non-operating income, net			12,341				—				—				5,635				17,976
Income (loss) before income taxes		$	(4,070	)		$	7,962			$	(2,170	)		$	4,712			$	6,434

     Segment income (loss) before income taxes for the quarter ended March 31, 2007 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	34,127			$	50,913			$	44,432			$	—			$	129,472
Cost of revenue			18,875				9,128				17,940				—				45,943
Gross profit			15,252				41,785				26,492				—				83,529
Operating expenses			24,949				32,907				30,538				(58,608	)			29,786
Operating income (loss)			(9,697	)			8,878				(4,046	)			58,608				53,743
Total non-operating income, net			—				—				—				9,437				9,437
Income (loss) before income taxes		$	(9,697	)		$	8,878			$	(4,046	)		$	68,045			$	63,180

     The Company’s customers consist primarily of end users located in the U.S., Republic of Korea, and various foreign countries. Revenue by geographic region is as follows (in thousands):

		Quarters Ended
		March 31,
		2008				2007
United States		$	99,169			$	84,554
Europe			24,167				17,710
Republic of Korea			13,320				18,399
Rest of the World			10,907				8,809
Total net revenue		$	147,563			$	129,472

     Long-lived assets, consisting of equipment, software, leasehold improvements, other intangible assets, and goodwill by geographic region are as follows (in thousands):

		March 31,				December 31,
		2008				2007
United States		$	186,152			$	186,665
Republic of Korea			218,010				235,728
Europe			91,896				87,181
Rest of the World			7,943				7,753
Total long-lived assets		$	504,001			$	517,327

     Net assets by geographic location are as follows (in thousands):

		March 31,				December 31,
		2008				2007
United States		$	580,004			$	576,994
Republic of Korea			215,000				228,153
Europe			85,696				79,410
Rest of the World			9,651				10,160
Total net assets		$	890,351			$	894,717

     Goodwill is assigned to the Company’s segments as follows (in thousands):

		March 31,				December 31,
		2008				2007
Music		$	37,029			$	37,029
Consumer			132,827				129,621
Technology products and solutions			177,992				186,503
Total goodwill		$	347,848			$	353,153

Note 17. Related Party Transactions

     Transactions with MTVN. As part of the formation of Rhapsody America, MTVN contributed a $230 million five-year note payable in partial consideration for acquiring MTVN’s interest in the venture. Rhapsody America is obligated to purchase $230 million in advertising and related integrated marketing on MTVN network properties over a five-year period. During the quarter ended March 31, 2008, Rhapsody America received $7.2 million in cash as a note payment and has spent $7.3 million in advertising with

MTVN. During the year ended December 31, 2007, Rhapsody America received $25.0 million in cash as a note payment and has spent $24.4 million in advertising with MTVN.

     MTVN provides various support services directly to Rhapsody America for which it bills the venture directly. Included within the support services are items such as facilities, personnel and overhead which are allocated based on various measures depending on the service provided, including employee headcount, or number of users of a service. MTVN charged costs for the support services, revenue and related costs for the quarter ended March 31, 2008 was $0.3 million. This amount is included in the consolidated financial statements within the related party payable of $8.3 million as of March 31, 2008.

     The Company also agreed to grant options to acquire shares of RealNetworks, Inc. common stock to Rhapsody America employees as part of the venture with MTVN and has included the expense associated with these options in its statement of operations and comprehensive income. MTVN’s share of the expense associated with the stock options granted to Rhapsody America employees is calculated based on its ownership percentage and is billed directly by the Company to MTVN under a separate agreement. The Company has charged $0.2 million to MTVN related to stock options since the formation of the venture. This amount was paid in full by MTVN prior to March 31, 2008.

     RealNetworks also provides various support services, including items such as facilities, information technology systems, personnel and overhead, directly to Rhapsody America. The allocation of other support service costs are based on various measures depending on the service provided, including employee headcount, time employees spend on providing services to Rhapsody America, server usage or number of users of a service. The allocations of these costs are billed directly to Rhapsody America. RealNetworks has treated these allocations as intercompany transactions and all such transactions were eliminated in consolidation.

