(Mark One)

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

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

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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 October 31, 2008 was 135,061,961.

 

 

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		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		37
Part II. Other Information
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3. Default Upon Senior Securities		48
Item 4. Submission of Matters to a Vote of Security Holders		48
Item 5. Other Information		48
Item 6. Exhibits		48
Signature		49
EX-31.1
EX-31.2
EX-32.1
EX-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)

		September 30,				December 31,
		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	305,143			$	476,697
Short-term investments			101,173				79,932
Trade accounts receivable, net of allowances for doubtful accounts and sales returns			70,427				84,674
Deferred costs, current portion			8,221				6,408
Prepaid expenses and other current assets			42,795				33,845
Total current assets			527,759				681,556
Equipment, software, and leasehold improvements, at cost:
Equipment and software			131,254				109,621
Leasehold improvements			30,795				30,632
Total equipment, software, and leasehold improvements, at cost			162,049				140,253
Less accumulated depreciation and amortization			98,877				83,756
Net equipment, software, and leasehold improvements			63,172				56,497
Restricted cash equivalents and investments			14,734				15,509
Equity investments			9,277				9,976
Other assets			17,821				10,161
Deferred tax assets, net			35,564				40,913
Other intangible assets, net			78,656				107,677
Goodwill			315,517				353,153
Total assets		$	1,062,500			$	1,275,442
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	34,384			$	56,160
Accrued and other liabilities			111,507				114,136
Deferred revenue, current portion			42,376				39,564
Related party payable			15,663				17,241
Convertible debt			—				100,000
Accrued loss on excess office facilities, current portion			4,299				3,389
Total current liabilities			208,229				330,490
Deferred revenue, non-current portion			1,138				2,663
Accrued loss on excess office facilities, non-current portion			3,864				7,311
Deferred rent			4,680				4,518
Deferred tax liabilities, net, non-current portion			15,178				22,060
Other long-term liabilities			10,644				13,683
Total liabilities			243,733				380,725
Minority interest in Rhapsody America ($83.7 million redemption value at September 30, 2008)			6,297				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 140,204 shares in 2008 and 142,298 shares in 2007			140				142
Additional paid-in capital			655,872				653,904
Accumulated other comprehensive (loss) income			(43,488	)			17,732
Retained earnings			199,946				203,326
Total shareholders’ equity			812,470				875,104
Total liabilities and shareholders’ equity		$	1,062,500			$	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								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net revenue (A)		$	151,955			$	145,095			$	452,166			$	410,738
Cost of revenue (B)			62,164				56,644				173,202				151,786
Gross profit			89,791				88,451				278,964				258,952
Operating expenses:
Research and development			31,076				26,528				85,147				75,012
Sales and marketing			55,080				52,812				161,730				152,593
Advertising with related party			15,153				7,747				31,733				7,747
General and administrative			15,453				16,750				50,874				51,167
Restructuring costs			—				—				686				—
Subtotal operating expenses			116,762				103,837				330,170				286,519
Antitrust litigation benefit, net			—				—				—				(60,747	)
Total operating expenses, net			116,762				103,837				330,170				225,772
Operating (loss) income			(26,971	)			(15,386	)			(51,206	)			33,180
Other income (expenses):
Interest income, net			2,865				7,290				11,198				24,457
Equity in net loss of investments			(226	)			—				(424	)			(132	)
Gain on sale of equity investments, net			—				—				222				132
Minority interest in Rhapsody America			12,337				6,466				29,129				6,466
Gain on sale of interest in Rhapsody America			7,405				7,946				14,502				7,946
Other income, net			818				38				1,636				990
Other income, net			23,199				21,740				56,263				39,859
Income (loss) before income taxes			(3,772	)			6,354				5,057				73,039
Income taxes			(728	)			(2,012	)			(8,436	)			(27,409	)
Net income (loss)		$	(4,500	)		$	4,342			$	(3,379	)		$	45,630
Basic net income (loss) per share		$	(0.03	)		$	0.03			$	(0.02	)		$	0.30
Diluted net income per share		$	(0.03	)		$	0.03			$	(0.02	)		$	0.27
Shares used to compute basic net income per share			141,975				149,667				142,611				154,670
Shares used to compute diluted net income per share			141,975				163,094				142,611				169,840
Comprehensive income (loss):
Net income (loss)		$	(4,500	)		$	4,342			$	(3,379	)		$	45,630
Unrealized holding losses on short-term and equity investments, net of income taxes			(1,841	)			(3,228	)			(2,130	)			(8,947	)
Foreign currency translation gains (losses)			(38,759	)			1,206				(59,090	)			(453	)
Comprehensive income (loss)		$	(45,100	)		$	2,320			$	(64,599	)		$	36,230
(A) Components of net revenue:
License fees		$	28,394			$	23,869			$	82,762			$	67,918
Service revenue			123,561				121,226				369,404				342,820
		$	151,955			$	145,095			$	452,166			$	410,738
(B) Components of cost of revenue:
License fees		$	11,137			$	8,436			$	31,139			$	24,610
Service revenue			51,027				48,208				142,063				127,176
		$	62,164			$	56,644			$	173,202			$	151,786

