1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
                                                    REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                               REALNETWORKS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

                                                                      
              WASHINGTON                               7371                               91-1628146
   (STATE OR OTHER JURISDICTION OF         (PRIMARY STANDARD INDUSTRIAL                (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)         CLASSIFICATION CODE NUMBER)               IDENTIFICATION NO.)

 
                         1111 THIRD AVENUE, SUITE 2900
                           SEATTLE, WASHINGTON 98101
                                 (206) 674-2700
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
 
                     ROBERT GLASER, CHIEF EXECUTIVE OFFICER
                         1111 THIRD AVENUE, SUITE 2900
                           SEATTLE, WASHINGTON 98101
                                 (206) 674-2700
 
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------
 
                                   COPIES TO:
 

                                           
               LAURA T. PUCKETT                            CHARLES J. KATZ, JR.
                JOHN M. STEEL                                SCOTT L. GELBAND
                 ALAN KOSLOW                                   PERKINS COIE
   GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.           1201 THIRD AVENUE, 40TH FLOOR
     1001 FOURTH AVENUE PLAZA, SUITE 4500             SEATTLE, WASHINGTON 98101-3099
          SEATTLE, WASHINGTON 98154

 
                            ------------------------
 
          Approximate date of commencement of proposed sale to public:
  AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
 
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
 
     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] __________________
 
     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] __________________
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
 
                        CALCULATION OF REGISTRATION FEE
 

                                                                      
==================================================================================================
                                                PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS                              OFFERING PRICE     AGGREGATE
OF SECURITIES                    AMOUNT TO BE         PER            OFFERING        AMOUNT OF
TO BE REGISTERED                REGISTERED(1)       UNIT(2)          PRICE(2)     REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Common Stock, par value $.001
  per share...................      shares             $           $34,500,000        $10,455
==================================================================================================

 
(1) Includes       shares that may be purchased by the Underwriters to cover
    over-allotments, if any.
 
(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457(a).
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
   2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
                SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1997
 
                                     SHARES
[REALNETWORKS LOGO]            REALNETWORKS, INC.
                    (FORMERLY "PROGRESSIVE NETWORKS, INC.")
 
                                  COMMON STOCK
                          (PAR VALUE $.001 PER SHARE)
 
                            ------------------------
 
     All of the           shares of Common Stock offered hereby are being sold
by RealNetworks, Inc. Prior to the offering, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $          and $          per share. For factors
considered in determining the initial public offering price, see "Underwriting".
 
     THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
 
     Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RNWK".
 
                            ------------------------
 
    THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
       AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
         THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
      COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
           ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
                            ------------------------
 


                                       INITIAL PUBLIC     UNDERWRITING     PROCEEDS TO
                                       OFFERING PRICE      DISCOUNT(1)     COMPANY(2)
                                       ---------------    -------------    -----------
                                                                  
Per Share..........................           $                 $               $
Total(3)...........................           $                 $               $

 
- ---------------
 
(1) The Company has agreed to indemnify the Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended. See "Underwriting".
 
(2) Before deducting estimated expenses of $          payable by the Company.
 
(3) The Company has granted the Underwriters an option for 30 days to purchase
    up to an additional           shares at the initial public offering price
    per share, less the underwriting discount, solely to cover over-allotments.
    If such option is exercised in full, the total initial public offering
    price, underwriting discount and proceeds to Company will be $          ,
    $          and $          , respectively. See "Underwriting".
 
                            ------------------------
 
     The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
            , 1997, against payment therefor in immediately available funds.
 