Note 18. Subsequent Events

     In May 2008 the Board of Directors of the company authorized a new share repurchase program for the repurchase of up to an aggregate of $50.0 million of the Company’s outstanding common stock. No shares have been repurchased under the May 2008 program.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements with respect to:

	•		future revenues, income taxes, tax benefits, net income per diluted share, acquisition costs and related amortization, and other measures of results of operations;
	•		the effects of our acquisitions, including WiderThan, Sony NetServices GmbH and Exomi Oy, and our position as a technology services provider for leading wireless carriers;
	•		plans, strategies and expected opportunities for growth, increased profitability and innovation in 2008 and future years;
	•		the creation of new strategic partnerships and broadening of existing strategic partnerships and the advantages and growth we will achieve as a result of such partnerships (including in connection with our Games, Music and Technology Products and Solutions businesses);
	•		the expected growth and profitability of our Technology Products and Solutions business;
	•		the governance, management, accounting and integration of our Rhapsody America venture;
	•		the dilutive impact on our shareholders if the call or put rights contained in the limited liability agreement for Rhapsody America are exercised and result in the issuance of additional shares of our common stock;
	•		the financial performance and growth of our Games business, including future international growth;
	•		RealNetworks’ intention to separate its games business, distribute shares of the newly created games company to its shareholders, the potential sale of up to 20% of the shares of the new games company in an initial public offering and the anticipated tax-free nature of the proposed transactions;
	•		the migration of our Media Software and Services businesses from general purpose subscription businesses toward premium services and free-to-consumer services, the popularity of the RealPlayer and our expected introduction of new products and innovations in our Media Software and Services business;
	•		our ability to grow our Music business, including opportunities for us to become the platform of choice for the consumer electronics industry, the integration of our Rhapsody DNA into the digital devices of an expanding list of partners and our plans to introduce additional innovations;
	•		the effect of future interoperability on our Music business, the significance of growth opportunities in the digital music market and our expectations for short-term progress and long-term success in our Music business;
	•		our financial position and the availability of resources;
	•		our expectations regarding acquisition activity in 2008 and our focus on the integration of completed acquisitions;
	•		our relationships with our employees;
	•		future competition; and
	•		the degree of seasonality in our revenue.

     These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in section Item 1 of Part II entitled “Legal Proceedings” and Item 1A of Part II entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview

     We are a leading creator of digital media services and software. Our mission is to deliver world class digital entertainment experiences — music, games or video — wherever and whenever consumers want them. Consumers use our services and software, such as Rhapsody, RealArcade, and RealPlayer to find, play, purchase, and manage free and premium digital content, including music, games, and video. Broadcasters, cable and wireless communication companies, media companies and enterprises, such as AT&T and Verizon in the U.S., Vodafone in Europe, and SK Telecom in Korea, use our digital media applications and services to create, secure and deliver digital media to PCs, mobile phones, portable music players and other consumer electronics devices and to provide entertainment services to their subscribers.

     Our strategy is to continue to (1) develop technology that provides meaningful differentiation to our chosen markets in digital entertainment services; (2) build a direct relationship with, and grow, our worldwide user base; and (3) create strong business partnerships with device makers, media companies, service providers and other distribution channels in order to build a sustainable and profitable global business. We intend to continue to expand our products and services beyond the PC to mobile devices and to create compelling digital media experiences on a variety of entertainment devices. We also intend to use our strong cash position to continue to seek acquisition opportunities to further our strategic initiatives and to enhance our competitive position.

     We have recently focused our efforts on growing our consumer businesses through both internal initiatives and strategic acquisitions of businesses and technologies. We have also increased our focus on “free-to-consumer” products and services, such as our Rhapsody.com website, and our introduction of downloadable games containing in-game advertising. These products and services generate advertising revenue and are also designed to increase the exposure of our paid digital music and games products and services to consumers.

     On May 8, 2008 we announced that we intend to separate our casual games business into an independent company and to distribute shares of the newly created games company to our shareholders. RealNetworks may precede the spin with an inital public offering and sale of up to 20% of the shares of the new games company. RealNetworks expects that either a spin-off or an IPO and subsequent spin-off will be tax-free to its shareholders. In addition to final approval by the RealNetworks’ board of directors, completion of the transaction will be subject to a number of factors, including the effectiveness of a registration statement, the receipt of a favorable letter ruling from the Internal Revenue Service, the receipt of an opinion of tax counsel, market conditions, as well as the execution of inter-company agreements and other matters.