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2008 and 2007

Note 1. Summary of Significant Accounting Policies

     Description of Business. 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 September 30, 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 (loss). MTVN’s proportionate share of equity is included in Minority interest in Rhapsody America in the unaudited condensed consolidated balance sheets.

     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 and nine months ended September 30, 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 and nine months ended September 30, 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 consolidated statement of operations.

Note 2. Recent Accounting Pronouncements

     In December 2007, the FASB 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. Early adoption is prohibited. 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, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS 160 requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest shall be accounted for as equity transactions. As a result, beginning in 2009, the gain on sales of interest in Rhapsody America will no longer be recorded in the statement of operations, but will be reflected as a component of shareholders equity. The requirements of SFAS 160 are effective for the Company for periods beginning after December 15, 2008. Early adoption is prohibited. The Company is in the process of evaluating all the impacts of this guidance and therefore has not yet determined the full impact that SFAS 160 will have on the Company’s financial position or results of operations upon adoption.

     In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact FSP No. 142-3 may have on the Company’s financial position or results of operations upon adoption.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS 162). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). While the effective date of this pronouncement has not yet been determined, the Company is currently assessing the impact SFAS 162 may 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 recognized 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								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Expected dividend yield			0	%			0	%			0	%			0	%
Risk-free interest rate			2.95	%			4.44	%			2.65	%			4.56	%
Expected life (years)			4.2				4.1				4.2				4.1
Volatility			45	%			42	%			45	%			42	%

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

		Quarters								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Cost of service revenue		$	696			$	208			$	1,592			$	520
Research and development			2,247				1,740				6,307				5,153
Sales and marketing			1,458				2,395				4,798				6,985
General and administrative			1,554				1,641				4,778				4,633
Total stock-based compensation expense		$	5,955			$	5,984			$	17,475			$	17,291

     No stock-based compensation was capitalized as part of the cost of an asset during the quarter and nine months ended September 30, 2008 or 2007. As of September 30, 2008, $40.5 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 2.6 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 $17.0 million and $31.4 million during the quarter and nine months ended September 30, 2008, respectively. As a result, RealNetworks realized and recorded gains of $8.7 million and $16.0 million, as all of the SAB 51 gain criteria were met. As of September 30, 2008, $56.4 million in payments have been made on the note since the formation of Rhapsody America.

     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 sheets as of September 30, 2008 and December 31, 2007. MTVN’s contribution included identifiable intangible assets with estimated fair values as of the date of formation 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 of $17.4 and $16.7 million, respectively, in the quarter ended December 31, 2007, for future operations.

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 common stock representing up to 15% of the outstanding shares of RealNetworks’ common stock immediately prior to the transaction and shares of 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, 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 September 30, 2008 is $83.7 million. The current redemption price has been adjusted under the formula in the limited liability agreement for the remaining outstanding amounts due of $173.6 million on the note payable as of September 30, 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, SFAS 157 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 third 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 September 30, 2008 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value. 