GOLDMAN, SACHS & CO.
                             MONTGOMERY SECURITIES
                                                   ROBERTSON, STEPHENS & COMPANY
                            ------------------------
 
               The date of this Prospectus is             , 1997.
   3
 
                                [SCREEN-SHOTS OF
                             WEB PAGES SUPERIMPOSED
                               OVER COMPANY LOGO]
 
     CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
 
                                        2
   4
 
                              CD-ROM INSERTED HERE
 
      THE CD-ROM CONTAINS THE REALPLAYER, WHICH IS AVAILABLE FOR DOWNLOAD FREE
OF CHARGE FROM THE COMPANY'S WEB SITE. THE CD-ROM IS CONTAINED IN AN ENVELOPE
BOUND INTO THE PROSPECTUS, WITH A CLEAR CIRCULAR WINDOW THAT ALLOWS THE TOP OF
THE CD-ROM TO BE SEEN. THE CD-ROM IS LAMINATED WITH THE COMPANY'S LOGO AND THE
REALPLAYER LOGO, AS WELL AS THE FOLLOWING LANGUAGE: "FOR WINDOWS 95, WINDOWS NT
AND MACINTOSH."
   5
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including the information under "Risk Factors."
 
     Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters' over-allotment option will not be exercised; (ii)
reflects an amendment to the Company's Amended and Restated Articles of
Incorporation (the "Articles") to change the Company's authorized capital stock
to Common Stock, Special Common Stock and preferred stock effective on the
closing of the offering; (iii) reflects the conversion of each outstanding share
of the Company's Series A Common Stock, Series B Common Stock, Series C Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock into one share of Common Stock effective on
closing of the offering; (iv) reflects the conversion of each outstanding share
of the Company's Series E Preferred Stock, at the election of the holder, into
one share of Common Stock, rather than Special Common Stock, on closing of the
offering; and (v) assumes the issuance of        shares of Common Stock
reflecting exercise of outstanding warrants on closing of the offering, except
as noted hereinafter. See "Description of Capital Stock."
 
                                  THE COMPANY
 
     RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. Streaming technology enables the transmission and playback of
continuous "streams" of multimedia content, such as audio and video, over the
Internet and intranets and represents a significant advancement over earlier
technologies. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of
advertising-supported content aggregation Web sites.
 
     The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium. These enhanced multimedia
capabilities, combined with the unique interactive properties of the Internet,
are attracting a large and expanding audience, a growing number of advertisers
and an increasing breadth and depth of content and online commercial
applications. As the Web continues to evolve as a mass communications medium,
the Company believes that an increasing amount of the types of content currently
delivered through traditional media, such as radio and television, will be
delivered over the Internet. The Company believes that streaming media
technology is essential to this evolution because it provides a more compelling
user experience, allowing the Internet to compete more effectively with
traditional media for audience share.
 
     From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 18 million copies of its
RealPlayer software have been downloaded and that over 200,000 copies of its
premium client product, RealPlayer Plus, have been sold electronically in the
product's first year of distribution. In addition, the Company believes that
more than 55,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. As a result of these activities
and the Company's aggressive promotional programs, the Company believes that its
"Real" brand has become one of the most widely recognized brands on the
Internet. The Company's customers, including ABC Radio Net, Bloomberg Online,
The Boeing Company, Dow Jones & Company, Inc., NBC Desktop, News Corporation,
Starwave Corporation and 3Com Corporation, use its software products and
services to deliver a broad range of streaming audio and video news, sports,
entertainment and corporate information over the Internet and intranets.
 
                                        3
   6
 
     The Company's objective is to be the leading streaming media company,
providing software and services that enable the delivery of a broad range of
multimedia content over the Internet and intranets, thereby facilitating the
evolution of the Internet into a mass communications and commerce medium. The
key elements of this strategy include the extension of the Company's technology
leadership, a continued focus on product ubiquity and brand leadership, the
continued development of its electronic commerce and content aggregation
businesses, a focus on providing cross-platform product solutions that operate
in a wide variety of bandwidth environments, and the strengthening and expansion
of strategic relationships.
 
     The Company was incorporated in Washington in February 1994. Unless the
context otherwise requires, the term "Company" or "RealNetworks" refers to
RealNetworks, Inc. and its subsidiaries: RealNetworks, SARL, RealNetworks,
Limited and Progressive Networks Kabushiki Kaisha. Prior to September 26, 1997,
the Company's name was "Progressive Networks, Inc." The Company's principal
executive offices are located at 1111 Third Avenue, Suite 2900, Seattle,
Washington 98101, and its telephone number is (206) 674-2700. Information
contained on the Company's Web sites will not be deemed to be part of this
Prospectus.
 