     In the quarter ended March 31, 2008, we continued to grow our revenue compared with the quarter ended March 31, 2007, primarily due to our acquisitions of SonyNetServices (SNS) and Exomi Oy in mid 2007, and also due to significant growth in revenue from our Music and Consumer segments. This growth was partially offset by a decline in revenue in our Media Software and Services business from 2007 to 2008, due primarily to a decline in revenue from our SuperPass subscription service.

     Revenue in the quarter ended March 31, 2008 from our Technology Products and Solutions segment grew 15% compared with the same period in 2007. This increase was driven primarily by increases in sales of application services and professional services to wireless carriers, including ringback tones, music-on-demand, inter-carrier messaging, and video-on-demand services offset by a decrease in server software revenue. While revenue increased from the quarter ended March 31, 2007, we experienced a decrease in revenue from the quarter ended December 31, 2007 of 14% due primarily to a shift away from our lower-margin systems integration business, which also tends to be concentrated in the fourth quarter to focus on our application service provider business.

     On October 1, 2007, we acquired all of the outstanding securities of Game Trust, Inc. (Game Trust), a provider of scalable and secure infrastructures for community and commerce applications in online casual games. We believe that combining Game Trust’s assets and technology with our existing business will enhance our casual game offerings in our existing markets.

     On August 20, 2007, RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), created Rhapsody America to jointly own and operate a business-to-consumer digital audio music service. The Rhapsody America music service is a subscription and advertising-supported service that offers a combination of permanent downloads, conditional downloads and on-demand streaming services. The elements necessary to create, build, operate and grow the Rhapsody America music service were contributed, licensed to, or provided as services to Rhapsody America by each of MTVN and us, through a series of commercial agreements. Rhapsody America will operate primarily in the United States, although the parties are not precluded from expanding the territory in the future by mutual agreement.

     On June 8, 2007, we acquired all of the outstanding securities of Exomi, a provider of short message service (SMS) messaging and wireless application protocol gateway products and services with customers primarily in Europe and Latin America. We believe that combining Exomi’s assets and network with our products and services will enhance our presence in the Latin American market.

     On May 15, 2007, we acquired all of the outstanding securities of SNS, a provider of comprehensive white label digital music services to mobile operators in Europe. We believe that combining SNS’ assets and technology with our existing business will enhance our digital music offerings in the European market.

     On October 31, 2006, we acquired 99.7% of the outstanding common shares and American Depository Shares of WiderThan Co. Ltd. (WiderThan), a leading provider of ringback tones, music-on-demand and other mobile entertainment services to wireless carriers. We acquired substantially all of the remaining 0.3% of the outstanding common shares and American Depository Shares of WiderThan during the quarter ended June 30, 2007. The acquisition further enhanced our strategy of providing end-to-end digital media solutions to partners including music, casual games and video services.

     In October 2005, we entered into an agreement to settle all of our antitrust disputes worldwide with Microsoft. Upon settlement of the legal disputes, we also entered into two commercial agreements with Microsoft that provide for collaboration in digital music and casual games. Pursuant to these commercial agreements we received payments and other consideration of $478.0 million in 2005, $221.9 million in 2006 and $61.1 million in 2007 for a total of $761.0 million. As of December 31, 2007, we have received all the proceeds and other consideration from this settlement.

     We manage our business, and correspondingly report segment revenue and profit (loss), based on three segments: Music, Consumer and Technology Products and Solutions, each of which is described further below under “Revenue by Segment” and “Costs of Revenue by Segment.”

Critical Accounting Policies and Estimates

     The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:

	•		Revenue recognition;
	•		Estimating music publishing rights and music royalty accruals;
	•		Recoverability of deferred costs;
	•		Estimating allowances for doubtful accounts and sales returns;
	•		Estimating losses on excess office facilities;
	•		Determining whether declines in the fair value of investments are other-than-temporary and estimating fair market value of investments in privately held companies;
	•		Valuation of other intangible assets;
	•		Valuation of goodwill;
	•		Stock-based compensation;
	•		Minority interest;
	•		Accounting for gains on sale of subsidiary stock; and
	•		Accounting for income taxes.
	•		Accounting for taxes collected from customers.