		Fair Value Measurements as of
		September 30, 2008
(in thousands)		Total				Level 1				Level 2				Level 3
Cash equivalents
Money market funds		$	138,490			$	138,490			$	—			$	—
Corporate notes and bonds			91,876				91,876				—				—
Short-term investments
Corporate notes and bonds			24,186				24,186				—				—
U.S. government agency securities			76,987				76,987				—				—
Equity investments
Publicly traded investments			4,654				4,654				—				—
Total		$	336,193			$	336,193			$	—			$	—

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 and Investments

     Cash, cash equivalents, trading securities, short-term investments, and restricted cash equivalents and investments as of September 30, 2008 consist of the following (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Cash and cash equivalents:
Cash		$	74,777			$	—			$	—			$	74,777
Money market mutual funds			138,490				—				—				138,490
Corporate notes and bonds			91,876				—				—				91,876
Total cash and cash equivalents:			305,143				—				—				305,143
Short-term investments:
Corporate notes and bonds			25,097				1				(912	)			24,186
U.S. Government agency securities			76,919				119				(51	)			76,987
Total short-term investments:			102,016				120				(963	)			101,173
Total cash, cash equivalents and short-term investments		$	407,159			$	120			$	(963	)		$	406,316
Restricted cash equivalents and investments		$	14,734			$	—			$	—			$	14,734

     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 and investments		$	15,509			$	—			$	—			$	15,509

     At September 30, 2008 and December 31, 2007, restricted cash equivalents and investments represent cash equivalents and short-term investments pledged as collateral against two letters of credit for a total of $14.7 million and $15.5 million, respectively, in connection with two lease agreements.

     Realized gains or losses on sales of available-for-sale securities for the quarters ended September 30, 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 September 30, 2008 are as follows (in thousands):

		Amortized				Estimated
		Cost				Fair Value
Within one year		$	93,848			$	93,908
Between one year and five years			8,168				7,265
Total available-for-sale investments		$	102,016			$	101,173

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 Receivable				Sales Returns
Balances, December 31, 2007		$	1,117			$	1,338
Additions charged to expenses/revenue			525				2,599
Amounts written off			(323	)			(2,797	)
Balances, September 30, 2008		$	1,319			$	1,140

     As of September 30, 2008, one domestic and one international customer accounted for approximately 11% and 15% of trade accounts receivable, respectively. No one customer accounted for more than 10% of total revenue during the quarter or nine months ended September 30, 2008. As of December 31, 2007, one international customer accounted for 19% of trade accounts receivable. The same international customer accounted for 13% of total revenue during the quarter and nine months ended September 30, 2007.

Note 8.		Equity Investments

     As of September 30, 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):

		September 30, 2008								December 31, 2007
						Carrying								Carrying
		Cost				Value				Cost				Value
Publicly traded investments		$	855			$	4,654			$	933			$	8,085
Privately held investments			5,364				4,623				2,740				1,891
Total equity investments		$	6,219			$	9,277			$	3,673			$	9,976

Note 9.		Other Intangible Assets

     Other intangible assets at September 30, 2008 consist of the following (in thousands):

		Gross				Accumulated
		Amount				Amortization				Net
Customer relationships		$	70,404			$	21,228			$	49,176
Developed technology			44,159				23,418				20,741
Patents, trademarks and tradenames			13,099				6,935				6,164
Service contracts and other			6,029				3,454				2,575
Total other intangible assets		$	133,691			$	55,035			$	78,656

     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 quarter and nine months ended September 30, 2008 was $6.5 million and $20.4 million, respectively. Amortization expense related to other intangible assets during the quarter and nine months ended September 30, 2007 was $6.1 million and $17.5 million, respectively.

