REALNETWORKS INC (Form: 10-Q, Received: 08/09/2011 06:07:24)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2011

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

For the transition period from to

Commission file number 0-23137

RealNetworks, Inc.

(Exact name of registrant as specified in its charter)

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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):

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

The number of shares of the registrant’s Common Stock outstanding as of July 29, 2011 was 136,791,347.

TABLE OF CONTENTS


	Page
Part I. Financial Information		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		39

Part II. Other Information		40
Item 1. Legal Proceedings		40
Item 1A. Risk Factors		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3. Default Upon Senior Securities		48
Item 4. Removed and Reserved		48
Item 5. Other Information		48
Item 6. Exhibits		48

Signature		50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	236,730		$	236,018
Short-term investments		91,142			98,303
Trade accounts receivable, net of allowances for doubtful accounts and sales returns		46,011			48,324
Deferred costs, current portion		9,882			9,173
Related party receivable – Rhapsody		527			351
Prepaid expenses and other current assets		24,845			30,441

Total current assets		409,137			422,610

Equipment, software, and leasehold improvements, at cost:
Equipment and software		146,744			144,623
Leasehold improvements		25,454			25,367

Total equipment, software, and leasehold improvements, at cost		172,198			169,990
Less accumulated depreciation and amortization		131,193			126,619

Net equipment, software, and leasehold improvements		41,005			43,371
Restricted cash equivalents and investments		10,141			10,000
Equity method investments		11,397			15,486
Available for sale securities		26,150			27,541
Other assets		3,064			3,316
Deferred costs, non-current portion		16,443			18,401
Deferred tax assets, net, non-current portion		12,943			12,805
Other intangible assets, net		9,837			6,952
Goodwill		6,502			4,960

Total assets	$	546,619		$	565,442

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,194		$	30,413
Accrued and other liabilities		82,199			85,702
Deferred revenue, current portion		18,010			19,036
Accrued loss on excess office facilities, current portion		1,391			1,144

Total current liabilities		123,794			136,295
Deferred revenue, non-current portion		88			460
Accrued loss on excess office facilities, non-current portion		2,430			3,380
Deferred rent		3,032			3,514
Deferred tax liabilities, net, non-current portion		2,015			1,049
Other long-term liabilities		11,231			7,999

Total liabilities		142,590			152,697

Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value, no shares issued and outstanding:
Series A: authorized 200 shares		0			0
Undesignated series: authorized 59,800 shares		0			0
Common stock, $0.001 par value authorized 1,000,000 shares; issued and outstanding 136,783 shares in 2011 and 136,083 shares in 2010		137			136
Additional paid-in capital		705,344			697,430
Accumulated other comprehensive loss		(30,018	)		(32,543	)
Retained deficit		(271,434	)		(252,278	)

Total shareholders’ equity		404,029			412,745

Total liabilities and shareholders’ equity	$	546,619		$	565,442

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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net revenue (A)	$	83,752		$	88,884		$	171,053		$	217,484
Cost of revenue (B)		30,666			29,149			62,732			78,308

Gross profit		53,086			59,735			108,321			139,176

Operating expenses:
Research and development		17,809			27,583			37,704			62,258
Sales and marketing		28,853			27,382			57,333			65,209
Advertising with related party		0			0			0			1,065
General and administrative		10,874			14,590			16,496			29,511
Restructuring and other charges		508			4,792			7,412			10,407
Loss (gain) on excess office facilities		(174	)		7,082			(174	)		7,082

Total operating expenses		57,870			81,429			118,771			175,532

Operating loss		(4,784	)		(21,694	)		(10,450	)		(36,356	)

Other income (expenses):
Interest income, net		311			551			690			931
Equity in net loss of Rhapsody and other equity method investments		(1,018	)		(5,427	)		(4,299	)		(5,427	)
Loss on sale of equity investments, net		0			(50	)		0			(50	)
Gain on deconsolidation of Rhapsody		0			0			0			10,929
Other income (expense), net		(311	)		994			(433	)		1,093

Total other income (expenses), net		(1,018	)		(3,932	)		(4,042	)		7,476

Loss before income taxes		(5,802	)		(25,626	)		(14,492	)		(28,880	)
Income tax benefit (expense)		(1,047	)		(281	)		(4,662	)		3,291

Net loss		(6,849	)		(25,907	)		(19,154	)		(25,589	)
Net loss attributable to noncontrolling interest in Rhapsody		—			—			—			2,910

Net loss attributable to common shareholders	$	(6,849	)	$	(25,907	)	$	(19,154	)	$	(22,679	)

Basic net income (loss) per share available to common shareholders	$	(0.05	)	$	(0.19	)	$	(0.14	)	$	(0.14	)
Diluted net income (loss) per share available to common shareholders	$	(0.05	)	$	(0.19	)	$	(0.14	)	$	(0.14	)
Shares used to compute basic net income (loss) per share available to common shareholders		136,539			135,277			136,266			135,209
Shares used to compute diluted net income (loss) per share available to common shareholders		136,539			135,277			136,266			135,209
Comprehensive income (loss):
Net loss	$	(6,849	)	$	(25,907	)	$	(19,154	)	$	(25,589	)
Unrealized holding gains (losses) on short-term and equity, investments net of income taxes		5,679			(3,160	)		(1,387	)		(1,609	)
Foreign currency translation gains (losses)		1,357			(4,743	)		3,910			(6,354	)

Comprehensive income (loss)		187			(33,810	)		(16,631	)		(33,552	)
Net loss attributable to noncontrolling interest in Rhapsody		0			0			0			2,910

Comprehensive income (loss) attributable to common shareholders	$	187		$	(33,810	)	$	(16,631	)	$	(30,642	)

(A) Components of net revenue:
License fees	$	16,817		$	16,644		$	35,232		$	40,816
Service revenue		66,935			72,240			135,821			176,668

	$	83,752		$	88,884		$	171,053		$	217,484

(B) Components of cost of revenue:
License fees	$	4,800		$	5,668		$	10,046		$	13,217
Service revenue		25,866			23,481			52,686			65,091

	$	30,666		$	29,149		$	62,732		$	78,308

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(19,154	)	$	(25,589	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		8,116			13,973
Stock-based compensation		6,129			6,692
Loss (gain) on disposal of equipment, software, and leasehold improvements		85			(3	)
Equity in net loss of Rhapsody and other investments		4,299			5,427
Loss on sale of equity investments, net		0			50
Excess tax benefit from stock option exercises		(57	)		(18	)
Gain on deconsolidation of Rhapsody		0			(10,929	)
Accrued loss (gain) on excess office facilities		(174	)		6,470
Deferred income taxes, net		(351	)		(1,609	)
Accrued restructuring and other charges		131			3,581
Other		62			22
Net change in certain operating assets and liabilities, net of acquisitions, disposals and deconsolidation of Rhapsody:
Trade accounts receivable		3,661			7,649
Prepaid expenses and other assets		7,837			(7,336	)
Accounts payable		(10,593	)		(2,417	)
Accrued and other liabilities		(5,481	)		(52,300	)

Net cash used in operating activities		(5,490	)		(56,337	)

Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements		(3,134	)		(9,507	)
Purchases of short-term investments		(54,844	)		(65,754	)
Proceeds from sales and maturities of short-term investments		62,005			16,559
Decrease (increase) in restricted cash equivalents and investments, net		(141	)		3,700
Payment in connection with the restructuring of Rhapsody		0			(18,000	)
Payment of acquisition costs, net of cash acquired		(2,888	)		0
Repayment of temporary funding upon deconsolidation of Rhapsody		0			5,869

Net cash provided by (used in) investing activities		998			(67,133	)

Cash flows from financing activities:
Net proceeds from sale of common stock under employee stock purchase plan and exercise of stock options		1,610			1,272
Excess tax benefit from stock option exercises		57			18
Net proceeds from sales of interest in Rhapsody		0			1,213

Net cash provided by financing activities		1,667			2,503

Effect of exchange rate changes on cash and cash equivalents		3,537			92

Net increase (decrease) in cash and cash equivalents		712			(120,875	)
Cash and cash equivalents, beginning of period		236,018			277,030

Cash and cash equivalents, end of period	$	236,730		$	156,155


Supplemental disclosure of cash flow information:
Cash received from income tax refunds	$	3,534		$	131
Cash paid for income taxes	$	3,459		$	1,818

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Quarters and Six Months Ended June 30, 2011 and 2010

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 applications and services that make it easy to manage, play and share digital media. 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. 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 subsidiaries. All 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) to jointly own and operate a business-to-consumer digital audio music service. RealNetworks held a 51% interest in Rhapsody and Rhapsody’s financial position and operating results were consolidated into RealNetworks’ financial statements prior to March 31, 2010. MTVN’s proportionate share of income (loss) was included in noncontrolling interest in Rhapsody in the unaudited condensed consolidated statements of operations and comprehensive income (loss). MTVN’s proportionate share of equity was included in noncontrolling interest in Rhapsody in the unaudited condensed consolidated balance sheets. On March 31, 2010, the Company and MTVN restructured Rhapsody, and RealNetworks held approximately 47% of the outstanding shares of capital stock of Rhapsody after the restructuring. RealNetworks continues to own approximately 47% of the outstanding shares of capital stock as of June 30, 2011. Since March 31, 2010, RealNetworks has not held a controlling interest in Rhapsody and therefore, the Company has treated its ownership interest in Rhapsody as an equity method investment. Rhapsody’s financial position as of March 31, 2010 and its operating results beginning April 1, 2010 are no longer consolidated with RealNetworks’ consolidated financial statements.

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 six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2011. 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, 2010.

Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the products or services are made available, digitally, to the end user.

The Company recognizes revenue on a gross or net basis. In most arrangements, the Company contracts directly with end user customers, is the primary obligor and carries all collectability risk. In such arrangements, the Company recognizes 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 collectability risk. In such instances, the Company recognizes revenue on a net basis.

In the Company’s direct to consumer business, the Company derives revenue through (1) subscriptions of SuperPass within the Company’s Core Products segment and subscriptions sold by the Company’s Games segment, (2) sales of content downloads, software and licenses offered by the Company’s Core Products, Emerging Products and Games segments and (3) the sale of advertising and the distribution of third-party products on its websites and in its games. Prior to April 1, 2010, the Company’s direct to consumer business also included the products and services primarily sold by the Company’s Rhapsody joint venture and included in the Company’s Music segment. Beginning on April 1, 2010, revenue from the Company’s Rhapsody joint venture is no longer consolidated within the Company’s financial statements. The Company now reports its share of Rhapsody’s net income or losses as “Equity in net loss of Rhapsody and other equity method investments.”

Consumer subscription products are paid in advance, typically for a monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on the Company’s websites and from advertising and the distribution of third-party products included in the Company’s products is recognized as revenue at the time of delivery.

The Company also generates revenue through business-to-business channels by providing services within the Company’s Core Products segment enabling mobile carriers to deliver audio and video content to their customers and by selling software licenses and products and related support and other services.

Revenue generated from services provided to mobile carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.

A portion of the revenue related to the sale of software licenses and products and related support and other services is recorded as unearned due to undelivered elements including, in some cases, post-delivery support and the right to receive unspecified upgrades or enhancements on a when-and-if-available basis. Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using estimated selling prices if the Company does not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. Unearned revenue due to undelivered elements is recognized ratably on a straight-line basis over the related products’ contract term.

Accounting for Gains on Sale of Subsidiary Stock. Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160) which was primarily codified into FASB ASC 810 — Consolidation (ASC 810). Current guidance requires that the difference between the carrying amount of the parent’s investment in a subsidiary and the underlying net book value be recorded as an equity transaction. The Company elected to recognize any such gain in its consolidated statements of operations prior to January 1, 2009 as was allowable under generally accepted accounting principles in place at that time if certain recognition criteria were met. Due to the completion of the restructuring of Rhapsody on March 31, 2010, which resulted in the Company holding approximately 47% of the outstanding shares of capital stock of Rhapsody, this accounting policy no longer applies with respect to its investment as the Company no longer consolidates Rhapsody and no longer reports a noncontrolling interest.

Noncontrolling Interests. The Company records noncontrolling interest expense (benefit) which reflects the portion of the earnings (losses) of majority-owned entities which are applicable to the noncontrolling interest holders in the consolidated statements of operations. Redeemable noncontrolling interests that are redeemable at either fair value or are based on a formula that is intended to approximate fair value follow the Company’s historical disclosure only policy for the redemption feature. Redeemable noncontrolling interests that are redeemable at either a fixed price or are based on a formula that is not akin to fair value are reflected as an adjustment to income attributable to common shareholders based on the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature with the remaining amount of accretion to redemption value recorded directly to equity. Net loss attributable to the noncontrolling interest in Rhapsody is included within the consolidated statements of operations and comprehensive income (loss). The Company applied this accounting policy to the noncontrolling interest in

Rhapsody that was held by MTVN for periods beginning when Rhapsody was formed in August 2007 through the quarter ended March 31, 2010. Due to the completion of the restructuring of Rhapsody on March 31, 2010, which resulted in the Company holding approximately 47% of the outstanding shares of capital stock of Rhapsody, this accounting policy no longer applies with respect to the Company’s investment as the Company no longer consolidates Rhapsody and no longer reports a noncontrolling interest.

Note 2. Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2011, to be implemented by the Company in future periods as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, that are of significance, or potential significance to the Company.

In September 2009, the FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 supersedes EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price.

In September 2009, the FASB ratified ASU 2009-14 (ASU 2009-14) (previously EITF No. 09-3, Certain Revenue Arrangements That Include Software Elements) . ASU 2009-14 modifies the scope of Software Revenue Recognition to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.

The Company elected to adopt ASU 2009-13 and ASU 2009-14 at the beginning of the first quarter of 2011 on a prospective basis. The Company did not have a significant change in units of accounting, allocation methodology, or timing of revenue recognition. As a result, the adoption of these accounting standards did not have a material impact on the Company’s consolidated financial position, results of operations or financial condition.

Note 3. Stock-Based Compensation

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. The Company recognizes compensation cost related to options granted 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. Notwithstanding the special dividend described in Note 19, dividend yield is estimated at zero because the Company does not anticipate paying regular dividends in the foreseeable future.

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


	Quarters Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Expected dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		1.57	%		1.65	%		1.73	%		1.91	%
Expected life (years)		4.0			4.0			4.0			4.0
Volatility		54	%		62	%		54	%		62	%

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


	Quarters Ended June 30,					Six Months Ended June 30,
	2011			2010		2011		2010
Cost of revenue	$	234		$	228	$	522	$	459
Research and development		306			693		803		2,290
Sales and marketing		994			811		1,928		1,807
General and administrative		1,152			1,039		2,040		2,136
Restructuring and other charges		(10	)		0		836		0

Total stock-based compensation expense	$	2,676		$	2,771	$	6,129	$	6,692

No stock-based compensation was capitalized as part of the cost of an asset during the quarters or six month periods ended June 30, 2011 or 2010. As of June 30, 2011, $14.6 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 2.9 years.

Note 4. Rhapsody Joint Venture

Restructuring of Rhapsody

As described in Note 1. Summary of Significant Accounting Policies, the Company initially formed in August 2007 a joint venture with MTVN to own and operate a business-to-consumer digital audio music service known as Rhapsody. Prior to March 31, 2010, the Company held a 51% interest in Rhapsody and MTVN owned the remaining 49%. On March 31, 2010, restructuring transactions involving Rhapsody were completed, and Rhapsody was converted from a limited liability company to a corporation. Following the completion of the restructuring transactions, RealNetworks owned approximately 47%, MTVN owned approximately 47%, and two minority stockholders held slightly more than 5% of the outstanding shares of capital stock of Rhapsody.

As part of the March 31, 2010 restructuring, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. RealNetworks’ cash contribution included the repurchase of the international radio business that was previously contributed to Rhapsody by RealNetworks. MTVN contributed a $33.0 million advertising commitment in exchange for shares of common stock of Rhapsody, and MTVN’s previous obligation to provide advertising of approximately $111 million as of December 31, 2009 was cancelled. In addition, the put and call rights held by RealNetworks and MTVN and MTVN’s rights to receive a preferred return in connection with the exercise of RealNetworks’ put right were terminated. RealNetworks is also providing certain operational transition services to Rhapsody. These transition services are expected to be completed in the first half of 2012. Rhapsody is governed by a board of directors with two directors appointed by each of the Company and MTVN and one independent director appointed by mutual agreement of the Company and MTVN.

Effective March 31, 2010, RealNetworks no longer has a controlling interest in Rhapsody and therefore, the operating results of Rhapsody are accounted for under the equity method of accounting for investments, and the Company’s proportionate share of the income or loss is recognized as a component of “Other income (expenses), net” in the Company’s condensed consolidated statements of operations in periods subsequent to March 31, 2010. As a result of the deconsolidation of Rhapsody’s operations from the Company’s financial statements, the Company no longer records any operating results for its Music segment for periods subsequent to March 31, 2010. The removal of these assets and liabilities and the creation of the initial equity method investment resulted in a one-time net gain of $10.9 million recorded in “Other income (expenses), net” in the Company’s unaudited condensed consolidated statements of operations for the quarter ended March 31, 2010, at which time the Company determined the fair value of its retained interest of approximately 47% to be approximately $29.7 million as of March 31, 2010. The Company recorded its share of losses in the operations of Rhapsody of approximately $1.0 million and $4.3 million for the quarter and six months ended June 30, 2011, respectively, and $5.4 million for the quarter and six months ended June 30, 2010. These losses reduced the carrying value of the investment to approximately $11.2 million as of June 30, 2011.

As mentioned above, MTVN’s preferred return rights were terminated in connection with the restructuring of Rhapsody. Prior to the restructuring, if the appraised value of Rhapsody at a redemption date was less than $436.3 million, then the exercise price of the put right would have included a preferred return to MTVN. The Company previously elected to accrete any excess of the redemption value over the carrying amount of the noncontrolling interest as an adjustment to income attributable to common shareholders, and adjusted

earnings per share for the current quarter’s accretion of the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature. Due to the termination of MTVN’s preferred return rights at the completion of the restructuring, the Company decreased the noncontrolling interest that was on the unaudited condensed consolidated balance sheet at March 31, 2010, prior to the transaction above by $10.4 million as part of the deconsolidation transactions, of which $3.7 million was an adjustment to income attributable to common shareholders for the purposes of calculating earnings per share for the quarter ended March 31, 2010.

Noncontrolling interest rollforward

Activity in noncontrolling interest and equity attributable to common shareholders is as follows (in thousands):


	Noncontrolling interest			Total Equity
Balances, December 31, 2009	$	7,253		$	375,811
Net loss		0			(25,589	)
Net loss attributable to noncontrolling interest in Rhapsody		(2,910	)		2,910
Contribution and other transactions with owners		616			619
Reversal of MTVN’s accretion equity interest in Rhapsody		(6,736	)		6,736
Reversal of MTVN’s preferred return in Rhapsody		(3,700	)		3,700
Deconsolidation		5,477			0
Unrealized holding losses on short-term and equity investments, net of taxes		0			(1,609	)
Foreign currency translation losses		0			(6,354	)
Stock-based transactions and compensation expense, net of taxes		0			7,861

Balances, June 30, 2010	$	0		$	364,085

Summarized financial information for Rhapsody for the period accounted for under the equity method (in thousands):


	Quarter Ended June 30, 2011			Six Months Ended June 30, 2011
Statements of Operations Data:
Net revenue	$	30,985		$	63,472
Gross profit		9,793			19,238
Net loss		(2,165	)		(9,146	)

Note 5. Fair Value Measurements

The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents, short-term investments, and equity investments. The fair value of these financial assets was determined based on three levels of inputs:

•

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

Items Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets that have been measured at fair value on a recurring basis as of June 30, 2011, and December 31, 2010, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).


	Fair Value Measurements as of June 30, 2011
	Total		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	31,075	$	31,075	$	0	$	0
Corporate notes and bonds		126,398		126,398		0		0
U.S. government agency securities		4,200		4,200		0		0
Short-term investments:
Corporate notes and bonds		52,564		52,564		0		0
U.S. government agency securities		38,578		38,578		0		0
Restricted cash equivalents and investments		10,141		10,141		0		0
Available for sale securities:
Publicly traded investments		26,150		26,150		0		0

Total	$	289,106	$	289,106	$	0	$	0


	Fair Value Measurements as of December 31, 2010
	Total		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	44,348	$	44,348	$	0	$	0
Corporate notes and bonds		120,984		120,984		0		0
U.S. Government agency securities		3,700		3,700		0		0
Short-term investments:
Corporate notes and bonds		76,157		76,157		0		0
U.S. government agency securities		22,146		22,146		0		0
Restricted cash equivalents and investments		10,000		10,000		0		0
Available for sale securities:
Publicly traded investments		27,541		27,541		0		0

Total	$	304,876	$	304,876	$	0	$	0

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 no fair value is derived on a recurring basis. The Company has consistently applied these valuation techniques in all periods presented.

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities of the Company are measured at estimated fair value on a non-recurring basis. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The Company performed a valuation using Level 3 inputs of its investment in the Rhapsody joint venture as of March 31, 2010. The Company performed the analysis as a result of the restructuring and related deconsolidation of Rhapsody, which is further described in “Note 4, Rhapsody Joint Venture.” The fair value analysis used multiple valuation models and was based on assumptions of future results made by management, including operating and cash flow projections.