     Revenue Recognition.  We recognize revenue in accordance with the following authoritative literature: AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition; SOP No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements; SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts; Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements; Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables; and EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Generally we recognize revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the product or services have been delivered and collectibility of the resulting receivable is reasonably assured.

     Consumer subscription products are paid in advance, typically for monthly, quarterly or annual periods. Subscription revenue is recognized ratably over the related subscription period. Revenue from sales of downloaded individual music tracks, albums and games are recognized at the time the music or game is made available, digitally, to the end user.

     We recognize revenue under the residual method for multiple element software arrangements when vendor-specific objective evidence (VSOE) exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements in the arrangement, under SOP No. 97-2. Under the residual method, at the outset of the arrangement with a customer, we defer revenue for the fair value of the arrangement’s undelivered elements such as Post Contract Support (PCS), and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered, such as software licenses. VSOE for PCS is established on standard products for which no installation or customization is required based upon amount charged when PCS is sold separately. For multiple element software arrangements involving significant production, modification, or customization of the software, which are accounted for in accordance with the provisions of SOP No. 81-1, VSOE for PCS is established if customers have an optional renewal rate specified in the arrangement and the rate is substantive.

     We have arrangements whereby customers pay one price for multiple products and services and in some cases, involve a combination of products and services. For arrangements with multiple deliverables, revenue is recognized upon the delivery of the individual deliverables in accordance with EITF Issue No. 00-21. In the event that there is no objective and reliable evidence of fair value of the delivered items, the revenue recognized upon delivery is the total arrangement consideration less the fair value of the undelivered items. We apply significant judgment in establishing the fair value of multiple elements within revenue arrangements.

     We recognize revenue on a gross or net basis in accordance with EITF Issue No. 99-19. In many arrangements, we contract directly with end user customers, are the primary obligor and carry all collectibility risk. In such arrangements we report the revenue on a gross basis. In some cases, we utilize third-party distributors to sell products or services directly to end user customers and carry no collectibility risk. In such instances we report the revenue on a net basis.

     Revenue generated from advertising appearing on our websites and from advertising included in our products is recognized as revenue as the delivery of the advertising occurs.

     Music Publishing Rights and Music Royalty Accruals.  We must make estimates of amounts owed related to our music publishing rights and music royalties for our domestic and international music services. Material differences may result in the amount and timing of our expense for any period if management made different judgments or utilized different estimates. Under copyright law, we may be required to pay licensing fees for digital sound recordings and compositions we deliver. Copyright law generally does not specify the rate and terms of the licenses, which are determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. There are certain geographies and agencies for which we have not yet completed negotiations with regard to the royalty rate to be applied to the current or historic sales of our digital music offerings. Our estimates are based on contracted or statutory rates, when established, or management’s best estimates based on facts and circumstances regarding the specific music services and agreements in similar geographies or with similar agencies. While we base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates under different assumptions or conditions.

     Recoverability of Deferred Costs.  We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.

     We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

     Allowances for Doubtful Accounts and Sales Returns.  We must make estimates of the uncollectibility of our accounts receivable. We specifically analyze the age of accounts receivable and historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Similarly, we must make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant judgments and estimates must be made and used in connection with establishing allowances for doubtful accounts and sales returns in any accounting period. Material differences may result in the amount and timing of our revenue for any period if we were to make different judgments or utilize different estimates.

     Accrued Loss on Excess Office Facilities.  We made significant estimates in determining the appropriate amount of accrued loss on excess office facilities. If we made different estimates, our loss on excess office facilities could be significantly different from that recorded, which could have a material impact on our operating results. Our original estimate has been revised in previous periods in response to changes in market conditions for commercial real estate in the area where the excess office facilities are located, or to reflect negotiated changes in sublease rates charged to occupying tenants.

     Impairment of Investments.  We periodically evaluate whether any declines in the fair value of our investments are other-than-temporary. Significant judgments and estimates must be made to assess whether an other-than-temporary decline in fair value of investments has occurred and to estimate the fair value of investments in privately held companies. Material differences may result in the amount and timing of any impairment charge if we were to make different judgments or utilize different estimates.