     As of September 30, 2008, estimated future amortization of other intangible assets is as follows (in thousands):

2008 (remaining three months)		$	6,130
2009			23,063
2010			16,961
2011			11,898
2012			10,705
Thereafter			9,899
Total		$	78,656

Note 10.		Goodwill

     Changes in goodwill are as follows (in thousands):

Balance, December 31, 2007		$	353,153
Increases due to current year acquisitions			1,817
Decreases for the reduction of liabilities assumed related to the acquisition of Sony NetServices GmbH			(538	)
Effects of foreign currency translation			(38,915	)
Balance, September 30, 2008		$	315,517

Note 11.		Accrued and Other Liabilities

     Accrued and other liabilities consist of (in thousands):

		September 30,				December 31,
		2008				2007
Royalties and other fulfillment costs		$	48,654			$	37,554
Employee compensation, commissions and benefits			19,849				21,639
Sales, VAT and other taxes payable			12,580				18,156
Legal fees and contingent legal fees			2,676				3,439
Other			27,748				33,348
Other		$	111,507			$	114,136

Note 12.		Loss on Excess Office Facilities

     The accrued loss of $8.2 million for estimated future losses on excess office facilities located near the Company’s corporate headquarters in Seattle Washington at September 30, 2008, is shown net of expected future sublease income of $5.7 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			(2,537	)
Accrued loss on excess office facilities, September 30, 2008			8,163
Less current portion			(4,299	)
Accrued loss on excess office facilities, non-current portion		$	3,864

Note 13.		Repurchase of Common Stock

     In May 2008, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to an aggregate of $50.0 million of its outstanding common stock. During the quarter ended September 30, 2008, the Company purchased 3.6 million shares of its common stock at an average cost of $6.36 per share for an aggregate value of $23.0 million. The Company purchased a total of 3.8 million shares of its common stock at an average cost of $6.39 per share for an aggregate value of $24.5 million under the May 2008 repurchase program and $25.5 million remained authorized as of September 30, 2008.

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								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Weighted average common shares outstanding used to compute basic net income per share			141,975				149,667				142,611				154,670
Dilutive potential common shares:
Stock options and restricted stock			—				2,677				—				4,420
Convertible debt			—				10,750				—				10,750
Shares used to compute diluted net income per share			141,975				163,094				142,611				169,840

     During the quarter and nine months ended September 30, 2008, 32.1 million 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. During the quarter and nine months ended September 30, 2007, 27.8 million and 19.2 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 lines of credit with two Korean domestic banks with an aggregate maximum available limit of $2.4 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 $0.8 million bearing interest at 7.3%. During the quarter and nine months ended September 30, 2008, the Company did not draw on these lines of credit and there were no balances outstanding as of September 30, 2008 or 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 $4.1 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 and nine months ended September 30, 2008, the Company did not draw on the letter of credit and there was no balance outstanding as of September 30, 2008 or December 31, 2007.

     The Company’s subsidiary, WiderThan, has purchased guarantees amounting to $0.5 million from Seoul Guarantee Insurance which guarantees payments for one year under certain supply contracts the Company has with a customer in Korea.

     Purchase Obligations. As of September 30, 2008, the Company has commitments with third party vendors to pay $11.8 million and $23.4 million through the years ended May 31, 2009 and 2010, respectively. These commitments are ordinary course expenses relating to the Company’s on-going business operations.

     Litigation. On September 30, 2008, the Company filed a declaratory action against Disney Enterprises, Inc., Paramount Pictures Corp., Sony Pictures Entertainment, Inc., Twentieth Century Fox Film Corp., NBC Universal, Inc., Warner Bros. Entertainment, Inc., and Viacom, Inc. and the DVD Copy Control Association (DVD CCA) in the Northern District of California relating to the Company’s RealDVD product, which, among other things, allows consumers to store a copy of DVDs that they own on their computers. On the same day, various movie studios filed suit against the Company in the Central District of California. The Company’s suit asks the court to find that the RealDVD product does not breach the license agreement that the Company entered into with the DVD CCA. The movie studios’ suit alleges that by offering the RealDVD product, RealNetworks has violated the Digital Millennium Copyright Act. The movie studios’ suit was subsequently transferred to the Northern District of California. On October 3, 2008, the Studios obtained a temporary restraining order (TRO) requiring the Company to cease distribution of its RealDVD product. The TRO was extended on October 7, 2008. The Court scheduled a preliminary injunction hearing to address the movie studios’ claim that RealDVD should not be sold pending a final judicial determination of the underlying claims between the parties. The Company believes that RealDVD complies with the law, and the Company intends to vigorously defend the preliminary injunction request and, if necessary, pursue its declaratory judgment action.