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

Cash, cash equivalents, short-term investments, and restricted cash equivalents as of June 30, 2011, consist of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	75,057	$	0	$	0		$	75,057
Money market mutual funds		31,075		0		0			31,075
Corporate notes and bonds		126,398		0		0			126,398
U.S. government agency securities		4,200		0		0			4,200

Total cash and cash equivalents		236,730		0		0			236,730

Short-term investments:
Corporate notes and bonds		52,411		163		(10	)		52,564
U.S. government agency securities		38,506		80		(8	)		38,578

Total short-term investments		90,917		243		(18	)		91,142

Total cash, cash equivalents and short-term investments	$	327,647	$	243	$	(18	)	$	327,872

Restricted cash equivalents and investments	$	10,141	$	0	$	0		$	10,141

Cash, cash equivalents, short-term investments, and restricted cash equivalents as of December 31, 2010 consist of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	66,986	$	0	$	0		$	66,986
Money market mutual funds		44,348		0		0			44,348
Corporate notes and bonds		120,984		0		0			120,984
U.S. government agency securities		3,700		0		0			3,700

Total cash and cash equivalents		236,018		0		0			236,018

Short-term investments:
Corporate notes and bonds		75,962		221		(26	)		76,157
U.S. government agency securities		22,126		23		(3	)		22,146

Total short-term investments		98,088		244		(29	)		98,303

Total cash, cash equivalents and short-term investments	$	334,106	$	244	$	(29	)	$	334,321

Restricted cash equivalents and investments	$	10,000	$	0	$	0		$	10,000

At June 30, 2011, and December 31, 2010, restricted cash equivalents and investments represent cash equivalents and short-term investments pledged as collateral against a letter of credit for a total of $10.1 million in connection with lease agreements.

Realized gains or losses on sales of available-for-sale securities for the quarters and six month period ended June 30, 2011 and 2010, 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 short-term investments at June 30, 2011, are as follows (in thousands):


	Amortized Cost		Estimated Fair Value
Within one year	$	38,860	$	38,915
Between one year and five years		52,057		52,227

Total short-term investments	$	90,917	$	91,142

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, 2010	$	1,529		$	1,039
Additional charged to expenses		271			489
Amounts written off		(337	)		(485	)

Balances, June 30, 2011	$	1,463		$	1,043

No customers accounted for 10% or more of trade accounts receivable as of June 30, 2011. As of December 31, 2010, one customer accounted for 15% of trade accounts receivable. No one customer accounted for more than 10% of total revenue during the quarters and six months ended June 30, 2011 and 2010.

Note 8. Available for Sale Securities

As of June 30, 2011 and December 31, 2010, the carrying value of the Company’s equity investments in publicly traded companies consisted primarily of J-Stream Inc., a Japanese media services company, and LoEn Entertainment, Inc., a Korean digital music distribution company. These equity investments are accounted for as available for sale. Although the carrying value of the available for sale securities was $26.2 million at June 30, 2011, there can be no assurance that any gain can be realized through the disposition of these shares.

Summary of available for sale securities is as follows (in thousands):


	June 30, 2011				December 31, 2010
	Cost		Carrying Value		Cost		Carrying Value
Available for sale securities	$	10,765	$	26,150	$	10,765	$	27,541

Note 9. Other Intangible Assets

Other intangible assets consist of the following (in thousands):


	Gross Amount		Accumulated Amortization		Net
Customer relationships	$	31,610	$	25,381	$	6,229
Developed technology		29,870		26,485		3,385
Patents, trademarks and tradenames		5,495		5,434		61
Service contracts and other		6,339		6,177		162

Total other intangible assets, June 30, 2011	$	73,314	$	63,477	$	9,837

Total other intangible assets, December 31, 2010	$	66,831	$	59,879	$	6,952

Amortization expense related to other intangible assets during the quarter and six months ended June 30, 2011 was $1.1 million and $1.8 million, respectively. Amortization expense related to other intangible assets during the quarter and six months ended June 30, 2010 was $1.2 million and $2.5 million, respectively.

As of June 30, 2011, estimated future amortization of other intangible assets is as follows (in thousands):


2011 (remaining six months)	$	2,316
2012		4,183
2013		2,582
2014		418
2015		338

Total	$	9,837

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparing their carrying amount to future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value. The Company did not record any impairment to long-lived assets during the quarter or six months ended June 30, 2011 or 2010.

Note 10. Goodwill

Changes in goodwill are as follows (in thousands):


Balances, December 31, 2010	$	4,960
Increases from acquisitions		1,385
Effects of foreign currency translation		157

Balances, June 30, 2011	$	6,502

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


	June 30, 2011		December 31, 2010
Core products	$	805	$	0
Emerging products		580		0
Games		5,117		4,960

Total goodwill	$	6,502	$	4,960

In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill is required to be tested for impairment annually and also if there is an event or change in conditions that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual goodwill impairment test during its fiscal fourth quarter. No impairments were recognized in the quarter or six months ended June 30, 2011.

Note 11. Accrued and Other Liabilities

Accrued and other liabilities consist of (in thousands):


	June 30, 2011		December 31, 2010
Royalties and other fulfillment costs	$	30,228	$	30,190
Employee compensation, commissions and benefits		14,325		19,353
Sales, VAT and other taxes payable		13,139		13,104
Deferred tax liabilities - current		12,248		12,162
Other		12,259		10,893

Total accrued and other liabilities	$	82,199	$	85,702

Note 12. Restructuring and Other Charges

Restructuring and other charges consist of costs associated with the realignment and reorganization of the Company’s operations and primarily include separation costs for employees, including severance, and other benefits. Included in restructuring and other costs for the six-month period ended June 30, 2011 are separation costs of approximately $2.8 million related to the resignation of the Company’s Chief Executive Officer, of which approximately $2.0 million was severance and $0.8 million was non-cash charges related to accelerated vesting of stock options.

A summary of activity for accrued restructuring and other charges is as follows (in thousands):


Accrued restructuring and other charges, December 31, 2010	$	652
Plus additional restructuring and other charges		7,412
Less non-cash stock-based compensation charges included in restructuring and other charges		(836	)
Less amounts paid		(6,947	)

Accrued restructuring and other charges, June 30, 2011	$	281

Note 13. Loss on Excess Office Facilities

The Company completed a business and operational reorganization which led to the reduction of its use of office space in its corporate headquarters in Seattle, Washington and one of its offices in Europe. As a result, the Company recorded losses of $7.4 million during the year ended December 31, 2010. These losses represented approximately $5.5 million of rent and contractual operating expenses over the remaining life of the lease, and approximately $1.6 million for the write-down of leasehold improvements to their estimated fair value. The Company regularly evaluates the market for office space. If the market for such space changes further in future periods, the Company may have to revise its estimates which may result in future gains or 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, 2010	$	4,524
Less amounts paid, net of sublease income		(529	)
Current period accrued sublease income estimate revision		(174	)

Accrued loss on excess office facilities, June 30, 2011		3,821
Less current portion		(1,391	)

Accrued loss on excess office facilities, non-current portion	$	2,430

Note 14. Earnings Per Share

For periods beginning August 2007 through the quarter ended March 31, 2010, basic net income (loss) available to common shareholders per share is computed by dividing net income (loss) attributable to common shareholders adjusted for the impact of MTVN’s preferred return in Rhapsody by the weighted average number of common shares outstanding during the period. Diluted net income (loss) available to common shareholders per share is computed by dividing net income (loss) attributable to common shareholders adjusted for the impact of MTVN’s preferred return in Rhapsody by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted net income (loss) per share available to common shareholders are calculated as follows (in thousands):


	Quarters Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net income (loss) available to common shareholders:
Net income (loss) attributable to common shareholders	$	(6,849	)	$	(25,907	)	$	(19,154	)	$	(22,679	)
Less termination of MTVN’s preferred return in Rhapsody		0			0			0			3,700

Net income (loss) available to common shareholders	$	(6,849	)	$	(25,907	)	$	(19,154	)	$	(18,979	)


Shares used to compute diluted net income (loss) per share available to common shareholders:
Weighted average common shares outstanding used to compute basic net income (loss) per share available to common shareholders		136,539			135,277			136,266			135,209
Dilutive stock options and restricted stock		0			0			0			0

Shares used to compute diluted net income (loss) per share available to common shareholders		136,539			135,277			136,266			135,209

Basic net income (loss) per share available to common shareholders	$	(0.05	)	$	(0.19	)	$	(0.14	)	$	(0.14	)
Diluted net income (loss) per share available to common shareholders	$	(0.05	)	$	(0.19	)	$	(0.14	)	$	(0.14	)

During the quarter and six months ended June 30, 2011, 16.1 million and 16.5 million shares of common stock, respectively, potentially issuable from stock options were excluded from the calculation of diluted net income per share because of their antidilutive effect. During the quarter and six months ended June 30, 2010, 18.4 million and 18.6 million shares of common stock, respectively, potentially issuable from stock options were 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, uses electronic promissory notes issued by a Korean domestic bank with an aggregate line of credit of up to $2.3 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 renewal in April of each year. The arrangement may be renewed in writing by mutual agreement between WiderThan and the bank. WiderThan is not subject to any financial or other restrictive covenants under the terms of this arrangement. As of June 30, 2011, WiderThan had $0.8 million outstanding on this promissory note and other guarantees.

Litigation . On April 25, 2007, a lawsuit was filed by Greenville Communications, LLC in Greenville, Mississippi against a number of cell phone carriers, including the Company’s partners T-Mobile USA, Inc. and Alltel Corporation, alleging that they infringe its patents by providing ringback tone services. The Company agreed to indemnify T-Mobile and Alltel against the claims based on an indemnity that is claimed to be owed by the Company. On August 27, 2007, the Company’s motion to transfer this matter to the U.S. District Court for the District of New Jersey was granted. The parties briefed claim construction, but the case was subsequently stayed pending reexamination of the patents at issue. On December 10, 2009, the U.S. Patent and Trademark Office issued notice of its intent to issue reexamination certificates for the patents in suit. The Court lifted the stay on the litigation on January 29, 2010 and

discovery has resumed. The Company disputes the plaintiff’s allegations regarding both the validity of its patents and its claims of infringement against the Company’s partners. The Company is unable to provide meaningful quantification of how the final resolution of this litigation may impact its future consolidated financial position or results of operations.

The Company has also been involved in a proceeding in the U.S. District Court for the Southern District of New York to 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 and subsequently issued additional rulings. After working with ASCAP to make a final determination of amounts due under the court’s rulings, the Company reached a partial agreement with ASCAP on January 12, 2009. The Company believes it has sufficiently accrued for expected royalties under the agreement, but the Company appealed some aspects of the court’s rulings that underlie the agreement, arguing that the district court had adopted an improper formula for establishing royalty rates. ASCAP also appealed the district court’s ruling, arguing that the district court should have ruled that all transmissions of content downloads constituted public performances. On September 28, 2010, the U.S. Court of Appeals for the Second Circuit issued an opinion substantially ruling in favor of each of the Company’s positions that were on appeal. On the public performance issue, the Second Circuit ruled that delivering a download is neither a “performance” nor “public,” and therefore ASCAP is not entitled to any royalties for such downloads. The Second Circuit agreed with the Company that the formula adopted by the District Court for establishing royalties was unreasonable and unsupported, and directed the District Court to establish new rates that reflect the “varying nature and scope” of the Company’s music use. These rates are relevant to the Company’s operation of the Rhapsody music business prior to the completion of its restructuring at the end of the first quarter of 2010. The rates are also relevant to the ongoing business of Rhapsody in which the Company continues to hold an approximate 47% interest. The case has been remanded to the District Court in order to establish a new formula. Based on information currently known to management, the Company believes that the ultimate outcome of this proceeding will not have a material effect on the Company’s financial position or results from operations.

From time to time the Company is, and expects to continue to be, subject to legal proceedings, governmental investigations, and claims in the ordinary course of 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 actual or potential third-party claims. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to the Company. 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

As of July 1, 2010, the Company reorganized the management of its product lines and businesses in order to more efficiently develop and sell its products, and more cost effectively manage its operations. Beginning in the quarter ended September 30, 2010, the Company’s financial results reflect the new corporate reorganization with the following reporting segments: (1) Core Products, which includes financial results from existing and future software as a service offerings of ringback tones, music on demand, video on demand, storefront services and inter-carrier messaging; systems integration and professional services; Helix software and licenses for handsets; SuperPass; and the Company’s international radio subscriptions; (2) Emerging Products, which includes financial results from RealPlayer, including distribution of third-party products, advertising and other revenue, and new products and services that will be introduced over time for consumers or enterprise customers; and (3) Games, which is unchanged and includes all games-related financial results, including game sales, subscriptions services, syndication services, advertising-supported games, and mobile and social games. In addition, the Company will continue to present financial results for its former Music segment on a historical basis only. The Music segment primarily includes financial results and operating performance of the Company’s Rhapsody joint venture, which was restructured as of March 31, 2010. As a result of the restructuring, Rhapsody’s results are no longer consolidated with the Company’s financial statements for periods after March 31, 2010. The Company now reports its share of Rhapsody’s income or losses as “Equity in net loss of Rhapsody and other equity method investments” in “Other income (expenses), net.” The Company has adjusted the financial information for periods prior to September 30, 2010, to reflect the segment reorganization to allow comparability between the periods.

Beginning with the third quarter of 2010, the Company also changed how it allocates corporate and shared overhead expenses. Historically, the Company allocated common corporate overhead expenses, including but not limited to finance, legal and headquarters

facilities, to each business segment. Beginning in the quarter ended September 30, 2010, these shared expenses, as well as stock compensation costs, are shown in the aggregate as “Corporate” expenses and are not reflected in segment results for the business segments described in the preceding paragraph. Only direct business segment expenses, such as research and development, marketing and certain other business shared services are reflected in the associated business segment results. The changes in the allocation of corporate expenses are designed to help ensure that business segment results reflect only those items that are directly attributable to that segment’s performance and that shared overhead expenses are centrally managed to promote focus on and accountability for the overall corporate cost structure.

The Company reports three ongoing reporting segments 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 Interim Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and certain 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, geographical regions and corporate expenses for purposes of making decisions and assessing financial performance. The CEOS reviews discrete financial information regarding profitability of the Company’s Core Products, Emerging Products, Games, and, prior to April 1, 2010, Music segments and, therefore, the Company reports these as operating segments. The accounting policies used to derive segment results are generally the same as those described in Note 1, Summary of Business and Summary of Significant Accounting Policies.

Segment operating income (loss) for the quarters and six months ended June 30, 2011 and 2010, are as follows (in thousands):

Core Products


	Quarters Ended June 30,										Six Months Ended June 30,
	2011		2010		$ Change			% Change			2011		2010		$ Change			% Change
Revenue	$	45,735	$	51,742	$	(6,007	)		(12	)%	$	93,842	$	102,945	$	(9,103	)		(9	)%
Cost of revenue		19,353		18,085		1,268			7			40,337		35,824		4,513			13

Gross profit		26,382		33,657		(7,275	)		(22	)		53,505		67,121		(13,616	)		(20	)
Operating expenses		19,174		22,508		(3,334	)		(15	)		38,560		46,594		(8,034	)		(17	)

Operating income (loss)	$	7,208	$	11,149	$	(3,941	)		(35	)%	$	14,945	$	20,527	$	(5,582	)		(27	)%

Emerging Products


	Quarters Ended June 30,											Six Months Ended June 30,
	2011		2010			$ Change			% Change			2011		2010		$ Change			% Change
Revenue	$	12,717	$	8,997		$	3,720			41	%	$	23,852	$	20,425	$	3,427			17	%
Cost of revenue		2,978		3,404			(426	)		(13	)		4,518		4,868		(350	)		(7	)

Gross profit		9,739		5,593			4,146			74			19,334		15,557		3,777			24
Operating expenses		9,369		7,602			1,767			23			19,260		14,635		4,625			32

Operating income (loss)	$	370	$	(2,009	)	$	2,379			(118	)%	$	74	$	922	$	(848	)		(92	)%

Games


	Quarters Ended June 30,										Six Months Ended June 30,
	2011		2010		$ Change			% Change			2011		2010			$ Change			% Change
Revenue	$	25,300	$	28,145	$	(2,845	)		(10	)%	$	53,359	$	58,381		$	(5,022	)		(9	)%
Cost of revenue		8,040		7,228		812			11			16,574		14,931			1,643			11

Gross profit		17,260		20,917		(3,657	)		(17	)		36,785		43,450			(6,665	)		(15	)
Operating expenses		15,211		20,832		(5,621	)		(27	)		32,025		43,603			(11,578	)		(27	)

Operating income (loss)	$	2,049	$	85	$	1,964			NM		$	4,760	$	(153	)	$	4,913			NM

Music


	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	0		$	0		$	0			0	%	$	0		$	35,733		$	(35,733	)		(100	)%
Cost of revenue		0			0			0			0			0			21,864			(21,864	)		(100	)

Gross profit		0			0			0			0			0			13,869			(13,869	)		(100	)
Operating expenses		0			0			0			0			0			13,911			(13,911	)		(100	)

Operating income (loss)	$	0		$	0		$	0			0	%	$	0		$	(42	)	$	42			(100	)%

*Corporate*
	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Cost of revenue	$	295		$	432		$	(137	)		(32	)%	$	1,303		$	821		$	482			59	%
Operating expenses		14,116			30,487			(16,371	)		(54	)		28,926			56,789			(27,863	)		(49	)

Operating income (loss)	$	(14,411	)	$	(30,919	)	$	16,508			(53	)%	$	(30,229	)	$	(57,610	)	$	27,381			(48	)%

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


	Quarters Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
United States	$	41,984	$	48,351	$	86,453	$	132,901
Europe		19,024		19,316		37,984		41,798
Rest of the world		22,744		21,217		46,616		42,785

Total net revenue	$	83,752	$	88,884	$	171,053	$	217,484

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


	June 30, 2011		December 31, 2010
United States	$	42,373	$	43,655
Republic of Korea		5,335		5,659
Europe		3,184		3,069
Rest of the world		6,452		2,900

Total long-lived assets	$	57,344	$	55,283

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


	June 30, 2011		December 31, 2010
United States	$	338,775	$	352,341
Republic of Korea		4,236		12,374
Europe		42,011		33,029
Rest of the world		19,007		15,001

Total net assets	$	404,029	$	412,745

Note 17. Related Party Transactions

Transactions with MTVN. As part of the initial formation of Rhapsody in 2007, MTVN contributed a $230 million five-year note payable in partial consideration for acquiring MTVN’s interest in the venture. In February 2009, RealNetworks and MTVN signed an amendment to the Rhapsody joint venture agreement which reduced the amount payable under the MTVN note to $213.8 million over the original five-year term and on March 31, 2010, the note was cancelled in connection with the completion of the Rhapsody restructuring transactions. During the quarter ended March 31, 2010, Rhapsody received $1.2 million in cash as note payments and spent $1.1 million in advertising with MTVN. MTVN agreed to a new $33.0 million marketing commitment as part of the restructuring transactions that were completed on March 31, 2010. RealNetworks no longer consolidates Rhapsody’s financial position and results, and consequently these transactions are no longer considered related party transactions. See Note 4, Rhapsody Joint Venture, for more information on the restructuring transactions.

Transactions with Rhapsody. For periods between August 2007 and March 31, 2010, the Company also provided various support services, including items such as facilities, information technology systems, personnel support and some overhead charges associated with the support services, directly to Rhapsody. The allocation of these and other support service costs were based on various measures depending on the service provided, including employee headcount, time employees spent on providing services to Rhapsody, server usage or number of users of a service. The allocations of these costs were billed directly to Rhapsody. Prior to March 31, 2010, the Company treated these allocations as intercompany transactions and all such transactions were eliminated in consolidation. As of March 31, 2010, the Company no longer consolidates these transactions.

Following the restructuring transactions, the Company is obligated to provide Rhapsody with a reduced amount of support services. These support services are expected to be completed in the first half of 2012 unless earlier terminated by Rhapsody. The support services include information technology and limited operational support provided directly to Rhapsody. The amount charged for these and other support service costs were based on various measures depending on the service provided, including vendor fees, an allocation of fixed costs and time employees spend on providing services to Rhapsody. RealNetworks allocates the cost of providing these support services and records such allocation as a reduction to the related expense in the period for which it was incurred. During the quarter and six months ended June 30, 2011 the Company charged Rhapsody $0.9 million and $1.8 million, respectively, for the support services. At June 30, 2011, the Related Party Receivable – Rhapsody of $0.5 million included these charges.

Transactions with LoEn Entertainment, Inc. During the fourth quarter of 2008, the Company paid $9.9 million to acquire approximately 11% of the outstanding shares of LoEn Entertainment, Inc. (LoEn). The Company paid market price for approximately 2.8 million common shares of LoEn which are traded on the Korean Securities Dealers Automated Quotations. The Company’s investment in LoEn is treated as an available for sale investment of a public company and is marked-to-market each period with resulting gains/losses recognized in equity as unrealized holding gains/losses on investment. During the quarters ended June 30, 2011 and 2010, the Company recorded revenue from LoEn of approximately $4.5 million and $3.7 million, respectively. During the six month periods ended June 30, 2011 and 2010, the Company recorded revenue from LoEn of approximately $8.6 million and $7.4 million, respectively. This revenue consisted primarily of sales of application service provider services, which includes sales of ringback tones, music-on-demand, video-on-demand, and inter-carrier messaging services. Associated with these transactions, the Company also recorded accounts receivable of approximately $2.3 million as of June 30, 2011. Accounts payable and cost of revenue balances associated with LoEn as of and for the quarters and six month periods ended June 30, 2011 and 2010, were nominal.

Note 18. Income Taxes

As of June 30, 2011, there have been no material changes to the Company’s uncertain tax positions disclosures as provided in Note 15 to the Company’s audited financial statements included in the Company’s 2010 Annual Report on Form 10-K. The Company

currently anticipates the closure of foreign income tax examinations in the next twelve months that may reduce total unrecognized tax benefits by an amount up to $9.3 million as a result of the successful defense of the Company’s positions, the settlement and payment of a liability, or a combination thereof.

The Company has not provided for U.S. deferred income taxes or withholding taxes on certain 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, the Company 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. However, as the Company currently has significant net operating losses and other tax attributes that could be used to offset the potential U.S. income tax that could result if these amounts were distributed to the U.S., the Company does not anticipate a material U.S. tax impact on such earnings as of June 30, 2011.