     Valuation of Other Intangible Assets.  Other intangible assets consist primarily of fair value of customer agreements and contracts, developed technology, trademarks, patents, and tradenames acquired in business combinations. Other intangible assets are amortized on a straight line basis over their useful lives and are subject to periodic review for impairment. The initial recording and periodic review processes require extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Should conditions be different than management’s current assessment, material write-downs of intangible assets may be required. We periodically review the estimated remaining useful lives of other intangible assets. A reduction in the estimated remaining useful life could result in accelerated amortization expense in future periods.

     Valuation of Goodwill.  We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the fair value of the reporting unit to which goodwill relates is less than the carrying value. Factors we consider important that could trigger an impairment review include the following:

	•		poor economic performance relative to historical or projected future operating results;
	•		significant negative industry, economic or company specific trends;
	•		changes in the manner of our use of the assets or the plans for our business; and
	•		loss of key personnel.

     If we were to determine that the fair value of a reporting unit was less than its carrying value, including goodwill, based upon the annual test or the existence of one or more of the above indicators of impairment, we would measure impairment based on a comparison of the implied fair value of reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the goodwill of the reporting unit. To the extent the carrying amount of reporting unit goodwill is greater than the implied fair value of reporting unit goodwill, we would record an impairment charge for the difference. Judgment is required in determining our reporting units and assessing fair value of the reporting units. There were no impairments related to goodwill in any of the periods presented in this report.

     Stock-Based Compensation.  We account for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment. Under the provisions of SFAS No. 123R, which we adopted as of January 1, 2006, stock-based compensation cost is estimated at the grant date based on the award’s fair-value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period, which is the vesting period. The Black-Scholes model requires various highly judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from the amounts recorded in our consolidated statement of operations. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Prior to the adoption of SFAS No. 123R, we measured compensation expense for our employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Under APB No. 25, when the exercise price of our employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

     Minority Interests.  The Company records minority interest expense (benefit) which reflects the portion of the earnings (losses) of majority-owned entities which are applicable to the minority interest partners in accordance with Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB No. 51). Redeemable minority interests that are redeemable at either fair value or are based on a formula that is intended to approximate fair value are accounted for in accordance with ARB No. 51. As of March 31, 2008 and December 31, 2007, the Company’s minority interests solely related to redeemable minority interests in Rhapsody America. Minority interest expense (benefit) is included in the unaudited condensed consolidated statement of operations and comprehensive income for 2008.

     Accounting for Gains on Sale of Subsidiary Stock.  We account for any changes in our ownership interest resulting from the issuance of equity capital by consolidated subsidiaries as either a gain or loss in the statement of operations pursuant to SAB No. 51 Accounting for the Sales of Stock of a Subsidiary. SAB No. 51 requires that the difference between the carrying amount of the parent’s investment in a subsidiary and the underlying net book value of the subsidiary after the issuance of stock by the subsidiary be reflected as either a gain or loss in the statement of operations if the appropriate recognition criteria has been met or reflected as an equity transaction. We have elected to reflect SAB No. 51 gains or losses in our consolidated statement of operations and comprehensive income.

     Accounting for Income Taxes.  We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. We must make assumptions, judgments and estimates to determine current provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

     We must periodically assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. Factors we consider in making such an assessment include, but are not limited to: past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.

     We have not provided for U.S. deferred income taxes or withholding taxes on non-U.S. subsidiaries’ undistributed earnings. These earnings are intended to be permanently reinvested in operations outside of the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, we could be subject to additional U.S. income taxes. It is not practicable to determine the U.S. federal income tax liability or benefit on such earnings due to the availability of foreign tax credits and the complexity of the computation if such earnings were not deemed to be permanently reinvested.

     As of March 31, 2008, there have been no material changes to the Company’s uncertain tax positions disclosures as provided in Note 15 of the 2007 Annual Report on Form 10-K. We do not anticipate that the total unrecognized tax benefits will significantly change within the next twelve months.

     We file numerous consolidated and separate income tax returns in the United States Federal, state, local, and foreign jurisdictions. With few exceptions, we are no longer subject to United States Federal, state, local, or foreign income tax examinations for years before 1993. We are currently under United States Internal Revenue Service income tax audit for our wholly-owned subsidiary WiderThan Americas, Inc. for the period ended December 31, 2005.

     Accounting for Taxes Collected From Customers. We collect various types of taxes from our customers, assessed by governmental authorities, that are imposed on and concurrent with revenue-producing transactions. Such taxes are recorded on a net basis and are not included in our net revenue.