     RealAudio(R), RealVideo(R), RealPlayer(TM), RealPlayer Plus(TM),
EasyStart(TM), RealNetworks(TM), Real(TM), the Real logo, RealStore(TM),
Film.com(TM), Daily Briefing(TM) and Timecast(TM) are registered and
unregistered trademarks, service marks and trade names of the Company. This
Prospectus also includes trademarks, service marks and trade names other than
those identified in this paragraph, all of which are the property of their
respective holders.
 
                                  THE OFFERING
 

                                              
Common Stock offered by the Company...........   shares
Common Stock to be outstanding after the
  offering:
  Common Stock................................   shares(1)
  Special Common Stock........................   0 shares(1)
Use of proceeds...............................   Working capital requirements and other
                                                 general corporate purposes. See "Use of
                                                 Proceeds."
Proposed Nasdaq National Market symbol........   "RNWK"

 
- ---------------
 
(1) Excludes 13,400,000 shares of Common Stock reserved for issuance under the
    Company's 1995 Stock Option Plan, Amended and Restated 1996 Stock Option
    Plan and 1998 Employee Stock Purchase Plan. See "Management -- Benefit
    Plans." Also excludes up to 3,709,305 shares of Common Stock or Special
    Common Stock issuable on exercise of a warrant to purchase Series E
    Preferred Stock at an exercise price of $13.48 per share (the "Series E
    Warrant") that terminates on the closing of the offering. The holder of the
    Series E Preferred Stock may elect to receive Common Stock or Special Common
    Stock, or a combination thereof, upon conversion of the Series E Preferred
    Stock. The Special Common Stock may only be converted into Common Stock upon
    the prior written consent of the Company's Board of Directors. Assumes
    3,338,374 shares of Series E Preferred Stock convert into an equal number of
    shares of Common Stock. See "Risk Factors -- Control by Mr. Glaser;
    Antitakeover Provisions," "-- Impact of Exercise of the Series E Warrant;
    Election by Microsoft to Receive Common Stock Or Special Common Stock" and
    "Description of Capital Stock -- Common Stock."
 
                                        4
   7
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following summary consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The summary
consolidated financial data for the period from February 9, 1994 (inception) to
December 31, 1994, for the years ended December 31, 1995 and 1996, and as of
December 31, 1996, are derived from the Consolidated Financial Statements of the
Company audited by KPMG Peat Marwick LLP, independent accountants. The summary
consolidated financial data as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements prepared by the Company on a basis consistent with the Company's
audited Consolidated Financial Statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results for such periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for any other interim period or for the year ending
December 31, 1997.
 


                                         PERIOD FROM
                                       FEBRUARY 9, 1994       YEAR ENDED           SIX MONTHS ENDED
                                        (INCEPTION) TO       DECEMBER 31,              JUNE 30,
                                         DECEMBER 31,     -------------------     -------------------
                                             1994          1995        1996        1996        1997
                                       ----------------   -------     -------     -------     -------
                                                                                      (UNAUDITED)
                                                                               
STATEMENT OF OPERATIONS DATA:
Total net revenues...................       $   --        $ 1,812     $14,012     $ 4,244     $13,366
Total cost of revenues...............           --             62       2,185         395       3,054
Gross profit.........................           --          1,750      11,827       3,849      10,312
Operating loss.......................         (545)        (1,595)     (4,016)     (1,566)     (6,808)
Net loss.............................         (545)        (1,501)     (3,789)     (1,449)     (6,372)
Pro forma net loss per share.........                                 $   (  )                $   (  )
Shares used to compute pro forma net
  loss per share(1)..................