The Company files numerous consolidated and separate income tax returns in the United States including federal, state and local, as well as foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for tax years before 2006 or state, local, or foreign income tax examinations for years before 1993. RealNetworks, Inc. and/or subsidiaries are under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

Note 19. Subsequent Event

On July 27, 2011, the Company’s Board of Directors approved the payment of a special cash dividend of $1.00 per common share and a one-for-four reverse stock split of the Company’s common stock, as follows:

Special Dividend: The Board of Directors declared a special dividend of $1.00 per share of its common stock, payable on August 23, 2011, to holders of record as of the close of business August 9, 2011. The aggregate amount of the special cash dividend will be approximately $136.8 million.

Reverse Stock Split: The Board of Directors authorized a one-for-four reverse stock split of the Company’s common stock, which is expected to become effective at the close of business on August 30, 2011. When the reverse stock split becomes effective, every four shares of issued and outstanding common stock will be automatically combined into one issued and outstanding share of common stock without any change in the par value per share. This will reduce the number of outstanding shares of common stock from approximately 136.8 million shares to approximately 34.2 million shares. Shareholders will be entitled to receive a cash payment in lieu of any fractional shares of common stock they would otherwise be entitled to receive as a result of the reverse stock split.

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. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:

•

future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;

•

the effects of our past acquisitions and expectations for future acquisitions;

•

plans, strategies and expected opportunities for future growth, increased profitability and innovation;

•

the prospects for creation and growth of strategic partnerships and the resulting financial benefits from such partnerships;

•

the expected financial position, performance, growth and profitability of our businesses and the availability of resources;

•

our involvement in potential claims and legal proceedings, the expected course and costs of existing claims and legal proceedings, and the potential outcomes and effects of both existing and potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;

•

the expected benefits and other consequences from restructuring Rhapsody and from our other strategic initiatives;

•

our expected introduction of new and enhanced products, services and technologies across our businesses, including Unifi, a personal media cloud service we launched with one of our mobile-carrier customers in the latter part of the quarter ended June 30, 2011;

•

the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;

•

the continuation and expected nature of certain customer relationships;

•

impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;

•

the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and

•

the effect of economic and market conditions on our business, prospects, financial condition or results of operations.

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 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

RealNetworks’ mission is to create innovative applications and services that make it easy to connect with and enjoy digital media. We pioneered the development of technology for streaming digital media over the Internet and have continued creating and delivering digital-media technology, services and content, such as music, games and video, around the world. We distribute our products and services directly to consumers and through mobile carriers, original equipment manufacturers and other communications companies who offer these products and services to their customers.

We are primarily focused on the following three businesses: (1) our software as a service (SaaS) offerings; (2) our RealPlayer media player software and related businesses; and (3) our casual games business. Our major business initiatives include the continued development of our converged media platform, from which we deliver some of our SaaS services and which we intend to utilize increasingly in that business in the future; the development of social media capability within our games segment; and the development of Unifi, a personal cloud-media-management product that we introduced through one of our mobile-carrier customers in the second quarter of 2011 and expect to distribute through other mobile carriers and directly to consumers.

As of the quarter ended September 30, 2010, we report our results in the following reporting segments: (1) Core Products, (2) Emerging Products and (3) Games. We present financial results from our former Music segment on a historical basis only. The Music segment primarily included the financial results and operating performance of our Rhapsody joint venture, which was restructured as of March 31, 2010. In addition, we report common overhead expenses and stock compensation costs in the aggregate as corporate expenses and, therefore, these expenses are not reflected in the financial and operating results of our business segments. The historical financial information presented in this report has been adjusted to reflect the new segments and the new corporate expense presentation.

During 2010 and continuing into the first part of 2011, we implemented a significant restructuring of our business, which impacted our year-over-year results for the quarter and six months ended June 30, 2011. As part of these activities we restructured our Rhapsody joint venture, and as of March 31, 2010, no longer consolidate its results in our financial statements. We also implemented other significant internal restructuring measures, including reductions in personnel and facilities and the discontinuance or de-emphasis of certain unprofitable products and service offerings, while continuing to invest in our major business initiatives described above.

Condensed consolidated results of operations for the quarter and six month periods ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30, 2011												Six Months Ended June 30, 2011
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue
Core Products	$	45,735		$	51,742		$	(6,007	)		(12	)%	$	93,842		$	102,945		$	(9,103	)		(9	)%
Emerging Products		12,717			8,997			3,720			41			23,852			20,425			3,427			17
Games		25,300			28,145			(2,845	)		(10	)		53,359			58,381			(5,022	)		(9	)
Music		0			0			0			0			0			35,733			(35,733	)		(100	)

Total revenue		83,752			88,884			(5,132	)		(6	)		171,053			217,484			(46,431	)		(21	)
Cost of revenue		30,666			29,149			1,517			5			62,732			78,308			(15,576	)		(20	)

Gross profit		53,086			59,735			(6,649	)		(11	)		108,321			139,176			(30,855	)		(22	)
Gross margin		63	%		67	%								63	%		64	%
Operating expenses		57,870			81,429			(23,559	)		(29	)		118,771			175,532			(56,761	)		(32	)

Operating loss	$	(4,784	)	$	(21,694	)	$	16,910			(78	)%	$	(10,450	)	$	(36,356	)	$	25,906			(71	)%

In the quarter ended June 30, 2011, our total consolidated revenue declined by $5.1 million, compared with the year-earlier period. The reduction in revenue largely resulted from reduced SaaS services and subscription revenue, mainly from SuperPass, within our Core Products segment and a decline in Games revenue. These declines were partially offset by an increase in revenue from our Emerging Products segment. We reduced operating expenses by $23.6 million in the quarter ended June 30, 2011, compared with the same period in 2010. The reduction in operating expenses was due principally to restructuring charges and loss on excess office facilities totaling $11.9 million in the quarter ended June 30, 2010. The majority of the remaining decrease in operating expenses was due to lower personnel and related costs.

In the six months ended June 30, 2011, our total consolidated revenue declined by $46.4 million, compared with the year-earlier period. The total reduction in revenue was largely a result of the deconsolidation of our Rhapsody joint venture as of March 31, 2010. We reduced operating expenses by $56.8 million in the six months ended June 30, 2011, compared with the same period in 2010, principally through reduced personnel expenses, lower Rhapsody costs, lower restructuring charges and losses on excess office facilities, and an insurance settlement reimbursement of $6.4 million related to previously settled litigation.

See “Segment Operating Results” below for more information and discussion regarding changes in the operating results for each of our reporting segments for the quarter and six months ended June 30, 2011.

Segment Operating Results

Core Products

The Core Products segment primarily generates revenue and incurs costs from the sales of SaaS services, such as ringback tones, inter-carrier messages, music on demand and video on demand; professional services and system integration services to carriers and mobile handset companies; sales of licenses of our software products such as Helix for handsets; and consumer subscriptions such as SuperPass and international radio subscriptions. Core Products segment results of operations for the quarter and six month ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarter Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	45,735		$	51,742		$	(6,007	)		(12	)%	$	93,842		$	102,945		$	(9,103	)		(9	)%
Cost of revenue		19,353			18,085			1,268			7			40,337			35,824			4,513			13

Gross profit		26,382			33,657			(7,275	)		(22	)		53,505			67,121			(13,616	)		(20	)
Gross margin		58	%		65	%								57	%		65	%
Operating expenses		19,174			22,508			(3,334	)		(15	)		38,560			46,594			(8,034	)		(17	)

Operating income (loss)	$	7,208		$	11,149		$	(3,941	)		(35	)%	$	14,945		$	20,527		$	(5,582	)		(27	)%

Total Core Products revenue decreased by $6.0 million in the quarter ended June 30, 2011, compared with the year-earlier period, primarily due to reduced service revenue from our SaaS offerings of $2.2 million. The decline in SaaS revenue during the quarter was mainly due to lower intercarrier messaging contract prices, resulting in a decline of $1.8 million. In addition, subscription revenue, mainly from SuperPass, declined by $2.0 million, compared with the same period in 2010 resulting primarily from a decline in the number of subscribers. Further contributing to the decrease was a decline of $1.2 million in technology license sales.

Total Core Products revenue decreased by $9.1 million in the six months ended June 30, 2011, compared with the year-earlier period, primarily due to reduced service revenue from our SaaS offerings of $5.3 million. The decline in SaaS revenue was mainly due to lower intercarrier messaging contract prices, resulting in a decline of $4.2 million. In addition, subscription revenue, mainly from SuperPass, declined by $2.0 million during the six months ended June 30, 2011, compared with the same period in 2010 due primarily to a decline in the number of subscribers.

Cost of revenue increased by $1.3 million and $4.5 million in the quarter and six months ended June 30, 2011, respectively, compared with the year-earlier periods principally due to increased costs associated with personnel working on the delivery of our SaaS services to an expanded customer base. Gross margins declined for the quarter and six months ended June 30, 2011, mainly due to declines in intercarrier messaging revenue and SuperPass revenue, which are higher margin services.

Operating expenses declined by $3.3 million and $8.0 million in the quarter and six months ended June 30, 2011, respectively, compared with the year-earlier periods, primarily due to reductions in personnel and related costs which resulted from our restructuring efforts.

Emerging Products

The Emerging Products segment primarily generates revenue and incurs costs from sales of RealPlayer and its related products, such as the distribution of third-party software products, advertising on RealPlayer websites, and sales of RealPlayerPlus software licenses to consumers. Also included within the Emerging Products segment is the cost to build and develop new product offerings for

consumers and business customers, including Unifi. Emerging Products segment results of operations for the quarter and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	12,717		$	8,997		$	3,720			41	%	$	23,852		$	20,425		$	3,427			17	%
Cost of revenue		2,978			3,404			(426	)		(13	)		4,518			4,868			(350	)		(7	)

Gross profit		9,739			5,593			4,146			74			19,334			15,557			3,777			24
Gross margin		77	%		62	%								81	%		76	%
Operating expenses		9,369			7,602			1,767			23			19,260			14,635			4,625			32

Operating income (loss)	$	370		$	(2,009	)	$	2,379			(118	)%	$	74		$	922		$	(848	)		(92	)%

Total Emerging Products revenue increased by $3.7 million in the quarter ended June 30, 2011, compared with the year-earlier period. Higher unit sales of our RealPlayer Plus software and higher distribution of third-party software products contributed approximately $1.3 million and $2.3 million, respectively, to the increase during the period. These increases were primarily attributable to our continued development of RealPlayer, specifically including our marketing efforts to optimize order paths and the distribution of third-party software.

Total Emerging Products revenue increased by $3.4 million in the six months ended June 30, 2011, compared with the year-earlier period. Higher unit sales of our RealPlayer Plus software and higher distribution of third-party software products contributed approximately $2.3 million and $1.4 million, respectively, to the increase during the period. Gross margins increased for the quarter and six months ended June 30, 2011, mainly due to an increase in sales of RealPlayer Plus and distribution of third-party products which have higher margins. In addition, for the quarter ended June 30, 2010, there was a one-time expense for the rights to use certain technologies within our RealPlayer software in the amount of $1.5 million.

Operating expenses increased by $1.8 million and $4.6 million in the quarter and six months ended June 30, 2011, respectively, compared with the year-earlier periods primarily due to increased marketing expense to drive the distribution of RealPlayer and related third-party software as well as continued development of Unifi. We have increased expenses associated with the development of Unifi and decreased expenses in other areas following our restructuring efforts.

Games

The Games segment primarily generates revenue and incurs costs from the creation, distribution and sales of games licenses, online games subscription services, advertising on game sites and social network sites, games syndication services, microtransactions from online and social games, and sales of mobile games. Games segment results of operations for the quarter and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	25,300		$	28,145		$	(2,845	)		(10	)%	$	53,359		$	58,381		$	(5,022	)		(9	)%
Cost of revenue		8,040			7,228			812			11			16,574			14,931			1,643			11

Gross profit		17,260			20,917			(3,657	)		(17	)		36,785			43,450			(6,665	)		(15	)
Gross margin		68	%		74	%								69	%		74	%
Operating expenses		15,211			20,832			(5,621	)		(27	)		32,025			43,603			(11,578	)		(27	)

Operating income (loss)	$	2,049		$	85		$	1,964			2,311	%	$	4,760		$	(153	)	$	4,913			2,311	%

Total Games revenue decreased by $2.8 million in the quarter ended June 30, 2011, compared with the year-earlier period. Lower revenue from our subscription products and a decline in the distribution of third-party software contributed approximately $1.4 million and $1.0 million, respectively, to the decline during the period. The decline in subscription revenue was due to fewer subscribers compared with the year-earlier period. The decline in distribution of third party software was due to reduced traffic to our games properties.

Total Games revenue decreased by $5.0 million in the six months ended June 30, 2011, compared with the year-earlier period. The decline was due to lower revenue from our subscription products of $2.2 million as a result of fewer subscribers. In addition, distribution of third party software declined by $1.7 million due to reduced traffic to our games properties. Further contributing to the decline was lower license revenue of $1.3 million due to decreased unit sales of games.

Cost of revenue increased by $1.6 million in the six months ended June 30, 2011, compared with the year-earlier period. The increase was due to higher costs associated with personnel who distribute and deliver our games products and services. Gross margins decreased for the quarter and six months ended June 30, 2011, as a result of higher personnel costs associated with the distribution and delivery of games products and services. Further contributing to the decline in gross margins was a revenue mix towards games with higher royalties.

Operating expenses declined by $5.6 million and $11.6 million in the quarter and six months ended June 30, 2011, respectively, compared with the year-earlier period. The decreases were primarily due to reductions in personnel and related costs of approximately $2.5 million and $5.2 million in the quarter and six months ended June 30, 2011, respectively. In addition, depreciation expense, related to our Games technology platform, decreased $1.5 million and $2.9 million in the quarter and six months ended June 30, 2011, respectively.

Music

Music segment results of operations for the quarter and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):

		$35,733		$35,733		$35,733		$35,733		$35,733		$35,733			$35,733			$35,733
	Quarters Ended June 30,								Six Months Ended June 30,
	2011		2010		$ Change		% Change		2011		2010			$ Change			% Change
Revenue	$	0	$	0	$	0		0	$	0	$	35,733		$	(35,733	)		(100	)%
Cost of revenue		0		0		0		0		0		21,864			(21,864	)		(100	)

Gross profit		0		0		0		0		0		13,869			(13,869	)		(100	)
Gross margin												39	%
Operating expenses		0		0		0		0		0		13,911			(13,911	)		(100	)

Operating loss	$	0	$	0	$	0		0	$	0	$	(42	)	$	42			(100	)%

On March 31, 2010, we completed the restructuring of Rhapsody, which resulted in our ownership interest of Rhapsody decreasing to approximately 47% and the loss of our operating control over Rhapsody. Our revenue for the first quarter of 2010 includes results from Rhapsody’s operations. Beginning with the second quarter of 2010, Rhapsody’s revenue and other operating results are no longer consolidated within our condensed consolidated financial statements, and we are not recording any operating or other financial results for our Music segment. We now report our share of Rhapsody’s income or losses as “Equity in net loss of Rhapsody and other equity method investments” in “Other income (expenses), net.” Our share of Rhapsody’s losses for the quarter and six months ended June 30, 2011 was $1.0 million and $4.3 million, respectively.

Corporate

Certain corporate-level activity is not allocated to our segments, including costs of the following: general and administrative functions and activities related to information technology, procurement activities, corporate headquarters, legal settlements and contingencies, stock compensation, losses on excess office facilities and employee severance costs. Corporate segment results of operations for the quarter and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Cost of revenue	$	295		$	432		$	(137	)		(32	)%	$	1,303		$	821		$	482			59	%
Operating expenses		14,116			30,487			(16,371	)		(54	)		28,926			56,789			(27,863	)		(49	)

Operating income (loss)	$	(14,411	)	$	(30,919	)	$	16,508			(53	)%	$	(30,229	)	$	(57,610	)	$	27,381			(48	)%

Operating expenses decreased by $16.4 million in the quarter ended June 30, 2011, compared with the year-earlier period. The decrease compared with the prior period was due to lower restructuring charges and loss of excess office facility charges related to our corporate headquarters in Seattle and our offices in Europe and Asia of $11.5 million. Lower personnel costs of $3.0 million as a result of our restructuring efforts also contributed to the decrease.

Operating expenses decreased by $27.9 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease was due in part to lower restructuring charges and loss on excess office facilities of approximately $10.3 million as well as a reduction in personnel and related costs of approximately $7.0 million in the six months ended June 30, 2011, compared with the year-earlier period. The remaining decrease in operating expenses in the six months ended June 30, 2011 was due in part to a benefit from an insurance reimbursement of $6.4 million related to previously settled litigation, which is accounted for as a reduction to operating expenses.

Consolidated Operating Expenses

Consolidated operating expenses consist primarily of salaries and related personnel costs including stock based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, restructuring and related charges, impairments of goodwill and losses on excess office facilities. To date, all research and development costs have been expensed as incurred because technological feasibility for software products is generally not established until substantially all development is complete. Operating expenses and changes for the quarters and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30,											Six Months Ended June 30,
	2011			2010		$ Change			% Change			2011			2010		$ Change			% Change
Research and development	$	17,809		$	27,583	$	(9,774	)		(35	)%	$	37,704		$	62,258	$	(24,554	)		(39	)%
Sales and marketing		28,853			27,382		1,471			5			57,333			65,209		(7,876	)		(12	)
Advertising with related party		0			0		0			0			0			1,065		(1,065	)		(100	)
General and administrative		10,874			14,590		(3,716	)		(25	)		16,496			29,511		(13,015	)		(44	)
Restructuring and other charges		508			4,792		(4,284	)		(89	)		7,412			10,407		(2,995	)		(29	)
Loss (gain) on excess office facilities		(174	)		7,082		(7,256	)		(102	)		(174	)		7,082		(7,256	)		(102	)

Total consolidated operating expenses	$	57,870		$	81,429	$	(23,559	)		(29	)%	$	118,771		$	175,532	$	(56,761	)		(32	)%

Research and development expenses decreased by $9.8 million in the quarter ended June 30, 2011, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of approximately $6.4 million due to our restructuring activities as well as a decrease in depreciation expense related to our Games technology platform of $1.5 million.

Research and development expenses decreased by $24.6 million in the six month period ended June 30, 2011, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of approximately $15.0 million as well as a decrease in depreciation expense related to our Games technology platform of $2.9 million. In addition, the removal of Rhapsody’s operating expenses from our consolidated financial results beginning April 1, 2010, contributed approximately $3.8 million to the decline.

Sales and marketing expenses increased by $1.5 million in the quarter ended June 30, 2011, compared with the year-earlier period. The increase during the quarter was due to an increase in marketing expenses of $1.7 million for RealPlayer.

Sales and marketing expenses decreased by $7.9 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease during the six-month period was due primarily to the removal of Rhapsody’s operating expenses of $8.8 million from our consolidated financial results beginning April 1, 2010. All of the historical costs associated with “Advertising with related party” were included within our Music segment as discussed in “Segment Operating Results – Music” above.

General and administrative expenses decreased by $3.7 million in the quarter ended June 30, 2011, compared with year-earlier period due to our restructuring activities, of which approximately $2.5 million related to lower personnel and related costs.

General and administrative expenses decreased by $13.0 million in the six month period ended June 30, 2011, compared with the year-earlier period primarily due to an insurance reimbursement of $6.4 million related to previously settled ligation and a reduction in personnel and related costs of $5.1 million.

Restructuring and other charges consist of costs associated with the realignment and reorganization of our business operations and primarily include separation costs for employees, including severance, and other benefits. For the six months ended June 30, 2011, we recorded $7.4 million in restructuring and other charges that included separation costs of approximately $2.8 million related to the resignation of our Chief Executive Officer, of which approximately $2.0 million was severance and $0.8 million was non-cash charges related to accelerated vesting of stock options.

Loss on excess office facilities represent the reduction in the use of our current office space in our headquarters in Seattle, as well as our other offices in Europe in connection with the reorganization our business and operational structure, including the restructuring of Rhapsody. For the quarter and six months ended June 30, 2010, the estimated loss on excess office facilities, including the write-down of leasehold improvements, was approximately $7.1 million. Our estimates are based upon many factors including projections of sublease rates and the time period required to locate tenants which are updated from time to time as deemed necessary.

Other Income (Expenses), Net

Other income (expenses), net consists primarily of the following: interest income on our cash, cash equivalents, and short-term investments, our equity in net loss of Rhapsody and other equity method investments and our gain on deconsolidation of Rhapsody. Other income (expenses), net for the quarter and six months ended June 30, 2011 and 2010, are as follows (dollars in thousands):


	Quarters Ended June 30,												Six Months Ended June 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Interest income, net	$	311		$	551		$	(240	)		(44	)%	$	690		$	931		$	(241	)		(26	)%
Equity in net loss of Rhapsody and other equity method investments		(1,018	)		(5,427	)		4,409			(81	)		(4,299	)		(5,427	)		1,128			(21	)
Loss on sale of equity investments, net		0			(50	)		50			(100	)		0			(50	)		50			(100	)
Gain on deconsolidation of Rhapsody		0			0			0			0			0			10,929			(10,929	)		(100	)
Other income (expense), net		(311	)		994			(1,305	)		(131	)		(433	)		1,093			(1,526	)		(140	)

Total other income (expense), net	$	(1,018	)	$	(3,932	)	$	2,914			(74	)%	$	(4,042	)	$	7,476		$	(11,518	)		(154	)%

Total other income (expense), net increased by $2.9 million in the quarter ended June 30, 2011, compared with the year-earlier period. The increase during the quarter ended was primarily due to the reduction in loss of $4.4 million in our equity method investment in Rhapsody.

Total other income (expense), net decreased by $11.5 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease during the six-month period was primarily due to a $10.9 million one-time gain on the deconsolidation of Rhapsody in 2010, partially offset by the decline in equity loss for our investment in Rhapsody of $1.1 million.