     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. A partial settlement with respect to on-demand streaming and tethered downloads was recently reached between the Digital Media Association (DiMA), the Recording Industry Association of America (RIAA) and the National Music Publishers Association (NMPA), among others. This settlement was recently published by the CRB in an administrative judicial proceeding supervised by the U.S. Copyright Office. This settlement is still subject to comment by industry participants and is not yet final. 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 American Society of Composers, Authors and Publishers (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. On July 16, 2008, the court issued its ruling relating to the application of the new rates. The Company is working with ASCAP to make a final determination of amounts due under the court’s ruling. The Company believes it has sufficiently accrued for expected royalties. 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.

     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, and the court heard oral argument on October 7, 2008.

     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 other 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 (SFAS 131), 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 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 includes the Company’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer 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 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 its 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 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 September 30, 2008 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	41,591			$	58,731			$	51,633			$	—			$	151,955
Cost of revenue			23,787				14,790				23,587				—				62,164
Gross profit			17,804				43,941				28,046				—				89,791
Operating expenses			42,355				44,476				29,719				212				116,762
Operating income (loss)			(24,551	)			(535	)			(1,673	)			(212	)			(26,971	)
Total non-operating income, net			19,742				—				—				3,457				23,199
Income (loss) before income taxes		$	(4,809	)		$	(535	)		$	(1,673	)		$	3,245			$	(3,772	)

     Segment income (loss) before income taxes for the nine months ended September 30, 2008 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	116,840			$	181,121			$	154,205			$	—			$	452,166
Cost of revenue			65,999				41,765				65,438				—				173,202
Gross profit			50,841				139,356				88,767				—				278,964
Operating expenses			107,978				126,137				94,683				1,372				330,170
Operating income (loss)			(57,137	)			13,219				(5,916	)			(1,372	)			(51,206	)
Total non-operating income, net			43,631				—				—				12,632				56,263
Income (loss) before income taxes		$	(13,506	)		$	13,219			$	(5,916	)		$	11,260			$	5,057

     Segment income (loss) before income taxes for the quarter ended September 30, 2007 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	37,658			$	54,166			$	53,271			$	—			$	145,095
Cost of revenue			20,891				10,326				25,427				—				56,644
Gross profit			16,767				43,840				27,844				—				88,451
Operating expenses			33,426				36,782				33,428				201				103,837
Operating income (loss)			(16,659	)			7,058				(5,584	)			(201	)			(15,386	)
Total non-operating income, net			14,412				—				—				7,328				21,740
Income (loss) before income taxes		$	(2,247	)		$	7,058			$	(5,584	)		$	7,127			$	6,354

     Segment income (loss) before income taxes for the nine months ended September 30, 2007 is as follows (in thousands):

										Technology Products				Reconciling
		Music				Consumer				and Solutions				Amounts				Consolidated
Net revenue		$	108,586			$	155,393			$	146,759			$	—			$	410,738
Cost of revenue			59,570				28,890				63,326				—				151,786
Gross profit			49,016				126,503				83,433				—				258,952
Operating expenses			82,412				104,503				97,062				(58,205	)			225,772
Operating income (loss)			(33,396	)			22,000				(13,629	)			58,205				33,180
Total non-operating income, net			14,412				—				—				25,447				39,859
Income (loss) before income taxes		$	(18,894	)		$	22,000			$	(13,629	)		$	83,652			$	73,039

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

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
United States		$	102,363			$	91,281			$	302,430			$	263,870
Europe			27,151				22,150				78,514				60,382
Republic of Korea			12,171				20,591				38,261				57,875
Rest of the World			10,270				11,073				32,961				28,611
Total net revenue		$	151,955			$	145,095			$	452,166			$	410,738