Revenue by Segment

     Revenue by segment is as follows (dollars in thousands):

		Quarters Ended
		March 31,
		2008				Change				2007
Music		$	38,079				12	%		$	34,127
Consumer			58,207				14				50,913
Technology Products and Solutions			51,277				15				44,432
Total net revenue		$	147,563				14	%		$	129,472

     Revenue by segment as a percentage of total net revenue is as follows:

		Quarters Ended
		March 31,
		2008				2007
Music			26	%			27	%
Consumer			39				39
Technology Products and Solutions			35				34
Total net revenue			100	%			100	%

     Music. Music revenue primarily includes revenue from: our Rhapsody and RadioPass subscription services; sales of digital music content through our Rhapsody service and our RealPlayer music store; and advertising from our music websites. These products and

services are sold and provided primarily through the Internet and we charge customers’ credit cards at the time of sale. Billings for subscription services typically occur monthly, quarterly or annually, depending on the service purchased.

     Music revenue increased 12% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007, due primarily to growth in subscription revenue from our subscription-based music products and advertising, which together accounted for 81% of this increase. No other single factor contributed materially to the change during the periods. The increase in subscription revenue was primarily due to the price increase which occurred during the quarter ended June 30, 2007.

     Consumer. Consumer primarily includes revenue from: digital media subscription services such as GamePass, FunPass, SuperPass and stand-alone subscriptions; sales and distribution of third-party software and services; sales of digital content such as game downloads; sales of premium versions of our RealPlayer and related products; and advertising. These products and services are sold and provided primarily through the Internet and we charge customers’ credit cards at the time of sale. Billings for subscription services typically occur monthly, quarterly or annually, depending on the service purchased.

     Consumer revenue increased 14% during the quarter ended March 31, 2008, compared to the quarter ended March 31, 2007, due primarily to increased sales of our Games products. Additional factors contributing to the change in revenue are discussed below in the sections included within Consumer revenue. We believe the growth in Games revenue is due in part to the continued shift in our marketing and promotional efforts to these services as well as product improvements and increasing consumer acceptance and adoption of digital media products and services. In future periods, we expect revenue to increase as a result of the acquisition of substantially all the assets of Trymedia which we completed on April 1, 2008. We cannot predict with accuracy how our Consumer product offerings will perform in the future, at what rate digital media products and services will grow, if at all, or the nature or potential impact of anticipated competition.

     Technology Products and Solutions. Technology Products and Solutions revenue is derived from products and services that enable wireless carriers, cable companies, and other media and communications companies to distribute digital media content to PCs, mobile phones, and other non-PC devices. Technology Products and Solutions that we sell as application services consist of ringback tones, music-on-demand, video-on-demand, and inter-carrier messaging, and are primarily sold to wireless carriers. Technology Products and Solutions that we sell as software consist of Helix system software and related authoring and publishing tools, digital rights management technology, messaging gateways, and support and maintenance services that we sell to customers who purchase these products. We also offer broadcast hosting and consulting services to our customers. These products and services are primarily sold to corporate, government and educational customers. We do not require collateral from our customers, but we often require payment before or at the time products and services are delivered. Many of our customers are given standard commercial credit terms, and for these customers we do not require payment before products and services are delivered.

     Technology Products and Solutions revenue increased 15% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007, due primarily to an increase in sales of application services and professional services to wireless carriers, including ringback tones, music-on-demand, inter-carrier messaging, and video-on-demand services offset by a decrease in server software revenue. These changes accounted for 95% of the overall increase.

Consumer Revenue

     A further analysis of our Consumer revenue is as follows (dollars in thousands):

		Quarters Ended March 31,
		2008				Change				2007
Games			31,798				33	%			23,902
Media Software and Services			26,409				(2	)			27,011
Total consumer products and services revenue		$	58,207				14	%		$	50,913

     Games. Games revenue primarily includes revenue from: the sale of individual games through our RealArcade service and our Games related websites including GameHouse, Mr. Goodliving, Zylom and Atrativa; our GamePass and FunPass subscription service; and advertising through RealArcade and our Games related websites.