Since March 31, 2010, we do not hold a controlling interest in Rhapsody and we no longer consolidate Rhapsody’s results with our own. We now account for our ownership interest in Rhapsody as an equity method investment.

Income Taxes

During the quarters ended June 30, 2011 and 2010, we recognized income tax expense of $1.0 million and $0.3 million, respectively, related to U.S. and foreign income taxes. The increase in income tax expense and the change in income tax expense as a percentage of pre-tax loss during the quarter ended June 30, 2011, was largely the result of a change in our jurisdictional income mix. During the six months ended June 30, 2011 and 2010, we recognized income tax expense of $4.7 million and income tax benefit of $3.3 million, respectively, related to U.S. and foreign income taxes. The increase in income tax expense and the change in income tax expense as a percentage of pre-tax loss during the six months ended June 30, 2011, was largely the result of the settlement of a foreign tax audit and an adjustment relating to a state tax audit. Additionally, income tax expense in the year-ago period was lower due to a partial release of a valuation allowance on international net operating losses of $1.8 million and an adjustment from the restructuring of Rhapsody of $2.6 million, both of which resulted in lower income tax expense in 2010 compared with 2011.

As of June 30, 2011, there have been no material changes to our uncertain tax positions disclosures as provided in Note 15 to our audited financial statements included in our 2010 Annual Report on Form 10-K. We currently anticipate the closure of foreign income tax examinations in the next twelve months that may reduce our total unrecognized tax benefits by an amount up to $9.3 million as a result of the successful defense of the Company’s positions, the settlement and payment of a liability, or a combination thereof.

The majority of our tax expense is due to income in our foreign jurisdictions as we do not currently benefit from losses in the U.S. We generate income in a number of foreign jurisdictions, some of which have higher tax rates and some of which have lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates. For the quarter ended June 30, 2011, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. As such, the effect of differences in foreign tax rates on the Company’s tax expense for the second quarter of 2011 is minimal.

We file numerous consolidated and separate income tax returns in the United States, including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2006 or state, local or foreign income tax examinations for years prior to 1993. RealNetworks, Inc. and /or subsidiaries are under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

Geographic Revenue

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


	Quarters Ended June 30,										Six Months Ended June 30,
	2011		2010		$ Change			% Change			2011		2010		$ Change			% Change
United States	$	41,984	$	48,351	$	(6,367	)		(13	)%	$	86,453	$	132,901	$	(46,448	)		(35	)%
Europe		19,024		19,316		(292	)		(2	)		37,984		41,798		(3,814	)		(9	)
Rest of world		22,744		21,217		1,527			7			46,616		42,785		3,831			9

Total net revenue	$	83,752	$	88,884	$	(5,132	)		(6	)%	$	171,053	$	217,484	$	(46,431	)		(21	)%

Revenue in the United States declined by $6.4 million in the quarter ended June 30, 2011, compared with the year-earlier period. The decline was due to reductions in revenue generated from our SaaS offerings of $3.5 million, lower sales of games subscriptions and license sales of approximately $2.3 million and a decrease in revenue from our SuperPass subscription service of $1.1 million, partially offset by increased distribution of third party products of $1.1 million. See the section “Segment Operating Results” above for further discussion of these changes.

Revenue in the United States declined by $46.4 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease for the six months ended June 30, 2011 resulted primarily from a loss of revenue of $33.6 million from the deconsolidation of Rhapsody, which generated its revenue primarily in the United States. The decline was also due to reductions in revenue generated from our SaaS offerings of $7.8 million, lower sales of games subscriptions and license sales of approximately $2.8 million and a decrease in revenue from our SuperPass subscription service of $2.1 million. See the section “Segment Operating Results” above for further discussion of these changes.

Revenue in Europe declined $3.8 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease in the six-month period was due primarily to lower revenue of $1.1 million from our Games business, a decline in revenue from the distribution of third-party products of $1.3 million, and a decline in technology licensing of $1.4 million. See the section “Segment Operating Results” above for further discussion of these changes.

Revenue in rest of world increased by $1.5 million in the quarter ended June 30, 2011, compared with the year-earlier period. The increase in the quarter ended June 30, 2011 was primarily due to increased SaaS revenue of $0.7 million and revenue generated from our technology licensing services of $0.5 million. See the section “Segment Operating Results” above for further discussion of these changes.

Revenue in rest of world increased by $3.8 million in the six months ended June 30, 2011, compared with the year-earlier period. The increase for the six months ended June 30, 2011 was primarily due to increased SaaS revenue of $2.6 million and systems integration revenue of $0.9 million. See the section “Segment Operating Results” above for further discussion of these changes.

License Fees and Service Revenue

We also present our revenue based on License fees and Service revenue as set forth below (dollars in thousands):


	Quarters Ended June 30,										Six Months Ended June 30,
	2011		2010		$ Change			% Change			2011		2010		$ Change			% Change
License	$	16,817	$	16,644	$	173			1	%	$	35,232	$	40,816	$	(5,584	)		(14	)%
Service		66,935		72,240		(5,305	)		(7	)		135,821		176,668		(40,847	)		(23	)

Total net revenue	$	83,752	$	88,884	$	(5,132	)		(6	)%	$	171,053	$	217,484	$	(46,431	)		(21	)%

License Fees . License fees primarily include revenue from sales of content such as game licenses, sales of licenses of our system software products such as Helix for handsets, and sales of premium versions of our RealPlayer and related products. Prior to March 31, 2010, license fees also included the sales from digital music tracks from our Music segment. License fees include revenue from all of our reporting segments.

License fees decreased by $5.6 million in the six months ended June 30, 2011, compared with the year-earlier period. The deconsolidation of our Music segment contributed $3.9 million to the overall decrease for the six months ended June 30, 2011. The sale of games during the six-month period also declined by $2.6 million, offset by higher unit sales of RealPlayer Plus of $2.3 million compared with the year-earlier period. See the section “Segment Operating Results” above for further discussion of these changes.

Service Revenue . Service revenue primarily includes revenue from sales of digital media subscription services such as SuperPass, GamePass and FunPass, revenue from SaaS services, distribution of third party software, and advertising. Prior to March 31, 2010, service revenue also included sales of the Rhapsody music subscription service from our Music segment. Service revenue includes revenue from all of our reporting segments.

Service revenue decreased by $5.3 million in the quarter ended June 30, 2011, compared with the year-earlier period. The decline was due to lower sales of our subscription products of $3.4 million, reduced service revenue from our SaaS offerings of approximately $2.2 million and lower technology support service revenue of $1.2 million. See the section “Segment Operating Results” above for further discussion of these changes.

Service revenue decreased by $40.8 million in the six months ended June 30, 2011, compared with the year-earlier period. The deconsolidation of our Music segment contributed $31.8 million to the overall decrease for the six months ended June 30, 2011. The decline was also due to reduced service revenue from our SaaS offerings of approximately $5.3 million, lower sales of our subscription products of $4.2 million and lower service revenue of $1.7 million resulting from lower technology support services. See the section “Segment Operating Results” above for further discussion of these changes.

Cost of License Fees and Service Revenue

We also present our cost of revenue based on License fees and Service revenue as set forth below (dollars in thousands):


	Quarters Ended June 30,										Six Months Ended June 30,
	2011		2010		$ Change			% Change			2011		2010		$ Change			% Change
License	$	4,800	$	5,668	$	(868	)		(15	)%	$	10,046	$	13,217	$	(3,171	)		(24	)%
Service		25,866		23,481		2,385			10			52,686		65,091		(12,405	)		(19	)

Total cost of revenue	$	30,666	$	29,149	$	1,517			5	%	$	62,732	$	78,308	$	(15,576	)		(20	)%

Cost of License Fees . Cost of license fees includes royalties paid on the sales of games, amounts paid for licensed technology, amortization of acquired technology, and music royalties paid for periods prior to March 31, 2010.

Cost of license fees decreased by $3.2 million in the six months ended June 30, 2011, compared with the year-earlier period. The decrease for the six months ended was primarily due to a one-time expense paid for the rights to use certain technologies within our RealPlayer software in the amount of $1.5 million in the prior period. The deconsolidation of our Music segment contributed $2.7 million to the decline for the six months ended June 30, 2011. See the section “Segment Operating Results” above for further discussion of these changes.

Cost of Service Revenue . Cost of service revenue includes the cost of content and delivery of the content included in our digital media subscription and mobile service offerings, cost of in-house and contract personnel providing support services, amortization of acquired technology, fees for consulting services, expenses incurred in providing our SaaS hosting services and cost of content for our Rhapsody service for periods prior to March 31, 2010. Content costs are expensed over the period the content is available to our subscription services customers.

Cost of service revenue increased by $2.4 million in the quarter ended June 30, 2011, compared with the year-earlier period. The increase during the period is primarily due to increased costs associated with personnel working on the delivery of our SaaS services to an expanded customer base.

Cost of service revenue decreased by $12.4 million in the six months ended June 30, 2011, compared with the year-earlier period. The deconsolidation of our Music segment contributed $19.2 million to the overall decrease, partially offset by increases in costs of $5.5 million from delivery of our system integration and SaaS services to an expanded customer base during the six months ended June 30, 2011.

New Accounting Pronouncements

See “Note 2 Recent Accounting Pronouncements” to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for information regarding new accounting pronouncements.

Liquidity and Capital Resources

The following summarizes working capital, cash, cash equivalents, short-term investments, and restricted cash (in thousands):


	June 30, 2011		December 31, 2010
Working capital	$	285,343	$	286,315
Cash, cash equivalents, and short-term investments		327,872		334,321
Restricted cash equivalents and investments		10,141		10,000

The following summarizes cash flows (in thousands):


	Six Months Ended June 30,
	2011			2010
Cash used in operating activities	$	(5,490	)	$	(56,337	)
Cash provided by (used in) investing activities		998			(67,133	)
Cash provided by financing activities		1,667			2,503

Cash used in operating activities consisted of net loss adjusted for certain non-cash items including depreciation, amortization, stock-based compensation, deferred income taxes, gain on deconsolidation of Rhapsody, accrued restructuring and other charges and the effect of changes in certain operating assets and liabilities, net of acquisitions and deconsolidation of Rhapsody.

Cash used in operating activities in the six months ended June 30, 2011, was $5.5 million and consisted of (1) a net loss of $19.2 million, (2) adjustments to reconcile the net loss to cash used in operating activities of $18.2 million and (3) cash used in activities related to changes in certain operating assets and liabilities, net of acquisitions and deconsolidation of Rhapsody, of $4.6 million. Adjustments to reconcile the net loss to cash used in operating activities primarily consisted of $8.1 million of depreciation and amortization expense, $6.1 million of stock-based compensation and $4.3 million of equity in the net loss of Rhapsody and other equity investments. Changes in certain operating assets and liabilities, net of acquisitions and deconsolidation of Rhapsody, in the six months ended June 30, 2011 primarily consisted of uses of cash from a decrease in accounts payable of $10.6 million. This decrease was primarily related to the timing of certain payments.

Cash used in operating activities in the six months ended June 30, 2010, was $56.3 million and consisted of (1) net loss of $25.6 million, (2) adjustments for cash provided by non-cash items of $23.7 million, and (3) cash used in activities related to changes in certain operating assets and liabilities, net of acquisitions and deconsolidation of Rhapsody, of $54.4 million. Adjustments for cash provided by non-cash items primarily consisted of $14.0 million of depreciation and amortization expense, $6.7 million of stock-based compensation, $6.5 million of accrued loss on excess office facilities, $5.4 million of equity in the net loss of Rhapsody and other equity investments, and $3.6 million for amounts accrued relating to restructuring expenses incurred during the period, partially offset by $10.9 million of gain related to the deconsolidation of the Rhapsody joint venture.

Changes in certain operating assets and liabilities, net of acquisitions and deconsolidation of Rhapsody, in the six months ended June 30, 2010 primarily consisted of uses of cash from the decrease in accrued and other liabilities of $52.3 million. These decreases were related to reductions in accrued royalties and other fulfillment costs as well as a reduction in amounts payable to MTVN for related party advertising incurred during the six months ended June 30, 2010 as compared to December 31, 2009. Also contributing to the decline was the payment of the legal settlement and related legal expenses attributable to the RealDVD litigation of $5.5 million that was accrued for in the quarter ended December 31, 2009.

In the six months ended June 30, 2011, cash provided by investing activities of $1.0 million was due primarily from the sales and maturities, net of purchases, of short-term investments of $7.2 million, offset by purchases of equipment, software and leasehold improvements of $3.1 million and the payment of acquisition costs of $2.9 million. In the six months ended June 30, 2010, investing activities used cash primarily for payments made in connection with the restructuring of Rhapsody of $18.0 million as well as purchases of equipment, software, and leasehold improvements of $9.5 million. These uses of cash were partially offset by the repayment of temporary funding upon the deconsolidation of Rhapsody of approximately $5.9 million. Purchases, net of sales and maturities, of short-term investments used cash of $49.2 million during 2010.

Financing activities in the six months ended June 30, 2011 provided cash mainly from the proceeds of sales of common stock under employee stock purchase plans and the exercise of stock options of $1.6 million. Financing activities in 2010 provided cash from the proceeds of sales of (1) common stock under employee stock purchase plans and the exercise of stock options of $1.3 million and (2) payments received from the MTVN marketing note for our Rhapsody joint venture of $1.2 million.

In July 2011, our Board of Directors declared a special cash dividend of $1.00 per share, payable on August 23, 2011, to holders of our common stock as of August 9, 2011. The aggregate amount of the special cash dividend will be approximately $136.8 million. The declaration of the special dividend was based on an analysis of RealNetworks capital structure and the belief that we had excess cash relative to our future operational or strategic needs.

The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our board of directors and will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by our board of directors. Accordingly, there can be no assurance that we will declare and pay any dividends in the future.

We currently have no planned significant capital expenditures or other uses of cash for 2011 other than those in the ordinary course of business and those mentioned above. In the future, we may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.

Our principal commitments include office leases and contractual payments due to content and other service providers. We believe that our current cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

We do not hold derivative financial instruments or equity securities in our short-term investment portfolio. Our cash equivalents and short-term investments consist of high quality securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one non-U.S. Government or non-U.S. Agency issue or issuer to a maximum of 5% of the total portfolio. These securities are subject to interest rate risk and will decrease in value if interest rates increase. Because we have historically had the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in our securities portfolio.

We conduct our operations primarily in five functional currencies: the U.S. dollar, the Korean won, the Japanese yen, the British pound and the euro. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge the majority of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We invoice our international customers primarily in U.S. dollars, except in Korea, Japan, Germany, France, the United Kingdom and Australia, where we invoice our customers primarily in the respective foreign currencies. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Our exposure to foreign exchange rate fluctuations also arises from intercompany payables and receivables to and from our foreign subsidiaries.

As of June 30, 2011, $65.4 million of the $327.9 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Additionally, we currently have significant net operating losses and other tax attributes that could be used to offset any potential U.S. income tax that could result if these amounts were distributed to the

U.S. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held outside of the U.S to have a material effect on our overall liquidity, financial condition or results of operations.

Off-Balance Sheet Arrangements

Our only significant off-balance sheet arrangements relate to operating lease obligations for office facility leases and other contractual obligations related primarily to minimum contractual payments due to content and other service providers.

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 royalties;

•

Estimating recoverability of deferred costs;

•

Estimating allowances for doubtful accounts and sales returns;

•

Estimating losses on excess office facilities;

•

Valuation of equity method investments;

•

Valuation of available for sale securities;

•

Valuation of long-lived assets;

•

Valuation of goodwill;

•

Stock-based compensation;

•

Noncontrolling interest;

•

Accounting for gains on sale of subsidiary stock; and

•

Accounting for income taxes.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the product or services are made available, digitally, to the end user.

We recognize revenue on a gross or net basis. In most arrangements, we contract directly with end user customers, are the primary obligor and carry all collectability risk. In such arrangements, we recognize 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 collectability risk. In such instances, we recognize revenue on a net basis.

In our direct to consumer business, we derive revenue through (1) subscriptions of SuperPass within our Core Products segment and subscriptions sold by our Games segment, (2) sales of content downloads, software and licenses offered by the Company’s Core Products, Emerging Products and Games segments and (3) the sale of advertising and the distribution of third-party products on our websites and in our games. Prior to April 1, 2010, our direct to consumer business also included the products and services primarily sold by the Rhapsody joint venture and included in the Company’s Music segment. Beginning April 1, 2010, revenue from the Company’s Rhapsody joint venture is no longer consolidated within the Company’s financial statements. The Company now reports its share of Rhapsody’s net income or losses as “Equity in net loss of Rhapsody and other equity method investments”.

Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on our websites and from advertising and the distribution of third-party products included in our products is recognized as revenue at the time of delivery.

We also generate revenue through business-to-business channels by providing services within our Core Products segment enabling mobile carriers to deliver audio and video content to their customers and by selling software licenses and products and related support and other services.

A portion of the revenue related to the sale of software licenses and products and related support and other services is recorded as unearned due to undelivered elements including, in some cases, post-delivery support and the right to receive unspecified upgrades or enhancements on a when-and-if-available basis. Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using estimated selling prices if we do not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. Unearned revenue due to undelivered elements is recognized ratably on a straight-line basis over the related products’ contract term.

Estimating 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 primarily incurred by Rhapsody which was separated from our operating results beginning April 1, 2010. Unsettled obligations incurred prior to April 1, 2010 remain our liability. Material differences between these estimates and the actual amounts owed may impact 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 were 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 based our estimates on historical experience and on various other assumptions that management believed to be reasonable under the circumstances, actual results may differ materially from these estimates under different assumptions or conditions.

Estimating 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 as a component of cost of revenue, the timing of which is dependent upon the revenue recognition policy by project. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or customer acceptance, where applicable. 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.

Estimating Allowances for Doubtful Accounts and Sales Returns. We make estimates of the uncollectible portion 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 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 are 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 or actual future experience was different from the judgments and estimates.

Estimating Losses on Excess Office Facilities. We make significant estimates in determining the appropriate amount of accrued loss on excess office facilities. If we make 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.

Valuation of Equity Method Investments. We use the equity method in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We initially record our investments based on a fair value analysis of the investment. Prior to 2010, most of our equity method investments were purchased with cash which was determined to be fair value. For the investment in Rhapsody as of March 31, 2010, we used multiple valuation models to calculate the fair value since we contributed both cash and non-cash items in exchange for our interest. These models were based upon estimates and assumptions relating to future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital.

We record our percentage interest in the investee or joint venture’s income or loss under this method, which will increase or decrease the net book value of the investment. We record investee losses up to the aggregate amount of the investment.

We evaluate impairment of an investment valued under the equity method only if events and circumstances warrant. An impairment charge would be recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.

Valuation of Available for Sale Securities. Our investments in publicly traded companies are accounted for as available-for-sale and are carried at current market value. We periodically evaluate whether any declines in fair value of our available for sale securities are other-than-temporary based on a review of qualitative and quantitative factors. For investments with publicly quoted market prices, these factors include the time period and extent by which its accounting basis exceeds its quoted market price. We consider additional factors to determine whether declines in fair value are other-than-temporary, such as the investee’s financial condition, results of operations, and operating trends. The evaluation also considers publicly available information regarding the investee companies.

Valuation of Long-Lived Assets. Long-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. Long-lived assets are amortized on a straight line basis over their estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value. The impairment analysis of long-lived assets is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our long-lived assets could result in the need to perform an impairment analysis in future interim periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary period to period.

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. We consider a synthesis of the following important factors that could trigger an impairment review include the following:

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poor economic performance relative to historical or projected future operating results;

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significant negative industry, economic or company specific trends;

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market and interest rate risk;

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changes in the manner of our use of the assets or the plans for our business; and

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loss of key personnel.

In addition, we perform a reconciliation of our market capitalization plus a reasonable control premium to the aggregated implied fair value of all of our reporting units.

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.

The impairment analysis of goodwill is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital.

Stock-Based Compensation. 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 speculative 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 statements 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.

Noncontrolling Interests. We record noncontrolling interest expense (benefit) which reflects the portion of the earnings (losses) of majority-owned entities which are applicable to the noncontrolling interest partners in the consolidated statements of operations. Redeemable noncontrolling interests that are redeemable at either fair value or are based on a formula that is intended to approximate fair value follow our historical disclosure only policy for the redemption feature. Redeemable noncontrolling interests that are redeemable at either a fixed price or are based on a formula that is not akin to fair value are reflected as an adjustment to income attributable to common shareholders based on the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature with the remaining amount of accretion to redemption value recorded directly to equity. Net loss attributable to the noncontrolling interest in Rhapsody is included within the consolidated statements of operations and comprehensive income (loss). We applied this accounting policy to the noncontrolling interest in Rhapsody that was held by MTVN for periods beginning when Rhapsody was formed in August 2007 through the quarter ended March 31, 2010. Due to the completion of the restructuring of Rhapsody on March 31, 2010 which resulted in our holding approximately 47% of the outstanding shares of capital stock of Rhapsody, this accounting policy no longer applies with respect to our investment in Rhapsody as we no longer consolidate Rhapsody and no longer report a noncontrolling interest.

Accounting for Gains on Sale of Subsidiary Stock. Effective January 1, 2009, we adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 ( SFAS 160) which was primarily codified into FASB ASC 810 — Consolidation (ASC 810). Current guidance requires 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 to be recorded as equity transactions. We elected to recognize any such gain in our consolidated statements of operations prior to January 1, 2009 as was allowable under generally accepted accounting principles in place at that time if certain recognition criteria were met. Due to the completion of the restructuring of Rhapsody on March 31, 2010, which resulted in our holding approximately 47% of the outstanding shares of capital stock of Rhapsody, this accounting policy will no longer apply with respect to our investment as we no longer consolidate Rhapsody and no longer report a noncontrolling interest.

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.

Each reporting period we must 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 certain 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. However, as we currently have significant net operating losses and other tax attributes that could be used to offset the potential U.S. income tax that could result if these amounts were distributed to the U.S., we do not anticipate a material U.S. tax impact on such earnings as of June 30, 2011.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.

Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to our short-term investment portfolio. We do not hold derivative financial instruments or equity investments in our short-term investment portfolio. Our short-term investments consist of high quality debt securities as specified in our investment policy. Investments in both fixed and floating rate instruments carry a degree of interest rate risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Additionally, a declining rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. Due in part to these factors, our future interest income may be adversely impacted due to changes in interest rates. In addition, we may incur losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Because we have historically had the ability to hold our short-term investments until maturity, we would not expect our operating results or cash flows to be significantly impacted by a sudden change in market interest rates. There have been no material changes in our investment methodology regarding our cash equivalents and short-term investments during the quarter or six months ended June 30, 2011. Based on our cash, cash equivalents, short-term investments, and restricted cash equivalents at June 30, 2011, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest income and cash flows by more than a nominal amount.

Investment Risk. As of June 30, 2011, we had investments in voting capital stock of both publicly traded and privately-held technology companies for business and strategic purposes. Our investments in publicly traded companies are accounted for as available-for-sale, carried at current market value and are classified as long-term as they are strategic in nature. We periodically evaluate whether any declines in fair value of our investments are other-than-temporary based on a review of qualitative and quantitative factors. For investments with publicly quoted market prices, these factors include the time period and extent by which its accounting basis exceeds its quoted market price. We consider additional factors to determine whether declines in fair value are other-than-temporary,

such as the investee’s financial condition, results of operations, and operating trends. The evaluation also considers publicly available information regarding the investee companies. For investments in private companies with no quoted market price, we consider similar qualitative and quantitative factors as well as the implied value from any recent rounds of financing completed by the investee. Based upon an evaluation of the facts and circumstances during the quarter and six months ended June 30, 2011 and 2010, we determined that no other-than-temporary decline in fair value had occurred and therefore no impairment charges were recorded.

Foreign Currency Risk. We conduct business internationally in several currencies. As such, we are exposed to adverse movements in foreign currency exchange rates.

Our exposure to foreign exchange rate fluctuations arises in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers. A portion of these risks is managed through the use of financial derivatives, but fluctuations could impact our results of operations and financial position.

Generally, our practice is to manage foreign currency risk for the majority of material short-term intercompany balances through the use of foreign currency forward contracts. These contracts require us to exchange currencies at rates agreed upon at the contract’s inception. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the short-term intercompany balances, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. We do not designate our foreign exchange forward contracts related to short-term intercompany accounts as hedges and, accordingly, we adjust these instruments to fair value through results of operations. However, we may periodically hedge a portion of our foreign exchange exposures associated with material firmly committed transactions, long-term investments, highly predictable anticipated exposures and net investments in foreign subsidiaries. Some of our unhedged exposures are reconciled through our statement of operations on a mark-to-market basis each quarter, so to the extent we continue to experience adverse economic conditions, we may record losses related to such unhedged exposures in future periods that may have a material adverse effect on our financial condition and results of operations.

Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements.

We have cash balances denominated in foreign currencies which are subject to foreign currency fluctuation risk. The majority of our foreign currency denominated cash is held in Korean won and euros. A hypothetical 10% increase or decrease in the Korean won and euro relative to the U.S. dollar from June 30, 2011, would not result in more than a nominal amount of unrealized gain or loss.

Foreign currency transaction gains and losses were not material for the quarter or six month periods ended June 30, 2011 and 2010.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Based on an evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

See “Note 15. Commitment and Contingencies” to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for information regarding legal proceedings.

Item 1A.

Risk Factors

You should carefully consider the risks described below together with all of the other information included in this quarterly report on Form 10-Q. The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our common stock could decline, and investors in our common stock could lose all or part of their investment.

We need to successfully introduce new products and services to grow our businesses.

Our business is dependent upon the introduction of new products and services, which is subject to a number of risks. The process of developing new, and enhancing existing, products and services is complex, costly and uncertain. Providing products and services that are attractive and useful to subscribers and consumers is in part subject to unpredictable and volatile factors beyond our control, including end-user preferences and competing products and services. Any failure by us to timely respond to or accurately anticipate consumers’ changing needs, emerging technological trends or important changes in the market or competition for products and services we plan to introduce could significantly harm our current market share or result in the loss of market opportunities. In addition, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect consumer demand for our products and services, which may result in no return or a loss on our investments. Furthermore, new products and services may be subject to legal challenge. Responding to these potential claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop distributing or selling, or to redesign our products or services, or to pay damages. If we do not successfully introduce new products and services, our operating results may be materially harmed.

The mobile entertainment market is evolving rapidly and highly competitive.

The market for mobile entertainment services, including our ring back tones, music on demand and video on demand solutions, is highly competitive and evolving rapidly, particularly with the growth in the use of smartphones. Increased use of smartphones has resulted in a proliferation of applications and services that compete with our SaaS services and, in many cases, are not dependent upon our carrier customers to make them available to subscribers. To maintain or enhance our competitive position, we may need to develop new SaaS services that enable our carrier customers to compete with the broad range of applications and other services available in the market. We face competition, and may face future competition, from major media companies, Internet portal companies, content aggregators, wireless software providers and other pure-play wireless entertainment publishers, some of which have greater financial resources than we do. Furthermore, while most of our carrier customers do not offer internally developed services that compete with ours, if our carrier customers begin developing these services internally, we could be forced to lower our prices or increase the amount of service we provide in order to maintain our business with those carrier customers. Increased competition has in the past resulted in pricing pressure, forcing us to lower the selling price of our services. If we are unable to develop or provide services that compete effectively in the mobile entertainment market, our operating results and financial condition may be materially harmed.

Contracts with our carrier customers subject us to significant risks that could negatively impact our revenue or otherwise harm our operating results.

We derive a material portion of our revenue from our SaaS offerings we provide to carriers. Many of our SaaS contracts with carriers provide for revenue sharing arrangements, but we have little control over the pricing decisions of our carrier customers. Furthermore, most of these contracts do not provide for guaranteed minimum payments or usage levels. Because most of our carrier customer contracts are nonexclusive, it is possible that our mobile carrier customers could purchase similar services from third parties and cease to use our services in the future. As a result, our revenue derived under these agreements could be substantially reduced depending on the pricing and usage decisions of our carrier customers. In addition, some of our SaaS contracts require us to incur significant set-up costs prior to the launch of services with a carrier customer. These costs, particularly if combined with significant or sustained declines in revenue from our SaaS contracts, could result in impairments of deferred project costs in future periods, which would negatively impact our results of operations.

In addition, none of our SaaS contracts with carriers obligates our carrier customers to market or distribute any of our SaaS offerings. Despite the lack of marketing commitments, revenue related to our SaaS offerings is, to a large extent, dependent upon the marketing and promotion activities of our carrier customers. In addition, many of our carrier contracts are short term and allow for early termination by the carrier with or without cause. These contracts are therefore subject to renegotiation of pricing or other key terms that could be adverse to our interests and leave us vulnerable to non-renewal by the carriers. The loss of carrier customers, a reduction in marketing or promotion of our SaaS offerings, or the termination, non-renewal or renegotiation of contract terms that are less favorable to us would likely result in the loss of future revenues from our SaaS offerings.

Finally, nearly all of our carrier contracts obligate us to indemnify the carrier customer for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. Pursuant to these indemnifications obligations, we have agreed to control the defense on behalf of two of our carrier customers related to a pending patent infringement proceeding, and we are vigorously defending them. This pending proceeding or future claims against which we may be obligated to defend our carrier customers could result in payments that could materially harm our operating results.

A majority of the revenue that we generate in our Core Products business segment is dependent upon our relationship with a few customers, including SK Telecom and Verizon; any deterioration of these relationships could materially harm our business.

We generate a significant portion of our revenue from sales of our mobile entertainment services to a few of our mobile carrier customers, including SK Telecom, a leading wireless carrier in South Korea. In the near term, we expect that we will continue to generate a significant portion of our total revenue from these customers, particularly SK Telecom and Verizon. If these customers fail to market or distribute our services or terminate their business contracts with us, or if our relationships with these customers deteriorate in any significant way, we may be unable to replace the affected business arrangements with acceptable alternatives. Our relationship with SK Telecom may also be affected by the general state of the economy of South Korea. Failure to maintain our relationships with these customers could have a material negative impact on our revenue and operating results.

Our businesses face substantial competitive and other challenges that may prevent us from being successful in, and negatively impact future growth in, those businesses.

Many of our current and potential competitors in our businesses have longer operating histories, greater name recognition, more employees and significantly greater resources than we do. To effectively compete in the markets for our products and services, we may experience the following consequences, any of which would adversely affect our operating results and the trading price of our stock:

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reduced prices or margins,

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loss of current and potential customers, or partners and potential partners who provide content we distribute to our customers,

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changes to our products, services, technologies, licenses or business practices or strategies,

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lengthened sales cycles,

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industry-wide changes in content distribution to customers,

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pressure to prematurely release products or product enhancements, or

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degradation in our stature or reputation in the market.

In addition, we face the following competitive risks relating to our businesses:

Our SuperPass subscription service faces competition from a broad variety of entertainment sources, including traditional media outlets and emerging Internet media sources. We expect this competition to continue to be intense as the market and business models for Internet video content mature and more competitors enter these new markets. Competing services may be able to obtain better or more favorable access to compelling video content than us, may develop better offerings than us and may be able to leverage other assets or technologies to promote or distribute their offerings successfully. Our RealPlayer software services compete with alternative streaming

media playback technologies and audio and video formats including Microsoft Windows Media Player and Adobe Flash and their related file formats, each of which has obtained very broad market penetration. In addition, our overall ability to sell subscription services depends in part on the use of our formats on the Internet, and declines in the use of our formats have negatively affected, and are expected to continue to negatively affect, our subscription revenue and increase costs of obtaining new subscribers. If we are unable to compete successfully, including through the introduction of compelling new products and services, our SuperPass and RealPlayer businesses could continue to decline.

Our GameHouse, Zylom and Atrativa branded services compete with other online aggregators and distributors of online, downloadable and social casual PC games. Some of these competitors have high volume distribution channels and greater financial resources than we do. Our Games business also competes with many other smaller companies that may be able to adjust to market conditions, including responding effectively to the growing popularity of casual games on social networks, faster than us. We also face increasing price competition in the casual games market, and some of our competitors may be able to lower prices more aggressively than us. We expect competition to intensify in this market from these and other competitors, and no assurance can be made that we will be able to achieve growth in our revenue. Our games development studios compete primarily with other developers of online, downloadable, mobile and social casual PC games and must continue to develop popular and high-quality game titles. Our Games business must also continue to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including social networks, in order to maintain our competitive position and to grow the business.

We may not be successful in maintaining and growing our distribution of digital media products.

Maintaining and growing the distribution of digital media products through our websites and our other distribution channels is important to our future prospects, including future growth through the introduction of new products and services distributed through these channels. We cannot predict whether consumers will continue to download and use our digital media products consistent with past usage, which may reduce our ability to generate revenue from those products as well as result in lower than expected adoption of newly introduced products and services. Our inability to maintain continued high volume distribution of our digital media products could also hold back the growth and development of related revenue streams from these market segments, including the distribution of third-party products and sales of our subscription services, and therefore could harm our business and our prospects. Our revenue from the distribution of third-party products will also be negatively impacted if those products are not widely downloaded by consumers, including due to the relative market saturation of such products. In addition, our revenue from the distribution of third party products is currently significantly dependent on a single customer contract. If that contract is not renewed or terminated and cannot be replaced by another similar customer contract, our financial results would be harmed.

Our operating results are difficult to predict and may fluctuate, which may contribute to volatility in our stock price.

The trading price for our common stock has been volatile, ranging from $2.59 to $4.31 per share during the 52-week period ended June 30, 2011. As a result of the rapidly changing markets in which we compete, our operating results may fluctuate from period-to-period, which may continue to contribute to the volatility of our stock price. In past periods, our operating results have been affected by personnel reductions and related charges, charges relating to losses on excess office facilities, and impairment charges for certain of our equity investments, goodwill and other long-lived assets. Our operating results may be adversely affected by similar or other charges or events in future periods, including, but not limited to:

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impairments of long-lived assets,

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integrating and operating newly acquired businesses and assets,

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the seasonality of our business, which has experienced increased revenues in the fourth quarter of our fiscal year, and

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the general difficulty in forecasting our operating results and metrics, which could result in actual results that differ significantly from expected results.

Certain of our product and service investment decisions (for example, research and development and sales and marketing efforts) are based on predictions regarding business and the markets in which we compete. Fluctuations in our operating results, particularly when experienced beyond what we expected, could cause the trading price of our stock to continue to fluctuate.

Continued loss of revenue from some of our subscription services may harm our operating results.

Our operating results could be adversely impacted by the loss of subscription revenue. Subscribers may cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings, or because customer service issues are not satisfactorily resolved. Revenue from our SuperPass subscription service has declined in recent periods due in part to our focus on other products and services we offer, and we expect this trend to continue. For the subscription services we offer, we must continue to obtain compelling digital media content for our video and games services in order to maintain and increase usage and overall customer satisfaction for these products. Our operating results may be negatively impacted if we cannot obtain content for our subscription services on commercially reasonable terms.

Government regulation of the Internet is evolving, and unfavorable developments could have an adverse affect on our operating results.

We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services over the Internet. These laws and regulations cover taxation, user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply or will be enforced with respect to the Internet. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies becomes more likely. The adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services could decrease demand for our service offerings, resulting in lower revenue. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also hinder our operational flexibility, raise compliance costs or other costs of doing business and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results.

Uncertainty and adverse conditions in the economy could have a material adverse impact on our business, financial condition and results of operations.

Weaknesses in the national and global economy has resulted in recent years in a decline in overall consumer and corporate spending, declines in consumer and corporate access to credit, fluctuations in foreign exchange rates, declines in the value of assets and increased liquidity risks, all of which could materially impact our business, financial condition and results of operations. We provide digital entertainment services to consumers directly and indirectly through our carrier customers. Consumers may consider the purchase of our products and services to be a discretionary expenditure. As a result, consumers considering whether to purchase our products or services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, conditions in the residential real estate and mortgage markets and access to credit when making a determination whether to commence, continue, or stop subscribing to or otherwise purchasing our products and services. In addition, businesses may reduce their advertising spending during adverse macroeconomic conditions, which would negatively impact the revenue we generate through sales of advertising on our websites and other properties. We have recorded impairments to our assets in 2008 and 2009 due in part to weakness in the global economy, and if there is a sustained period of significant weakness or uncertainty in the global economy, we may need to record additional impairments to our assets in future periods. If any of these risks are realized, we may experience a material adverse impact on our financial condition and results of operations.

Our restructuring efforts may not yield the anticipated benefits to our shareholders.

We have been restructuring the operating and overhead costs of, and taking other measures to simplify, our business and operations. We have never before pursued initiatives to this extent and there is no assurance that our efforts will be successful. Our business and operations may be harmed to the extent there is customer or employee uncertainty surrounding the future direction of our product and service offerings and strategy for our businesses. Our restructuring activities have included implementing cost-cutting initiatives, which could materially impact our ability to compete in future periods. If we have not effectively re-aligned the cost structure of our remaining businesses or otherwise do not execute effectively on our strategic plans, our stock price may be adversely affected, and we and our shareholders will not realize the anticipated financial, operational and other benefits from such initiatives.

The restructuring of Rhapsody may not yield the anticipated benefits to us or to Rhapsody.

On March 31, 2010, we completed the restructuring transactions of our digital audio music service joint venture, Rhapsody America LLC (Rhapsody). As a result of the restructuring, we no longer have operational control over Rhapsody and Rhapsody’s operating performance is no longer consolidated with our condensed consolidated financial statements. We believe the restructuring will provide Rhapsody with the financial, intellectual property and other key assets, and the operational flexibility to compete more effectively in the digital music market. Rhapsody’s inability to operate and compete effectively as an independent company could adversely impact its financial condition and results of operations, which in turn would materially impact our reported net income (loss) in future periods. In addition, Rhapsody has generated losses since its inception, and the new structure may not alter this trend. If Rhapsody continues to incur losses, or if it otherwise experiences a significant decline in its business, we may incur a loss on our investment, which would have a material adverse effect on our financial condition and results of operations.

Given the current proportion of the outstanding equity of Rhapsody that we hold, we anticipate that we will need to receive Rhapsody’s unaudited quarterly financial statements in order to timely prepare our quarterly consolidated financial statements and also to report certain of Rhapsody’s financial results, as may be required, in our quarterly reports on Form 10-Q. In addition, we may be required to include Rhapsody’s annual audited financial statements in our annual report on Form 10-K in future periods. As we no longer exert operational control over Rhapsody, we cannot guarantee that Rhapsody will deliver its financial statements to us in a timely manner, or at all, or that the unaudited financial statement information provided by Rhapsody will not contain inaccuracies that are material to our reported results. Any failure to timely obtain Rhapsody’s quarterly financial statements or to include its audited financial statements in our future annual reports on Form 10-K, if required, could cause our reports to be filed in an untimely manner, which would preclude us from utilizing certain registration statements and could negatively impact our stock price.

We depend upon our executive officers and key personnel, but may be unable to attract and retain them, which could significantly harm our business and results of operations.

Our success depends on the continued employment of certain executive officers and key employees. In January 2010, Rob Glaser, our founder and the only Chief Executive Officer in our history, resigned as Chief Executive Officer, but remained the Chairman of our Board of Directors. In March 2011, Robert Kimball resigned as Chief Executive Officer and Michael Lunsford was appointed as Interim Chief Executive Officer while the Board of Directors conducts a search for a new Chief Executive Officer. We are experiencing our second transition at the Chief Executive Officer level in a little over one year and will face another transition when a new Chief Executive Officer is hired. We cannot provide assurance that we will effectively manage these transitions, which may impact our ability to retain our remaining key executive officers and which could harm our business and operations to the extent there is customer or employee uncertainty arising from these transitions.

Our success is also dependent upon our ability to identify, attract and retain highly skilled management, technical and sales personnel. Qualified individuals are in high demand and competition for such qualified personnel in our industry, particularly engineering talent, is intense, and we may incur significant costs to attract or retain them. Our ability to attract and retain personnel may also be made more difficult by the uncertainty created by the recent resignations of our Chief Executive Officers. There can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.

Acquisitions involve costs and risks that could harm our business and impair our ability to realize potential benefits from acquisitions.

As part of our business strategy, we have acquired technologies and businesses in the past and expect that we will continue to do so in the future. The failure to adequately manage the costs and address the financial, legal and operational risks raised by acquisitions of technology and businesses could harm our business and prevent us from realizing the benefits of the acquisitions.

Acquisition-related costs and financial risks related to completed and potential future acquisitions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and the incurrence of charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a significant negative impact on our future operating results.

Acquisitions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from an acquisition. These operational risks include:

•

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

•

retaining key management or employees of the acquired company;

•

entrance into unfamiliar markets, industry segments, or types of businesses;

•

operating and integrating acquired businesses in remote locations;

•

integrating and managing businesses based in countries in which we have little or no prior experience;

•

diversion of management time and other resources from existing operations to integration activities for acquired businesses;

•

impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business; and

•

assumption of known and unknown liabilities of the acquired company, including intellectual property claims.

We may be unable to adequately protect our proprietary rights or leverage our patent portfolio, and may face risks associated with third-party claims relating to our intellectual property.

Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our patent portfolio and other technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products and services or effectively prevent misappropriation of our technology. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities in China. Disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future. We may be forced to litigate to enforce or defend our patents and other intellectual property rights or to determine the validity and scope of other parties’ proprietary rights, enter into royalty or licensing agreements on unfavorable terms or redesign our product features and services. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute could fail to improve our business prospects or otherwise harm our business.

From time to time we receive claims and inquiries from third parties alleging that our technology may infringe the third parties’ proprietary rights, especially patents. Third parties have also asserted and most likely will continue to assert claims against us alleging contract breaches, infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights. These claims, even if not meritorious, could force the Company to spend significant financial and managerial resources. Given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. Currently, we are investigating or litigating a variety of such pending claims, some of which are described in “Note 15. Commitments and Contingencies” to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. 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.

Our business and operating results will suffer if our systems or networks fail, become unavailable, unsecured or perform poorly so that current or potential users do not have adequate access to our products, services and websites.

Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks. A significant or repeated reduction in the performance, reliability, security or availability of our information systems and network infrastructure could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems and networks could result from our failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, HVAC failures, intentional actions to disrupt our systems and networks and many other causes. The vulnerability of a large portion of our computer and communications infrastructure is enhanced because much of it is located at a single

leased facility in Seattle, Washington, an area that is at heightened risk of earthquake, flood, and volcanic events. Many of our services do not currently have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage.

The growth of our business is dependent in part on successfully managing our international operations.

Our international operations involve risks inherent in doing business globally, including difficulties in managing operations due to distance, language, and cultural differences, local economic conditions, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. The functional currency of our foreign subsidiaries is the local currency of the country in which each subsidiary operates. We translate our subsidiaries’ revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates, particularly if the U.S. dollar strengthens against the euro or the Korean won, may result in lower reported revenue or net assets in future periods. Our foreign currency exchange risk management program reduces, but does not eliminate, the impact of currency exchange rate movements. If we do not effectively manage any of the risks inherent in running our international businesses, our operating results and financial condition could be harmed.

We may be subject to market risk and legal liability in connection with our data collection and data security capabilities.