     Games revenue increased 33% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007, due primarily to increased advertising, syndication and subscription revenue generated through our RealArcade service and our websites, including Zylom and GameHouse. Advertising, syndication and subscription revenue together accounted for 75% of this revenue increase. No other single factor contributed materially to the change during the periods.

     Media Software and Services. Media Software and Services revenue primarily includes revenue from: our SuperPass and stand-alone premium video subscription services; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music and Games businesses.

     Media Software and Services revenue decreased 2% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007 due primarily to a decline in subscription revenue offset by an increase in advertising and PlayerPlus revenue which accounted for 91% of the revenue decrease. No other single factor contributed materially to the change during the period. The decreases were due primarily to a shift in our marketing and promotional efforts towards our Music and Games businesses, which we believe represent a greater growth opportunity.

Geographic Revenue

     Revenue by geographic region is as follows (dollars in thousands):

		Quarters Ended
		March 31,
		2008				Change				2007
United States		$	99,169				17	%		$	84,554
Europe			24,167				36				17,710
Republic of Korea			13,320				(28	)			18,399
Rest of the world			10,907				24				8,809
Total net revenue		$	147,563				14	%		$	129,472

     Revenue in the U.S. increased 17% for the quarter ended March 31, 2008, compared to the quarter ended March 31, 2007, due primarily to our acquisition of WiderThan and the growth of our Music and Games businesses. See Revenue by Segment above for further discussion of these changes. Revenue in Europe increased 36% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007, due primarily to the continued growth of our Games business and the acquisitions of SNS and Zylom. Revenue decreased in the Republic of Korea 28% due primarily to a shift away from our lower-margin systems integration business to focus on our application service provider business.

License and Service Revenue

     License fees and Service revenue in accordance with SEC regulations, is as follows (dollars in thousands):

		Quarters Ended
		March 31,
		2008				Change				2007
License fees		$	25,755				18	%		$	21,837
Service revenue			121,808				13				107,635
Total net revenue		$	147,563				14	%		$	129,472

     License fees and Service revenue as a percentage of total revenue is as follows:

		Quarters Ended
		March 31,
		2008				2007
License fees			17	%			17	%
Service revenue			83				83
Total net revenue			100	%			100	%

     License Fees. License fees primarily include revenue from: sales of content such as game licenses and digital music tracks; sales of our media delivery system software; sales of premium versions of our RealPlayer Plus and related products; sales of messaging gateways to mobile carriers; and sales of third-party products. License fees include revenue from all of our reporting segments. License revenue increased 18% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007. An increase in Games and Media Software and Services license revenue accounted for 88% of this revenue increase; no other single factor contributed materially to the change during the periods.

     Service Revenue. Service revenue primarily includes revenue from: digital media subscription services such as SuperPass, Rhapsody, RadioPass, GamePass, FunPass and stand-alone subscriptions; sales of application services sold to wireless carriers to deliver ringback tones, music-on-demand, video-on-demand, messaging, and information services to wireless carriers’ customers; support and maintenance services that we sell to customers who purchase our software products; broadcast hosting and consulting services that we offer to our customers; distribution of third-party software; and advertising. Service revenue includes revenue from all of our reporting segments. Service revenue increased 13% during the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007. Sales of application services to wireless carriers, including ringback tones, music-on-demand, inter-carrier messaging, and video-on-demand services, primarily obtained from our acquisition of WiderThan, together with an increase in Games service revenue accounted for 90% of the increase in service revenue; no other single factor contributed materially to the change during the periods.

Deferred Revenue

     Deferred revenue is comprised of unrecognized revenue and prepayments related to application services, unearned subscription services, support contracts, prepayments under OEM arrangements and other prepayments for which the earnings process has not been completed. Total deferred revenue at March 31, 2008 of $42.2 million remained unchanged from December 31, 2007.

Cost of Revenue by Segment

     Cost of revenue by segment is as follows (dollars in thousands):

		Quarters Ended
		March 31,
		2008				Change				2007
Music		$	21,519				14	%		$	18,875
Consumer			12,613				38				9,128
Technology products and solutions			21,261				19				17,940
Total cost of revenue		$	55,393				21	%		$	45,943

     Cost of revenue as a percentage of segment revenue is as follows:

		Quarters Ended
		March 31,
		2008				2007
Music			57	%			55	%
Consumer			22				18
Technology products and solutions			41				40
Total cost of revenue			38	%			35	%