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. For example, to provide better consumer experiences and to operate effectively, our products send information, including personally identifiable information, to our servers. In addition, we sell many of our products and services through online sales transactions directly with consumers, through which we collect and store credit card information. In connection with our direct sales to consumers, we may be the victim of fraudulent transactions, including credit card fraud, which presents a risk to our revenue and potentially disrupts service to our consumers. While we take measures to protect our consumer data from unauthorized access or disclosure, it is possible that our security controls over consumer data may not prevent the improper access or disclosure of credit card information or personally identifiable information. We also are not yet fully compliant with the Payment Card Industry (PCI) compliance standard for data security in connection with our use of credit card services for payment. We have an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products. A security breach that leads to disclosure of consumer account information (including personally identifiable information) or any failure by us to comply with our posted privacy policy or existing or new legislation regarding privacy issues could harm our reputation, impact the market for our products and services, subject us to litigation, and require us to expend significant resources to mitigate the breach of security, comply with breach notification laws or address related matters. In addition, if we fail to satisfy timely the PCI compliance standards we may be subject to substantial penalties and we could lose the ability to accept credit card payments for transactions with our customers. Any of these consequences could materially harm our operating results and financial condition.

Government regulation of the Internet and e-commerce is evolving, and changes in regulations that increase the taxes on the services we provide could materially harm our business and operating results.

As Internet commerce continues to evolve, increasing taxation by state, local or foreign tax authorities becomes more likely. For example, taxation of electronically delivered products and services or other charges imposed by government agencies may also be imposed. We believe we collect transactional taxes and are compliant and current in all jurisdictions where we believe we have a collection obligation for transaction taxes. Any regulation imposing greater taxes or other fees for products and services could result in a decline in the sale of products and services and the viability of those products and services, harming our business and operating results. A successful assertion by one or more states or foreign tax authorities that we should collect and remit sales or other taxes on the sale of our products or services could result in substantial liability for past sales.

In those countries where we have taxable presence, we collect value added tax, or VAT, on sales of “electronically supplied services” provided to European Union residents. The collection and remittance of VAT subjects us to additional currency fluctuation risks.

We may be subject to additional income tax assessments.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are

reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.

Our Chairman of the Board beneficially owns more than 38% of our stock, which gives him significant control over certain major decisions on which our shareholders may vote or may discourage an acquisition of us.

Robert Glaser, our Chairman of the Board, beneficially owns more than 38% of our common stock. As a result, Mr. Glaser and his affiliates will have significant influence to:

•

elect or defeat the election of our directors;

•

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

•

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

•

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

At our 2010 annual meeting of shareholders, Mr. Glaser withheld votes of his shares of our common stock with respect to the election of four of our directors, including three of our incumbent directors and Robert Kimball, our former President and Chief Executive Officer. Although these four directors were re-elected, none of them received approval of a majority of the votes cast. The stock ownership of Mr. Glaser and his affiliates may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

Provisions of our charter documents, Shareholder Rights Plan, and Washington law could discourage our acquisition by a third-party.

Our articles of incorporation provide for a strategic transaction committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:

•

adopt a plan of merger;

•

authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent;

•

authorize our voluntary dissolution; or

•

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

In addition, Mr. Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transaction committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr. Glaser’s consent. RealNetworks has also entered into an agreement providing Mr. Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr. Glaser’s roles and authority within RealNetworks. These rights and his role as Chairman of the Board of Directors, together with Mr. Glaser’s significant beneficial ownership, create unique potential for concentrated influence of Mr. Glaser over potentially material transactions involving RealNetworks and decisions regarding the future strategy and leadership of RealNetworks.

We have adopted a shareholder rights plan, which was amended and restated in December 2008, which provides that shares of our common stock have associated preferred stock purchase rights. The exercise of these rights would make the acquisition of RealNetworks by a third-party more expensive to that party and has the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise.

Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr. Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of “blank check” preferred stock, could have the effect of making it more difficult or more expensive for a third-party to acquire, or of discouraging a third-party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

Item 3.

Default Upon Senior Securities

None

Item 4.

Removed and Reserved

Reserved

Item 5.

Other Information

None

Item 6.

Exhibits

Exhibits Required by Item 601 of Regulation S-K


Exhibit Number		Description

10.1†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Michael Lunsford

10.2†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Michael Eggers

10.3†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Hank Skorny

10.4†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Tracy D. Daw

10.5†		Form of Amended and Restated Change in Control and Severance Agreement effective May 31, 2011 between RealNetworks, Inc. and each of Michael Lunsford, Michael Eggers, Hank Skorny and Tracy D. Daw

10.6†		Form of Performance Restricted Stock Units Terms and Conditions for use under the RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and restated

31.1		Certification of Michael Lunsford, Interim Chief Executive Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Michael Lunsford, Interim Chief Executive Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

†	Executive Compensation Plan or Agreement

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 8, 2011.


REALNETWORKS, INC.

By:		/ S / M ICHAEL E GGERS
		Michael Eggers
Title:		Senior Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS


Exhibit Number		Description

10.1†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Michael Lunsford

10.2†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Michael Eggers

10.3†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Hank Skorny

10.4†		Severance Letter Agreement dated May 31, 2011 between RealNetworks, Inc. and Tracy D. Daw

10.5†		Form of Amended and Restated Change in Control and Severance Agreement effective May 31, 2011 between RealNetworks, Inc. and each of Michael Lunsford, Michael Eggers, Hank Skorny and Tracy D. Daw

10.6†		Form of Performance Restricted Stock Units Terms and Conditions for use under the RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and restated

31.1		Certification of Michael Lunsford, Interim Chief Executive Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Michael Lunsford, Interim Chief Executive Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

†	Executive Compensation Plan or Agreement

Exhibit 10.1

May 31, 2011

Michael Lunsford

c/o RealNetworks, Inc.

2601 Elliott Avenue

Seattle, WA 98121

Dear Michael,

The purpose of this letter is to communicate the modification of your notice and severance terms as you continue to fill the role of interim Chief Executive Officer. Your salary, job duties and participation in our annual Executive MBO program will remain the same. In addition, this letter sets forth the terms of your bonus arrangement for serving as Real’s interim Chief Executive Officer.

Notice and Severance Terms:

The notice and severance terms set forth in this letter supersede any and all provisions you may have previously received from Real (other than in your Change in Control and Severance Agreement).

In the event that Real terminates your employment without “cause” (as defined in Exhibit A), and in consideration for your signing and not revoking a customary separation and release agreement to be provided by Real, Real will provide you with (a) a lump sum payment equal to 21 months of your then current base salary on the payment terms set forth in this letter, and (b) Real-paid COBRA health care coverage (assuming you elect COBRA) for a period not to exceed 12 months from your termination date.

you will provide Real with 90 days notice prior to voluntarily terminating your employment for any reason. In consideration for fulfilling the foregoing notice provision and for signing and not revoking a separation and release agreement, Real will pay you a lump sum payment equal to twelve (12) months of your then current base salary.

Any severance payments and benefits (other than COBRA reimbursements which will be made as incurred) will be made to you as soon as administratively practicable following your termination of employment but subject to Exhibit A, which contains important additional details regarding the timing of payment (including rules to help avoid your being subject to additional taxes under section 409A of the Internal Revenue Code).

Interim CEO Bonus:

Real will pay you a semi-annual cash bonus in the amount of $175,000 for each six-month period in which you serve as Real’s interim CEO commencing March 31, 2011. The first semi-annual bonus will be paid in full with your payroll check on September 30, 2011, if you are still serving as interim CEO as of such date, or within two weeks of any such earlier date that you cease serving as interim CEO. Any subsequent semi-annual bonuses will be paid at the end of each subsequent six-month period or prorated based on the number of full months you serve as interim CEO during the applicable six-month period and paid within two weeks of the date you cease serving as interim CEO. For example, if you no longer serve as interim CEO as of November 10, 2011, you will be paid $29,167 by November 24, 2011.

In the space provided below, please confirm your agreement to the terms of this letter, including the terms in the attached Exhibit A.

The provisions of your original offer letter and your related confidentiality and non-competition agreement shall continue to be in effect, except as specifically modified in this letter.

Thank you for your ongoing contributions and commitment to RealNetworks. We look forward to your continued success!

Sincerely,

/s/ Janice Roberts

Janice Roberts

Compensation Committee Chair

ACCEPTED AND AGREED:

By /s/ Michael Lunsford

Date 06/01/11

Exhibit A

Definition of “Cause”

For purposes of this letter, “cause” will mean the occurrence of any of the following: 1) your conviction of, or plea of nolo contendere to, a felony involving moral turpitude (including under Federal securities laws), resulting in material harm to the Real; (2) your substantial and continuing failure after written notice thereof to render services to the Real in accordance with the terms or requirements of your employment for reasons other than illness or incapacity; (3) your willful misconduct, gross negligence, fraud, embezzlement, theft, misrepresentation or dishonesty involving the Real or any of its subsidiaries, resulting in any case in material harm to the Real; or (4) your violation of any confidentiality or non-competition agreements with the Real or its subsidiaries, resulting in material harm to the Real.

COBRA Reimbursement

If you become entitled to Real-paid COBRA reimbursement and Real, in its sole discretion, determines that it cannot provide the company-paid COBRA benefit without potentially violating applicable law (including, without limitation, Section 2716 of the Public Health Service Act), Real will, in lieu thereof, provide to you a lump sum cash payment equal to the aggregate COBRA premiums that you would be required to pay to continue your group health coverage in effect on the last date of employment with Real (which amount will be based on the premium for the first month of COBRA coverage), which will be made regardless of whether you elect COBRA continuation coverage.

Release and Section 409A

The receipt of any severance benefits pursuant to this letter will be subject to your signing and not revoking a release of any and all claims, in a form prescribed by Real (the “ Release ”) and provided that such Release becomes effective and irrevocable no later than sixty (60) days following the termination date (such deadline, the “ Release Deadline ”). If you do not execute the Release on or prior to the date set forth in the Release for you to consider it, you will forfeit any rights to severance benefits under this letter. No severance benefits will be paid or provided until the Release becomes effective and irrevocable. Upon the Release becoming effective, any payments delayed from the date you terminate employment through the effective date of the Release will be payable in a lump sum without interest on the first payroll date after the Release becomes effective and irrevocable.

It is the intent of this letter that all payment and benefits hereunder comply with or be exempt from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the final regulations and any guidance promulgated thereunder and any applicable state law requirements (“ Section 409A ”) so that none of the payments and benefits to be provided under this letter will be subject to the additional tax imposed under Section 409A, and any ambiguities or ambiguous terms herein will be interpreted to be exempt or so comply. Each payment and benefit payable under this letter is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. You and Real agree to work together in good faith to consider amendments to this letter and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A. Notwithstanding anything to the contrary in this letter, no severance pay or benefits to be paid or provided to you, if any, pursuant to this letter that, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, “ Deferred Compensation ”) or otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be paid or otherwise provided until you have a “separation from service” within the meaning of Section 409A. However, unless a later date is required by the next sentence, any severance payments or benefits under this letter that would be considered Deferred Compensation will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ^th ) day following your separation from service and any installment payments that would have been made to you during the sixty (60) day period immediately following your separation from service but for this sentence will be paid to you on the sixtieth (60 ^th ) day following your separation from service and the remaining payments shall be made as provided in this letter. Further, if at the time of your termination of employment, you are a “specified employee” within the meaning of Section 409A, payment of such Deferred Compensation will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that you will receive payment on the first payroll date that occurs on or after the date that is six (6) months and one (1) day following your termination of employment, or your death, if earlier.

Exhibit 10.2

May 31, 2011

Michael Eggers

c/o RealNetworks, Inc.

2601 Elliott Avenue

Seattle, WA 98121

Dear Michael,

The purpose of this letter is to communicate the modification of your notice and severance terms as you continue to fill the role of Chief Financial Officer. Your salary, job duties and participation in our annual Executive MBO program will remain the same.

The notice and severance terms set forth in this letter supersede any and all provisions you may have previously received from Real (other than in your Change in Control and Severance Agreement).

Prior to August 1, 2011, you agree that prior to voluntarily terminating your employment for any reason, you will provide Real with six (6) months’ notice. After receipt of such notice Real may, at its election, direct you to continue your work for Real for up to six (6) months at your then-current base salary. In consideration for fulfilling the foregoing notice provision and for signing and not revoking a separation and release agreement, Real will pay you a lump sum payment equal to six (6) months of your then current base salary. Effective August 1, 2011, you agree that you will provide Real with 90 days notice prior to voluntarily terminating your employment for any reason. In consideration for fulfilling the foregoing notice provision and for signing and not revoking a separation and release agreement, Real will pay you a lump sum payment equal to twelve (12) months of your then current base salary.

Any severance payments and benefits (other than COBRA reimbursements which will be made as incurred) will be made to you as soon as administratively practicable

following your termination of employment but subject to Exhibit A, which contains important additional details regarding the timing of payment (including rules to help avoid your being subject to additional taxes under section 409A of the Internal Revenue Code).

In the space provided below, please confirm your agreement to the terms of this letter, including the terms in the attached Exhibit A.

The provisions of your original offer letter and your related confidentiality and non-competition agreement shall continue to be in effect, except as specifically modified in this letter.

Thank you for your ongoing contributions and commitment to RealNetworks. We look forward to your continued success!

Sincerely,

/s/ Michael Lunsford

Michael Lunsford

Interim Chief Executive Officer

ACCEPTED AND AGREED:

By /s/ Michael Eggers

Date 06/01/11

Exhibit A

Definition of “Cause”

COBRA Reimbursement

Release and Section 409A

imposed under Section 409A, and any ambiguities or ambiguous terms herein will be interpreted to be exempt or so comply. Each payment and benefit payable under this letter is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. You and Real agree to work together in good faith to consider amendments to this letter and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A. Notwithstanding anything to the contrary in this letter, no severance pay or benefits to be paid or provided to you, if any, pursuant to this letter that, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, “ Deferred Compensation ”) or otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be paid or otherwise provided until you have a “separation from service” within the meaning of Section 409A. However, unless a later date is required by the next sentence, any severance payments or benefits under this letter that would be considered Deferred Compensation will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ^th ) day following your separation from service and any installment payments that would have been made to you during the sixty (60) day period immediately following your separation from service but for this sentence will be paid to you on the sixtieth (60 ^th ) day following your separation from service and the remaining payments shall be made as provided in this letter. Further, if at the time of your termination of employment, you are a “specified employee” within the meaning of Section 409A, payment of such Deferred Compensation will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that you will receive payment on the first payroll date that occurs on or after the date that is six (6) months and one (1) day following your termination of employment, or your death, if earlier.

Exhibit 10.3

May 31, 2011

Hank Skorny

c/o RealNetworks, Inc.

2601 Elliott Avenue

Seattle, WA 98121

Dear Hank,

The purpose of this letter is to communicate the modification of your notice and severance terms as you continue to fill the role of Chief Strategy Officer. Your salary, job duties and participation in our annual Executive MBO program will remain the same.

The notice and severance terms set forth in this letter supersede any and all provisions you may have previously received from Real (other than in your Change in Control and Severance Agreement).

In the event that Real terminates your employment without “cause” (as defined in Exhibit A), and in consideration for your signing and not revoking a customary separation and release agreement to be provided by Real, Real will provide you with (a) a lump sum payment equal to 12 months of your then current base salary on the payment terms set forth in this letter, and (b) Real-paid COBRA health care coverage (assuming you elect COBRA) for a period not to exceed 12 months from your termination date.

At your election, you agree that prior to voluntarily terminating your employment for any reason, you will provide Real with six (6) months’ notice. After receipt of such notice Real may, at its election, direct you to continue your work for Real for up to six (6) months at your then-current base salary. In consideration for fulfilling the foregoing notice provision and for signing and not revoking a separation and release agreement, Real will pay you a lump sum payment equal to six (6) months of your then current base salary.

In the space provided below, please confirm your agreement to the terms of this letter, including the terms in the attached Exhibit A.

The provisions of your original offer letter and your related confidentiality and non-competition agreement shall continue to be in effect, except as specifically modified in this letter.

Thank you for your ongoing contributions and commitment to RealNetworks. We look forward to your continued success!

Sincerely,

/s/ Michael Lunsford

Michael Lunsford

Interim Chief Executive Officer

ACCEPTED AND AGREED:

By: /s/ Hank Skorny

Date 06/01/11

Exhibit A

Definition of “Cause”

COBRA Reimbursement

Release and Section 409A

interpreted to be exempt or so comply. Each payment and benefit payable under this letter is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. You and Real agree to work together in good faith to consider amendments to this letter and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A. Notwithstanding anything to the contrary in this letter, no severance pay or benefits to be paid or provided to you, if any, pursuant to this letter that, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, “ Deferred Compensation ”) or otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be paid or otherwise provided until you have a “separation from service” within the meaning of Section 409A. However, unless a later date is required by the next sentence, any severance payments or benefits under this letter that would be considered Deferred Compensation will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ^th ) day following your separation from service and any installment payments that would have been made to you during the sixty (60) day period immediately following your separation from service but for this sentence will be paid to you on the sixtieth (60 ^th ) day following your separation from service and the remaining payments shall be made as provided in this letter. Further, if at the time of your termination of employment, you are a “specified employee” within the meaning of Section 409A, payment of such Deferred Compensation will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that you will receive payment on the first payroll date that occurs on or after the date that is six (6) months and one (1) day following your termination of employment, or your death, if earlier.

Exhibit 10.4

May 31, 2011

Tracy Daw

c/o RealNetworks, Inc.

2601 Elliott Avenue

Seattle, WA 98121

Dear Tracy,

The purpose of this letter is to communicate the modification of your notice and severance terms as you continue to fill the role of Chief Legal Officer. Your salary, job duties and participation in our annual Executive MBO program will remain the same.

The notice and severance terms set forth in this letter supersede any and all provisions you may have previously received from Real (other than in your Change in Control and Severance Agreement).

In the event that Real terminates your employment without “cause” (as defined in Exhibit A), and in consideration for your signing and not revoking a customary separation and release agreement to be provided by Real, Real will provide you with (a) a lump sum payment equal to 12 months of your then current base salary on the payment terms set forth in this letter, and (b) Real-paid COBRA health care coverage (assuming you elect COBRA) for a period not to exceed 12 months from your termination date.

You agree that prior to voluntarily terminating your employment for any reason, you will provide Real with six (6) months’ notice. After receipt of such notice Real may, at its election, direct you to continue your work for Real for up to six (6) months at your then-current base salary. In consideration for fulfilling the foregoing notice provision and for signing and not revoking a separation and release agreement, Real will pay you a lump sum payment equal to six (6) months of your then current base salary.

In the space provided below, please confirm your agreement to the terms of this letter, including the terms in the attached Exhibit A.

The provisions of your original offer letter and your related confidentiality and non-competition agreement shall continue to be in effect, except as specifically modified in this letter.

Thank you for your ongoing contributions and commitment to RealNetworks. We look forward to your continued success!

Sincerely,

/s/ Michael Lunsford

Michael Lunsford

Interim Chief Executive Officer

ACCEPTED AND AGREED:

By Tracy D. Daw

Date 06/01/11

Exhibit A

Definition of “Cause”

COBRA Reimbursement

Release and Section 409A

Exhibit 10.5

REALNETWORKS, INC.

AMENDED AND RESTATED CHANGE IN CONTROL AND SEVERANCE AGREEMENT

This Amended and Restated Change in Control and Severance Agreement (the “ Agreement ”) is made and entered into by and between (“ Executive ”) and RealNetworks, Inc., a Washington corporation (the “ Company ”), effective as of May , 2011 (the “ Effective Date ”). The Agreement replaces the Change in Control and Severance Agreement previously entered into between Executive and the Company, which was dated , 2010.

RECITALS

1. It is expected that the Company from time to time will consider the possibility of a change in control or be subject to a change of control event. The Compensation Committee (the “Compensation Committee” ) of the Board of Directors of the Company, on behalf of the Board of Directors (the “ Board ”), recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Compensation Committee has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of such a termination of employment in connection with a Change in Control (as defined herein) of the Company.

2. The Compensation Committee believes that it is in the best interests of the Company and its shareholders to provide Executive with an incentive to continue Executive’s employment and to motivate Executive to maximize the value of the Company for the benefit of its shareholders.

3. The Compensation Committee believes that it is imperative to provide Executive with certain severance benefits upon Executive’s termination of employment in connection with a Change in Control. These benefits will provide Executive with enhanced financial security, incentive and encouragement to remain with the Company.

4. Certain capitalized terms used in the Agreement are defined in Section 7 below.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:

1. Term of Agreement . This Agreement will terminate upon the earlier of (i) the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied, or (ii) upon the expiration of a period of no less than twenty four (24) months following the Company’s written notice to Executive of the termination of the Agreement, provided, however, that any notice to Executive must be provided before the commencement of the Change in Control Period.

2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue to be at-will, as defined under applicable law, except as otherwise may be specifically provided under the terms of any written formal employment agreement between the Company and Executive (an “ Employment Agreement ”).

3. Change in Control . In the event of a Change in Control, no portion of any Retention Payment (as defined and set forth in the letter agreement by and between the Company and Executive dated February 24, 2010 (the “ Retention Letter ”)) that remains unpaid as of the date of the Change in Control will remain subject to the discretion of the Compensation Committee of the Company’s Board. Accordingly, with respect to any Retention Payment scheduled to be paid after the Change in Control, the maximum potential amount of such Retention Payment (including any formerly discretionary portion) will become payable upon satisfaction of Executive’s continued full-time employment through each relevant scheduled payment date in accordance with the Retention Letter.

4. Severance Benefits . If, during the Change in Control Period, either (i) the Company terminates Executive’s employment with the Company for a reason other than Cause, Executive’s death or Executive’s Disability, or (ii) Executive resigns for Good Reason, then, in each case subject to Section 5, Executive will receive from the Company the payments and benefits in (a) through (e) below:

(a) Base Salary Severance . Executive will receive a lump sum severance payment equal to one hundred twenty-five percent (125%) of Executive’s annual base salary as in effect at the time that provides the highest annual base salary among the following: (i) immediately prior to Executive’s termination of employment, (ii) immediately prior to any reduction of Executive’s base salary described in clause (ii) of the definition of “Good Reason” under Section 7(f) below, and (iii) immediately prior to the Change in Control. Such amount will be paid within the Applicable Payment Period. In addition, as set forth in the retention letter agreement between the Company and Executive dated February 24, 2010, (the “ Retention Letter ”), within thirty (30) days following the date of Executive’s termination of employment, the Company will pay Executive the remaining unpaid amount (as determined in accordance with the terms and conditions of the Retention Letter), if any, of Executive’s Retention Payment (as defined under the Retention Letter).

(b) Target Bonus Severance . Executive will receive a lump sum severance payment equal to one hundred twenty-five percent (125%) of Executive’s target bonus as in effect for such period that provides the highest target bonus for Executive among the following: (i) the fiscal year in which Executive’s termination occurs (unless the termination occurs as a result of clause (iii) of the definition of “Good Reason” under Section 7(f) below, in which case the amount will be equal to Executive’s target bonus in effect prior to such reduction), (ii) the fiscal year in which the Change in Control occurs, and (iii) the fiscal year preceding the fiscal year in which the Change in Control occurs. Such amount will be paid within the Applicable Payment Period.

(c) Prorated Incentive Bonus . Executive will receive a lump sum severance payment equal to Executive’s prorated bonus for any partial incentive bonus period (based on the number of days Executive remained an employee of the Company) through the date of Executive’s termination of employment (at an assumed 100% on-target achievement of applicable goals) to the extent not

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already paid, at the target level in effect for the period that provides the highest target bonus amount among the following: (i) the fiscal year in which Executive’s termination of employment occurs (unless the termination occurs as a result of clause (iv) of the definition of “Good Reason” under Section 7(f) below, in which case the amount under this clause (i) will be equal to Executive’s target bonus in effect prior to such reduction), (ii) the fiscal year in which the Change in Control occurs, and (iii) the fiscal year preceding the year in which the Change in Control occurs. Such amount will be paid within the Applicable Payment Period.

(d) Equity . All of Executive’s unvested and outstanding equity awards granted on or after February 1, 2010, will vest immediately and become exercisable as of the date of Executive’s termination of employment. In addition, Executive will have twelve (12) months following the date of Executive’s termination of employment in which to exercise Executive’s equity awards (including, but not limited to, any awards that become vested in accordance with the preceding sentence), and are outstanding, as of the date of Executive’s termination of employment; provided, however, (A) in no event will Executive’s equity awards be permitted to be exercised beyond their original maximum term to expiration and (B) notwithstanding the foregoing, the extension of post-termination exercisability described in this Section 4(d) will not apply to any of Executive’s stock options to purchase shares of the Company’s common stock granted prior to the Effective Date to the extent such options are intended to constitute and do qualify as incentive stock options within the meaning of Section 422 of the Code.

(e) Continued Employee Benefits . If Executive elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”) for Executive and Executive’s eligible dependents (as applicable), within the time period prescribed pursuant to COBRA, the Company will reimburse Executive for, or pay directly on Executive’s behalf, the COBRA premiums for such coverage (at the coverage levels in effect immediately prior to Executive’s termination of employment) until the earlier of (A) a period of eighteen (18) months from the last date of employment of the Executive with the Company, or (B) the date upon which Executive and/or Executive’s eligible dependents becomes covered under similar plans. Notwithstanding anything to the contrary in this Section 4(e), if the Company determines in its sole discretion that it cannot provide the COBRA benefits without potentially violating applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company will in lieu thereof provide to Executive a taxable monthly payment in an amount equal to the monthly COBRA premium that Executive would be required to pay to continue his group health coverage in effect on the date of his termination of employment (which amount will be based on the premium for the first month of COBRA coverage), which payments will be made regardless of whether Executive elects COBRA continuation coverage and will commence in the month following the month in which Executive terminates employment and will end on the earlier of (x) the date upon which Executive becomes covered under similar plans or (y) the last day of the eighteenth (18 ^th ) calendar month following the month in which Executive terminations employment.

(f) Voluntary Resignation without Good Reason; Termination for Cause; Death or Disability . If Executive’s employment with the Company terminates voluntarily by Executive (except upon resignation for Good Reason during the Change in Control Period), for Cause by the Company, without Cause by the Company (except during the Change in Control Period) or due to Executive’s death or Disability, then (i) all vesting will terminate immediately with respect to

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Executive’s outstanding equity awards, (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately (except as to amounts already earned), and (iii) Executive will be eligible for severance benefits only in accordance with any other written agreement between the Company and the Executive then in-effect and/or under the Company’s then-existing standard policies (if any).

5. Conditions to Receipt of Severance

(a) Release of Claims Agreement . The receipt of any severance payments or benefits pursuant to this Agreement is subject to Executive signing and not revoking a release of claims in the form attached hereto as Exhibit A (the “ Release ”), which must become effective and irrevocable no later than the sixtieth (60 ^th ) day following Executive’s termination of employment (the “ Release Deadline ”). If the Release does not become effective and irrevocable by the Release Deadline, Executive will forfeit any right to severance payments or benefits under this Agreement. In no event will severance payments or benefits be paid or provided until the Release actually becomes effective and irrevocable.

(i) In the event the termination occurs at a time during the calendar year when the Release could become effective in the calendar year following the calendar year in which Executive’s termination of employment occurs (whether or not it actually becomes effective in the following year), then any severance payments and benefits under Section 4 of this Agreement that would be considered Deferred Payments (as defined in Section 5(c) below) will be paid on the first payroll date to occur during the calendar year following the calendar year in which such termination occurs, or, if later, (A) the date the Release actually becomes effective, (B) such time as required by the payment schedule applicable to each payment or benefit as set forth in Section 5(a)(ii), or (C) such time as required by Section 5(c).

(ii) No severance payments and benefits under Section 4 of this Agreement will be paid or provided unless and until the Release is signed by Executive, delivered to the Company and if applicable, any seven day revocation period contained in the Release expires without Executive revoking the Release. Any severance payments and benefits otherwise payable to Executive between the date of Executive’s termination of employment and the date the Release is delivered to the Company and becomes irrevocable will be paid on the date the Release is delivered to the Company (if the Release contains no seven day revocation period) or on the date that the seven day revocation period expires (if the Release contains a seven day revocation period). In the event of Executive’s death before all of the severance payments and benefits under Section 4 have been paid, such unpaid amounts will be paid in a lump sum payment promptly following such event to Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate.

(b) Non-disparagement, No-hire, and Non-solicitation . Executive agrees, to the extent permitted by applicable law, that in the event Executive receives severance pay or other benefits pursuant to Sections 3 and 4 above,

(i) that for a period of one (1) year immediately following the date of Executive’s termination of employment, Executive will refrain from any disparaging statements

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about the Company and its officers, directors and affiliates, including, without limitation, the business, products, intellectual property, financial standing, future, or employment/compensation/benefit practices of the Company; provided, however , that the foregoing requirement under this Section 5(b)(i) will not apply to any statements that Executive makes in addressing any statements made by the Company, its officers and/or its directors regarding Executive or Executive’s performance as an employee of the Company so long as Executive’s statements are, in the good faith judgment of Executive, truthful; and

(ii) that for a period of one (1) year immediately following the date of Executive’s termination of employment, Executive will not, either directly or indirectly, solicit, induce, recruit or encourage any of the Company’s employees to leave their employment, or hire or take away such employees, or attempt to solicit, induce, recruit, encourage, hire or take away employees of the Company, either for Executive’s own purposes, or for any other person or entity. Executive acknowledges and agrees that the Company is relying on Executive’s compliance with this Section 5(b) as an essential term of this Agreement.

(iii) If Executive becomes entitled to receive any benefits or payments pursuant to Section 4 and a majority of the Board determines that Executive has committed a material violation of this Section 5(b) that results in substantial harm to the Company, the Company will be entitled to cease providing and/or recover any payments made or benefits provided pursuant to Section 4. The Company’s rights pursuant to this Section 5(b) are in addition to any remedies it may have for breach of contract or otherwise; further, the remaining terms of this Agreement, as well as the Release contemplated by Section 5(a), as applicable, will remain in full force and effect.

(i) Notwithstanding anything to the contrary in this Agreement, no severance payments or benefits payable to Executive, if any, pursuant to this Agreement that, when considered together with any other severance payments or separation benefits, is considered deferred compensation under Internal Revenue Code Section 409A (together, the “ Deferred Payments ”) will be payable until Executive has a “separation from service” within the meaning of Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986, as amended (the “ Code ”). Similarly, no severance payable to Executive, if any, pursuant to this Agreement that otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be payable until Executive has a “separation from service” within the meaning of Section 409A.

(ii) Further, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s separation from service (other than due to death), any Deferred Payments that otherwise are payable within the first six (6) months following Executive’s separation from service will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, in the event of Executive’s death following Executive’s separation from service but prior to the six (6) month anniversary of Executive’s separation from service (or any later delay date), then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively

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practicable after the date of Executive’s death and all other Deferred Payments will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under the Agreement is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.

(iii) The foregoing provisions are intended to comply with, or be exempt from, the requirements of Section 409A so that none of the severance payments and benefits to be provided under the Agreement will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply or be exempt. Specifically, the payments hereunder are intended to be exempt from the requirements of Section 409A under the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations. Executive and Company agree that this Agreement, as amended, complies in form with the requirements of Section 409A based on the applicable IRS and Treasury regulations and guidance issued under Section 409A as of the date of this Agreement and the Company presently does not intend to report any income to Executive under Section 409A with respect to benefits under this Agreement, as amended. Executive and the Company agree to work together in good faith to consider amendments to the Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A. In no event will the Company reimburse Executive for any taxes that may be imposed on Executive as result of Section 409A.

6. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section 6, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance and other benefits under Sections 3 and 4 will be either:

(a)

delivered in full, or

(b)

delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6 will be made in writing by the Company’s independent public accountants immediately prior to the Change in Control (the “ Accountants ”), whose determination will be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 6, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive will furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company will bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6. If a reduction in severance

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and other benefits constituting “parachute payments” is necessary so that benefits are delivered to a lesser extent, reduction will occur in the following order: (1) reduction of the cash severance payments; (2) cancellation of accelerated vesting of equity awards; and (3) reduction of continued employee benefits. In the event that the accelerated vesting of equity awards is to be cancelled, such vesting acceleration will be cancelled in the reverse chronological order of the Executive’s equity awards’ grant dates.

7. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:

(a) Applicable Payment Period . For the purposes of this Agreement, “ Applicable Payment Period ” means a date within forty-five (45) days following the applicable of: (i) the Change in Control, in the case of the Company’s termination of Executive without Cause or Executive’s resignation for Good Reason before a Change in Control as specified in Section 7(d)(i); or (ii) the termination of employment, in the case of the Company’s termination of Executive without Cause or Executive’s resignation for Good Reason coincident with or after a Change in Control as specified in Section 7(d)(ii).

(b) Cause . For purposes of this Agreement, “ Cause ” means conduct involving one or more of the following: (i) the conviction of Executive of, or plea of nolo contendere by Executive to, a felony involving moral turpitude (including under federal securities laws), resulting in material harm to the Company; (ii) the willful, substantial and continuing failure of Executive to perform the reasonable duties of his position for a period of at least thirty (30) days following written notice from the Board to the Executive that describes the basis for the Board’s belief that Executive has not substantially performed his reasonable duties for reasons other than illness or incapacity; (iii) willful misconduct, gross negligence, fraud, embezzlement, theft, misrepresentation or dishonesty by Executive involving the Company or any of its subsidiaries, in each case that is intended to result in the substantial personal enrichment of Executive and that results in substantial, material harm to the Company; or (iv) Executive’s violation of any confidentiality or non-competition agreements with the Company or its subsidiaries, which violation results in substantial, material harm to the Company.

Other than for a termination pursuant to Section 7(b)(i), Executive will receive notice and an opportunity to be heard before the Board with Executive’s own attorney before any termination for Cause is deemed effective. Notwithstanding anything to the contrary, if Executive wishes to avail himself of his opportunity to be heard before the Board prior to the Board’s termination of Executive’s employment for Cause, the Board may immediately place Executive on administrative leave (with full pay and benefits to the extent legally permissible) and suspend all access to Company information, employees and business. If Executive avails himself of his opportunity to be heard before the Board, and then fails to make himself available to the Board within five (5) business days of such request to be heard, the Board may thereafter cancel the administrative leave and terminate Executive for Cause.

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(i) during any period of twenty-four (24) consecutive months, individuals who, at the beginning of the period constitute the Board (the “ Incumbent Directors ”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the Company’s initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) will be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board will be deemed to be an Incumbent Director; or

(ii) any “person” (as such term is defined in the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “ Company Voting Securities ”); provided, however, that the event described in this paragraph (ii) will not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in clause (iii) below); or

(iii) the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or the issuance of securities in the transaction (a “ Business Combination ”), unless immediately following such Business Combination: (A) more than fifty percent (50%) of the total voting power of (x) the corporation resulting from such Business Combination (the “ Surviving Corporation ”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of one hundred percent (100%) of the voting securities eligible to elect directors of the Surviving Corporation (the “ Parent Corporation ”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of fifty percent (50%) or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above will be deemed to be a “ Non-Qualifying Transaction ”); or

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(iv) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any one person, or more than one person acting as a group (“ Person ”) acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For these purposes, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company. For purposes of this subsection (iv), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

Notwithstanding the foregoing, a Change in Control will not be deemed to occur as a result of the sale, spin-off, or other divestiture of the Company’s Games and/or Rhapsody businesses.

(d) Change in Control Period . For purposes of this Agreement, “ Change in Control Period ” means the period (i) commencing three (3) months before the occurrence of a Change in Control and (ii) ending twenty-four (24) months after the Change in Control.

(e) Disability . “ Disability ” means Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

(f) Good Reason . “ Good Reason ” means Executive’s resignation within thirty (30) days following the expiration of any Company cure period following the occurrence of one or more of the following, without Executive’s written consent:

(i) a material reduction in Executive’s duties, authorities or responsibilities relative to Executive’s duties, authorities or responsibilities as in effect immediately prior to the Change in Control (including, for example, but not by way of limitation, a material reduction due to (A) the Company ceasing to be a publicly held company; or (B) the Company becoming part of a larger entity (unless Executive receives substantially the same level of duties, authorities and responsibilities with respect to the total combined entity and not only with respect to the Company as a division, subsidiary or business unit of the total combined entity));

(ii) a material reduction in Executive’s annual base compensation, provided that one or more reductions totaling ten percent (10%) or less in any two-year period will not constitute a material reduction under this clause (ii), and provided further that one or more reductions totaling more than ten percent (10%) in any two-year period will constitute a material reduction under this clause (ii);

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(iii) a material reduction in Executive’s annual target bonus opportunity, provided that one or more reductions totaling ten percent (10%) or less in any two-year period will not constitute a material reduction under this clause (iii), and provided further that one or more reductions totaling more than ten percent (10%) in any two-year period will constitute a material reduction under this clause (iii); and

(iv) a material change in the geographic location at which Executive must perform services; provided, however, that any requirement of the Company that Executive be based anywhere within fifty (50) miles from Executive’s primary office location as of the date of this Agreement or within fifty (50) miles from Executive’s principal residence will not constitute a material change under this clause (iv).

Executive will not resign for Good Reason without first providing the Company with written notice within ninety (90) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days following the date of such notice.

8. Successors .

(a) The Company’s Successors . This Agreement will be binding on any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets and such successor will be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this Section 8(a) or that becomes bound by the terms of this Agreement by operation of law.

(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9. Notice .

(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of the Company’s Chief Executive Officer (or in the absence of a Chief Executive Officer, the President of the Company) and its Chief Legal Officer or General Counsel.

(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason will be communicated by a notice of termination to the other party

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hereto given in accordance with Section 9(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement relied upon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice). The failure by Executive to include in the notice any fact or circumstance which contributes to a showing of Good Reason will not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing Executive’s rights hereunder.

10. Miscellaneous Provisions .

(a) Waiver . No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(b) Headings . All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

(c) Entire Agreement . This Agreement, together with the Retention Letter, the Development, Confidentiality and Noncompetition Agreement entered into between Executive and the Company and any written agreement between Executive and the Company, constitute the entire agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by duly authorized representatives of the parties hereto and which specifically mention this Agreement. In the event of a termination of Executive’s employment in the circumstances described in the first paragraph of Section 4, the provisions of this Agreement (including, for the avoidance of doubt, the Retention Letter) are intended to be and are exclusive and in lieu of and supersede any other rights or remedies to which Executive or the Company otherwise may be entitled, whether at law, tort or contract or in equity.

(d) Choice of Law . The validity, interpretation, construction, and performance of this Agreement will be governed by the laws of the State of Washington (with the exception of its conflict of laws provisions). Any claims or legal actions by one party against the other arising out of the relationship between the parties contemplated herein (whether or not arising under this Agreement) will be commenced or maintained in any state or federal court located in the jurisdiction where Executive resides, and Executive and the Company hereby submit to the jurisdiction and venue of any such court.

(e) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision hereof, which will remain in full force and effect.

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(f) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

(g) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

(h) Legal Expenses . In the event that Executive’s employment terminates during the Change in Control Period and the Company or Executive brings an action to enforce or effect its or his rights under this Agreement, then, without regard to the reason or reasons resulting in the termination of Executive’s employment with the Company, the Company will reimburse Executive for his costs and expenses incurred in connection with the action (including, without limitation, in connection with Executive defending himself against an action brought by the Company to enforce or effect its rights under this Agreement), including (but not limited to) the costs of mediation, arbitration, litigation, court fees, expert fees, witness expenses, and reasonable attorneys’ fees. Executive’s costs and expenses (as described above) will be paid to him by the Company in advance of the final disposition of the underlying action and within thirty (30) days of Executive’s submission of documentation of the costs, expenses and fees to be reimbursed but no later than the last day of Executive’s taxable year that immediately follows the taxable year in which the costs or expenses were incurred. This right to reimbursement will be subject to the following additional requirements: (i) Executive must submit documentation of the costs, expenses and fees to be reimbursed within thirty (30) days of the end of his taxable year in which the costs, expenses and fees were incurred; (ii) the amount of any reimbursement provided during one taxable year will not affect any expenses eligible for reimbursement in any other taxable year; and (iii) the right to any such reimbursement will not be subject to liquidation or exchange for another benefit or payment. With respect to an action originally initiated by Executive, Executive agrees to repay the Company all costs and expenses advanced under this Section 10(h) in the event that it is ultimately determined by an entity of competent jurisdiction that Executive did not prevail on at least one material issue in such action.

(i) Indemnification and D&O Insurance . Subject to applicable law, Executive will be provided indemnification to the maximum extent permitted by the Company’s Articles of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, with such indemnification to be on terms determined by the Board or any of its committees, but on terms no less favorable than provided to any other Company executive officer or director and subject to the terms of any separate written indemnification agreement.

o O o

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth above.


COMPANY				REALNETWORKS, INC.

				By:

				Title:

EXECUTIVE				By:

				Title:

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EXHIBIT A

FORM OF RELEASE AGREEMENT

This Agreement and Release (“ Agreement ”) is made by and between (“ Executive ”) and RealNetworks, Inc. (the “ Company ”) (collectively referred to as the “ Parties ” or individually referred to as a “ Party ”).

WHEREAS, in connection with the Executive’s termination of employment effective [Click And Type Date], the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Executive may have against the Company and any of the Releasees as defined below, including, but not limited to, any and all claims arising out of or in any way related to Executive’s employment with or separation from the Company;

NOW, THEREFORE, in consideration of the mutual promises made herein, Executive hereby agrees as follows:

1. Consideration, Payment of Salary and Receipt of All Benefits . The Company will provide Executive with the Severance Benefits set forth in the Change in Control and Severance Agreement entered into between the Parties effective (the “ CIC and Severance Agreement ”), in accordance with the terms and conditions of such agreement.

2. Release of Claims . Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, benefit plans, plan administrators, insurers, trustees, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the “ Releasees ”). Executive, on his own behalf and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute, or pursue, any claim, complaint, charge, duty, obligation, or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages that have occurred up until and including the Effective Date of this Agreement, including, without limitation:

a. any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination of that relationship;

b. any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law;

c. any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; harassment; retaliation; breach of contract, both express

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and implied; breach of covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; and disability benefits;

d. any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act; the Fair Labor Standards Act; the Fair Credit Reporting Act; [the Age Discrimination in Employment Act of 1967; the Older Workers Benefit Protection Act] ¹ ; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act; the Sarbanes-Oxley Act of 2002; Washington State Law Against Discrimination, as amended (Wash. Rev. Code §§ 49.60.010 et seq.); Washington Equal Pay Law, as amended (Wash. Rev. Code § 49.12.175); Washington sex discrimination law (Wash. Rev. Code § 49.12.200); Washington age discrimination law (Wash. Rev. Code § 49.44.090); Washington whistleblower protection law (Wash. Rev. Code §§ 49.60.210, 49.12.005, and 49.12.130); Washington genetic testing protection law (Wash. Rev. Code § 49.44.180); Washington Family Care Act (Wash. Rev. Code § 49.12.270); Washington Minimum Wage Act (Wash. Rev. Code §§ 49.46.005 to 49.46.920); Washington wage, hour, and working conditions law (Wash. Rev. Code §§ 49.12.005 to 49.12.020, 49.12.041 to 49.12.050, 49.12.091, 49.12.101, 49.12.105, 49.12.110, 49.12.121, 49.12.130 to 49.12.150, 49.12.170, 49.12.175, 49.12.185, 49.12.187, 49.12.450); Washington wage payment law (Wash. Rev. Code §§ 49.48.010 to 49.48.190) and/or any of the laws of any other state or municipality;

e. any and all claims for violation of the federal or any state constitution;

f. any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;

g. any claim for any loss, cost, damage, or expense arising out of any dispute over the nonwithholding or other tax treatment of any of the proceeds received by Executive as a result of this Agreement; and

h. any and all claims for attorneys’ fees and costs.

Executive agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not release claims that cannot be released as a matter of law, including, but not limited to, Executive’s right to file a charge with or participate in a charge by the Equal Employment Opportunity Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment, against the Company (with the understanding that Executive’s release of claims herein bars Executive from recovering such monetary relief from the Company).

¹	[To be included only if Executive is age 40 and over.]

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3. [Acknowledgment of Waiver of Claims under ADEA . Executive understands and acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ ADEA ”), and that this waiver and release is knowing and voluntary. Executive understands and agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Executive understands and acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further understands and acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Agreement; (b) he has twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke this Agreement; (d) this Agreement shall not be effective until after the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Agreement and returns it to the Company in less than the twenty-one (21) day period identified above, Executive hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Agreement.] ¹ ^, ²

4. Unknown Claims . Executive acknowledges that he has been advised to consult with legal counsel and that he is familiar with the principle that a general release does not extend to claims that the releaser does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, may have materially affected his settlement with the releasee. Employee, being aware of said principle, agrees to expressly waive any rights he may have to that effect, as well as under any other statute or common law principles of similar effect.

5. Non-disparagement, No-hire, and Non-solicitation . Executive agrees to comply with the provisions of Section 4(b) of the CIC and Severance Agreement (relating to non-disparagement, no-hire and non-solicitation) for such applicable period of time as set forth therein.

6. Severability . In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect without said provision or portion of provision.

7. No Oral Modification . This Agreement may only be amended in a writing signed by Executive and a duly authorized officer of the Company.

8. Governing Law . This Agreement shall be governed by the laws of the State of Washington without regard for choice-of-law provisions. Executive consents to personal and exclusive jurisdiction and venue in the State of Washington.

²	[This language may be revised to provide for a longer period (e.g., 45 days) for Executive to consider the Agreement, as required by applicable law.]

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9. Effective Date . [Each Party has seven (7) days after that Party signs this Agreement to revoke it. This Agreement will become effective on the eighth (8th) day after Executive signed this Agreement, so long as it has been signed by the Parties and has not been revoked by either Party before that date (the “ Effective Date ”).] ¹ [This Agreement will become effective on the date it has been signed by both Parties (the “ Effective Date ”).] ³

10. Voluntary Execution of Agreement . Executive understands and agrees that he executed this Agreement voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Executive acknowledges that: (a) he has read this Agreement; (b) he has not relied upon any representations or statements made by the Company that are not specifically set forth in this Agreement; (c) he has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his own choice or has elected not to retain legal counsel; (d) he understands the terms and consequences of this Agreement and of the releases it contains; and (e) he is fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, Executive executed this Agreement on the respective dates set forth below.


						[CLICK & TYPE EMPLOYEE NAME], an individual

Dated:
						[Click and Type Employee Name]

³	[Include for employee if he is under the age of 40 in lieu of the alternative language preceding it.]

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Exhibit 10.6

RealNetworks, Inc. 2005 Stock Incentive Plan

Performance Restricted Stock Units Terms and Conditions

Performance Restricted Stock Units Terms and Conditions (the “Agreement”) made and entered into as of the effective date (the “Grant Date”) set forth in the Notice of Grant of Performance Restricted Stock Units and Performance Restricted Stock Units Agreement attached hereto (the “Notice of Grant”), by and between RealNetworks, Inc., a Washington corporation (the “Company”), and you (the “Participant”) pursuant to the RealNetworks, Inc. 2005 Stock Incentive Plan (the “Plan”). Capitalized terms not defined in this Agreement have the meanings ascribed to them in the Plan.

1. Grant of Performance Restricted Stock Units . The Company hereby grants to the Participant pursuant to the Plan that number of Performance Restricted Stock Units set forth in the Notice of Grant, subject to the terms of this Agreement and the Plan. Each Performance Restricted Stock Unit shall be deemed to be the equivalent of one Share.

2. Account . The Company shall credit to a bookkeeping account (the “Account”) maintained by the Company for the Participant’s benefit the Performance Restricted Stock Units. On each date that cash dividends are paid on the Shares, the Company will credit the Account with a number of additional Performance Restricted Stock Units equal to the result of dividing (i) the product of the total number of Performance Restricted Stock Units credited to the Account on the record date for such dividend and the per Share amount of such dividend by (ii) the Fair Market Value of one Share on the date such dividend is paid by the Company to shareholders. The additional Performance Restricted Stock Units shall be or become vested to the same extent as the Performance Restricted Stock Units that resulted in the crediting of such additional Performance Restricted Stock Units.

3. Vesting . Except as otherwise provided in this Agreement, the vesting schedule applicable to the Performance Restricted Stock Units credited to the Account shall be as set forth on Appendix A. The Performance Restricted Stock Units shall cease to vest upon the Participant’s termination of employment. Notwithstanding the foregoing, the Committee may, in its discretion, accelerate the date that any installment of the Performance Restricted Stock Units vests.

4. Termination of Employment .

(a) Termination by Company Other Than for Cause . If the Company terminates the employment of the Participant for any reason other than for Cause (as defined in paragraph (c) of this Section) and the Performance Restricted Stock Units credited to the Account are not fully vested, then the unvested portion of the Performance Restricted Stock Units credited to the Account shall become fully vested as of the date of termination of employment; provided that the Participant executes and delivers a Settlement Agreement and Release (“Release”) satisfactory to the Company before the Effective Date (as defined in the Release). For purposes hereof, employment shall not be considered as having terminated during any leave of absence if the leave of absence has been approved in writing by the Company; in the event of any unpaid leave of absence, vesting of the Performance Restricted Stock Units credited to the Account shall be suspended (and the unpaid portion of the leave of absence shall be added to all vesting installment dates) unless otherwise determined by the Committee.

(b) Termination by Company for Cause . If the employment of the Participant is terminated by the Company for Cause (as defined below), the Performance Restricted Stock Units credited to the Account that were not vested on the date of such termination of employment shall be immediately forfeited.

(c) Cause . For purposes of this Agreement, “Cause” means conduct involving one or more of the following: (i) the conviction of the Participant, or plea of nolo contendere by the Participant to, a felony or misdemeanor involving moral turpitude; (ii) the indictment of the Participant for a felony or misdemeanor involving moral turpitude under the federal securities laws; (iii) the substantial and continuing failure of the Participant after written notice thereof to render services to the Company in accordance with the terms or requirements of the Participant’s employment for reasons other than illness or incapacity; (iv) the willful

misconduct or gross negligence by the Participant; (v) fraud, embezzlement, theft, misrepresentation or dishonesty by the Participant involving the Company or any Subsidiary, or willful violation by the Participant of a policy or procedure of the Company, resulting in any case in significant harm to the Company; or (vi) the Participant’s violation of any confidentiality or non-competition agreements with the Company or its Subsidiaries.

(d) If the Participant is a party to a Change in Control and Severance Agreement with the Company, no provision in this Agreement shall deprive the Participant of any protection or benefit provided in the Change in Control and Severance Agreement.

(e) Termination by Participant . If the Participant voluntarily terminates his or her employment for any reason other than death or disability, then except to the limited extent provided in Appendix B to this Agreement or in any Company Change in Control and Severance Agreement applicable to the Participant, the Performance Restricted Stock Units credited to the Account that were not vested on the date of such termination of employment shall be immediately forfeited.

5. Death; Disability .

(a) Death . If the Participant’s employment terminates due to the Participant’s death, the Performance Restricted Stock Units credited to the Account will fully vest on the date of termination of employment.

(b) Disability . If the Participant’s employment is terminated by reason of his or her disability and the Performance Restricted Stock Units credited to the Account are not fully vested, the Pro Rata Portion of the next installment of the Performance Restricted Stock Units credited to the Account scheduled to vest (if any) shall vest. For purposes hereof, “disability” means “permanent and total disability” as defined in Section 22(e)(3) of the Code.

6. Payment of Performance Restricted Stock Units . The Company shall make a payment to the Participant of the vested Performance Restricted Stock Units credited to the Account as provided in Section 7 upon the date the Performance Restricted Stock Units vest.

7. Form of Payment . Payment pursuant to Section 6 shall be made in Shares equal to the number of vested Performance Restricted Stock Units credited to the Account. Payment shall be made as soon as practicable after the applicable payment date, but in no event later than 30 days after the date such Performance Restricted Stock Units have vested.

8. Beneficiary . In the event of the Participant’s death prior to payment of the Performance Restricted Stock Units credited to the Account, payment shall be made to the last beneficiary designated in writing that is received by the Company prior to the Participant’s death or, if no designated beneficiary survives the Participant, such payment shall be made to the Participant’s estate.

9. No Obligation to Continue Employment . Neither the Plan, this Agreement, nor the grant of the Performance Restricted Stock Units imposes any obligation on the Company or its Subsidiaries to continue the Participant’s employment, or limit in any way the rights of the Company or a Subsidiary to terminate the Participant’s employment at any time.

10. No Rights as Shareholder . The Participant shall have no rights as a shareholder with respect to any Shares subject to the Performance Restricted Stock Units until such Shares have been issued.

11. Adjustment for Capital Changes . The Plan contains provisions covering the treatment of outstanding Awards, including these Performance Restricted Stock Units in the event of mergers, stock splits, spin-offs and certain other corporate transactions. Provisions in the Plan for such adjustment are hereby made applicable hereunder and are incorporated herein by reference.

12. Change in Control; Corporate Transaction . Provisions regarding a Change in Control and a Corporate Transaction are set forth on Appendix B.

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13. Withholding . When Shares are issued as payment for vested Performance Restricted Stock Units or, in the discretion of the Company, such earlier time as the Tax Obligations (defined below) are due, the Company (or the employing Subsidiary) will withhold a portion of the Shares that have an aggregate market value sufficient to pay all taxes and social insurance liability and other requirements in connection with the Shares, including, without limitation, (a) all federal, state and local income, employment and any other applicable taxes that are required to be withheld by the Company or the employing Subsidiary, (b) the Participant’s and, to the extent required by the Company (or the employing Subsidiary), the Company’s (or the employing Subsidiary’s) fringe benefit tax liability, if any, associated with the grant, vesting, or sale of the Performance Restricted Stock Units awarded and the Shares issued thereunder, and (c) all other taxes or social insurance liabilities with respect to which the Participant has agreed to bear responsibility (collectively, the “Tax Obligations”). The number of Shares withheld pursuant to the prior sentence will be rounded down to the nearest whole Share. The remaining required withholding (representing a fractional share) will be withheld from the Participant’s compensation on the next regular pay date or the Company may require the Participant to deliver funds directly to the Company (unless otherwise determined by the Company to be necessary to comply with applicable law). Notwithstanding the foregoing, the Company, in its sole discretion, may require the Participant to make alternate arrangements satisfactory to the Company for such withholdings or remittances in advance of the arising of any remittance obligations to which the Participant has agreed or any withholding obligations.

Notwithstanding any contrary provision of this Agreement, no Shares will be issued unless and until satisfactory arrangements (as determined by the Company) have been made by the Participant with respect to the payment of any income and other taxes which the Company determines must be withheld or collected with respect to such Shares. In addition and to the maximum extent permitted by law, the Company (or the employing Subsidiary) has the right to retain without notice from salary or other amounts payable to the Participant, cash having a sufficient value to satisfy any Tax Obligations that the Company determines cannot be satisfied through the withholding of otherwise deliverable Shares or that are due prior to the issuance of Shares under the Performance Restricted Stock Units award. All Tax Obligations related to the Performance Restricted Stock Units award and any Shares delivered in payment thereof are the sole responsibility of the Participant.

14. Policy on the Avoidance of Insider Trading . The Participant acknowledges that he/she has received and read the RealNetworks Policy on the Avoidance of Insider Trading, and, if applicable, the Addendum to the Policy on the Avoidance of Insider Trading, and the Participant agrees to comply with the Policy’s terms, together with the Addendum, if applicable.

15. Compliance with Section 409A of the Code .

(a) Automatic Delay of Payment . Notwithstanding anything contained in this Agreement to the contrary, if the Company determines that as of the date of payment the Participant is a “specified employee” (as such term is defined under Section 409A of the Code), and the Performance Restricted Stock Units could be considered deferred compensation subject to Section 409A of the Code, any Shares (or shares of the common stock of the successor company in the event of a Change in Control) payable by reason of the Participant’s separation from service (as such term is defined in Section 409A of the Code) with the Company and its Subsidiaries for any reason other than death or “disability” (as such term is defined under Section 409A of the Code) will not be paid until the date that is six months following the date of the separation from service (or such earlier time permitted under Section 409A of the Code without the imposition of any accelerated or additional taxes under Section 409A of the Code).

(b) General . This Agreement is intended to comply and shall be administered in a manner that is intended to comply with Section 409A of the Code and shall be construed and interpreted in accordance with such intent. Payment under this Agreement shall be made in a manner that will comply with Section 409A of the Code, including regulations or other guidance issued with respect thereto, as determined by the Committee. Any provision of this Agreement that would cause the payment or settlement thereof to fail to satisfy Section 409A of the Code shall be amended to comply with Section 409A of the Code on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section 409A of the Code.

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16. Miscellaneous .

(a) Notices . All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Participant, to the address indicated on the signature page below or at the most recent address shown on the records of the Company, and if to the Company, to the Company’s principal office, attention of the Corporate Secretary.

(b) Entire Agreement; Modification . This Agreement, the Notice of Grant and the Plan constitute the entire agreement between the parties relative to the subject matter hereof, and supersedes all understandings between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties.

(c) Cost of Litigation . In any action at law or in equity to enforce any of the provisions or rights under this Agreement, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys’ fees incurred by the successful party or parties (including without limitation costs, expenses and fees in any appellate proceedings), and if the successful party recovers judgment in any such action or proceeding, such costs, expenses and attorney’s fees shall be included as part of the judgment.

(d) Severability . The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including the Participant’s heirs, executors, administrators and legal representatives.

(f) Governing Law . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Washington, without giving effect to the principles of the conflicts of laws thereof.

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APPENDIX A

Performance-Based Vesting Conditions

A. The Performance Restricted Stock Units are subject to certain performance-based vesting requirements. The Performance Restricted Stock Units will vest, if at all, only if the performance goals described below are satisfied by April 1, 2012 (the “Vesting Determination Date”). The number of Performance Restricted Stock Units that become vested, if at all, on the Vesting Determination Date, will depend on the Company’s level of performance, as determined in the sole and absolute discretion of the Committee, of the following performance objectives.

B. Up to one-third (1/3 ^rd ) of the Performance Restricted Stock Units shall become vested based on the Committee’s determination of the Company’s achievement of the Strategic Goal (as defined below).

C. Up to an additional one-third (1/3 ^rd ) of the Performance Restricted Stock Units shall become vested based on the Committee’s determination of the Company’s achievement of the Transition Goal (as defined below).

D. Up to an additional one-third (1/3 ^rd ) of the Performance Restricted Stock Units shall become vested based on the Committee’s determination of the Company’s achievement of the Operational Goals (as defined below).

E. In the event of a Change in Control prior to the Vesting Determination Date, and the Performance Restricted Stock Units are assumed by the Surviving Corporation or Parent Corporation as more fully described in Appendix B, the vesting schedule of the Performance Restricted Stock Units shall be revised such that the performance-based vesting conditions (the Strategic Goal, the Transition Goal and the Operation Goals) shall be deemed achieved and thereafter one hundred percent (100%) of the Performance Restricted Stock Units will become vested, provided the Participant remains employed with the Company, the Surviving Corporation or the Parent Corporation, on the Vesting Determination Date.

F. Definitions. For the purposes of this Appendix A:

“Strategic Goal” shall mean the development, in partnership with the Company’s Executive Committee, of a compelling growth strategy for the Company that is accepted and endorsed by the Board.

“Transition Goal” shall mean the facilitation and achievement of a smooth and effective leadership transition for the Company’s new permanent Chief Executive Officer.

“Operational Goals” shall mean the achievement of both: (a) the launch of Unifi and on two different carriers and directly to consumers by April 1, 2012; and (b) the re-launch of GameHouse as a social game portal.

G. The Committee has full authority to make adjustments to each of the applicable performance goals, and to determine, in its sole and absolute discretion, the level of achievement of the Strategic Goal, the Transition Goal and the Operation Goals. All determinations regarding the achievement, or lack thereof, of the Company in meeting these performance goals, will be made by the Committee in its sole discretion and all such determinations will be final and binding on all parties.

H. Any Performance Restricted Stock Units that the Committee determines have not vested as of the Vesting Determination Date, will be forfeited.

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APPENDIX B

Change in Control; Corporate Transaction

I. Change in Control

Notwithstanding anything contained herein to the contrary, if (i) the Performance Restricted Stock Units credited to the Account are assumed or substituted for on substantially the same terms and conditions (which may include payment in shares of the common stock of the Surviving Corporation or the Parent Corporation) immediately following the Change in Control and (ii) on or prior to the Vesting Determination Date the Participant’s employment is terminated by the Company or its successor without Cause or by the Participant for Good Reason (as defined in this Appendix B), all of the Shares subject to the Performance Restricted Stock Unit shall be vested immediately.

Furthermore and notwithstanding anything contained herein to the contrary, if the Performance Restricted Stock Units credited to the Account are not assumed or substituted for immediately following the Change in Control on substantially the same terms and conditions (which may include payment in shares of the common stock of the Surviving Corporation or the Parent Corporation), all of the Shares subject to the Performance Restricted Stock Units credited to the Account shall vest immediately upon the Change in Control.

For purposes of this Agreement:

“ Change in Control ” means the occurrence of any one of the following events:

(a) Any Person or Group acquires stock of the Company that, together with stock held by such Person or Group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company. However, if any Person or Group is considered to own more than 50% of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same Person or Group is not considered to cause a Change in Control. An increase in the percentage of stock owned by any Person or Group as a result of a transaction in which the Company acquires its stock in exchange for cash or other property will be treated as an acquisition of stock for purposes of this subsection. This subsection applies only when there is a transfer of stock of the Company (or issuance of stock of the Company) and stock in the Company remains outstanding after the transaction;

(b) Any Person or Group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person or Group) ownership of stock of the Company possessing 35% or more of the total voting power of the stock of the Company. However, if any Person or Group is considered to own 35% of the total voting power of the stock of the Company, the acquisition of additional stock by the same Person or Group is not considered to cause a Change in Control;

(c) A majority of members of the Company’s Board is replaced during any 12-month period by Participants whose appointment or election is not endorsed by a majority of the members of the Company’s Board prior to the date of the appointment or election; or

(d) Any Person or Group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person or Group) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. However, no Change in Control shall be deemed to occur under this subsection (d) as a result of a transfer to:

(i) A shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to its stock;

(ii) An entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the Company;

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(iii) A Person or Group that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Company; or

(iv) An entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a person described in clause (iii) above.

For these purposes, the term “Person” shall mean an individual, Company, association, joint stock company, business trust or other similar organization, partnership, limited liability company, joint venture, trust, unincorporated organization or government or agency, instrumentality or political subdivision thereof. The term “Group” shall have the meaning set forth in Rule 13d-5 of the Securities Exchange Commission, modified to the extent necessary to comply with any applicable Section 409A regulations, or any successor thereto in effect at the time a determination of whether a Change in Control has occurred is being made.

“ Good Reason ” shall mean any of the following events or conditions, but only if the Participant shall have provided written notice to the Company within 90 days of the initial existence or occurrence of such event or condition and the Company shall have failed to cure such event or condition within 30 days of its receipt of such notice:

(i) a reduction by the Company or its successor of more than 10% in the Participant’s rate of annual base salary as in effect immediately prior to such Change in Control;

(ii) a reduction by the Company or its successor of more than 10% of the Participant’s individual annual target or bonus opportunity; or

(iii) any requirement of the Company that Participant be based anywhere more than fifty (50) miles from Participant’s primary office location at the time of the Change in Control and more than fifty (50) miles from Participant’s principal residence at the time of the Change in Control.

II. Corporate Transaction

Notwithstanding anything contained herein to the contrary, in the event of a Corporate Transaction that is not a Change in Control, the surviving corporation or acquiring corporation may assume, continue or substitute for the Performance Restricted Stock Units credited to the Account on substantially the same terms and conditions (which may include payment in shares of the common stock of the surviving corporation or acquiring corporation, or the parent company of the surviving or acquiring corporation). In the event of a Corporate Transaction that is not a Change in Control, then notwithstanding anything contained herein to the contrary, to the extent that the surviving corporation or acquiring corporation (or its parent company) does not assume, continue or substitute for the Performance Restricted Stock Units credited to the Account on substantially the same terms and conditions (which may include payment in shares of the common stock of the surviving corporation, acquiring corporation, or the surviving or acquiring corporation’s parent company), then all of such Performance Restricted Stock Units shall become fully vested immediately prior to the Corporate Transaction if the Participant is then an Employee.

For purposes of this Agreement, “Corporate Transaction” means (i) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (ii) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. Notwithstanding the foregoing, a “Corporate Transaction” shall not include a transaction that is effected exclusively for the purpose of changing the domicile of the Company.

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Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Lunsford, certify that:

1.	I have reviewed this report on Form 10-Q of RealNetworks, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2011


/s/ Michael Lunsford
Michael Lunsford
Title: Interim Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Eggers, certify that:

1.	I have reviewed this report on Form 10-Q of RealNetworks, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2011


/s/ Michael Eggers
Michael Eggers
Title:		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Michael Lunsford, Interim Chief Executive Officer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

Date: August 8, 2011


By:	/s/ Michael Lunsford
	Name:	Michael Lunsford
	Title:	Interim Chief Executive Officer,
		(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

Date: August 8, 2011


By:	/s/ Michael Eggers
	Name:	Michael Eggers
	Title:	Senior Vice President, Chief Financial Officer and Treasurer,
		(Principal Financial and Accounting Officer)