 


                                                                                 JUNE 30, 1997
                                                          DECEMBER 31,     --------------------------
                                                              1996         ACTUAL      AS ADJUSTED(2)
                                                          ------------     -------     --------------
                                                                                  (UNAUDITED)
                                                                           
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.....      $ 19,595       $11,496        $
Working capital.......................................        16,893         8,879
Total assets..........................................        26,468        22,148
Redeemable, convertible preferred stock...............        23,153        23,264
Shareholders' equity (deficit)........................        (3,320)       (9,764)

 
- ---------------
 
(1) For an explanation of the number of shares used to compute pro forma net
    loss per share, see Note 1 of Notes to Consolidated Financial Statements.
 
(2) As adjusted to give effect to the (i) issuance in July 1997 of 3,338,374
    shares of Series E Preferred Stock at $8.99 per share; (ii) conversion of
    all outstanding shares of Series A Common Stock, Series B Common Stock,
    Series C Common Stock, Series A Preferred Stock, Series B Preferred Stock,
    Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
    Stock into Common Stock on closing of the offering; (iii) sale by the
    Company of the           shares of Common Stock offered hereby at an assumed
    initial public offering price of $          per share (after deducting the
    underwriting discount and estimated expenses of the offering); and (iv)
    application of the estimated net proceeds of the offering. Excludes up to
    3,709,305 shares of Common Stock or Special Common Stock (representing
    additional cash and shareholders' equity of up to $50,001,431) issuable on
    exercise of the Series E Warrant. See "Use of Proceeds," "Capitalization"
    and "Description of Capital Stock."
 
                                        5
   8
 
                                  RISK FACTORS
 
     In addition to the other information contained in this Prospectus,
investors should consider carefully the following risk factors before making an
investment decision concerning the Common Stock. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
 
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES
 
     The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. Accordingly, the Company has a limited
operating history on which an evaluation of the Company and its prospects can be
based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in rapidly evolving markets such as media
delivery and electronic commerce over the Internet and intranets. The Company
has incurred significant losses since its inception and expects to continue to
incur substantial operating losses for the foreseeable future. As of June 30,
1997, the Company had an accumulated deficit of $12.4 million. To achieve and
sustain profitability, the Company must, among other things, establish
widespread market acceptance of its existing products, successfully develop new
products and services, respond quickly and effectively to competitive, market
and technological developments, expand sales and marketing operations, broaden
customer support capabilities, control expenses and continue to attract and
retain qualified personnel. In addition, market prices for the Company's
products must attain a level at which the Company can generate revenues in
excess of its anticipated operating and other expenses. There can be no
assurance that the Company will achieve or sustain profitability. See
"-- Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results," "-- Competition; Relationship With Microsoft" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
 
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATION IN QUARTERLY
OPERATING RESULTS
 
     As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
accurately its revenues. The Company expects to experience significant
fluctuations in its future quarterly operating results due to a variety of
factors, many of which are outside the Company's control, including (i) demand
for the Company's products and services, (ii) introduction or enhancement of
products and services by the Company and its competitors, (iii) market
acceptance of new products and services of the Company and its competitors, (iv)
price reductions by the Company or its competitors or changes in how products
and services are priced (such as the Company's recent decision to distribute
free of charge a version of its basic EasyStart Server, which previously sold
for $295 to $995), (v) the mix of products and services sold by the Company and
its competitors, (vi) the mix of distribution channels through which the
Company's products are licensed and sold, (vii) the mix of international and
North American revenues, (viii) costs of litigation and intellectual property
protection, (ix) the growth in the use of the Internet, (x) the Company's
ability to attract and retain qualified personnel, (xi) the amount and timing of
operating costs and capital expenditures related to expansion of the Company's
business, operations and infrastructure, (xii) technical difficulties with
respect to the use of the Company's products, (xiii) governmental regulations
and (xiv) general economic conditions and economic conditions specifically
related to the Internet. It is often difficult to forecast what the effect of
such factors would be, or the effect that any such factors or any combination
thereof would have, on the Company's results of operations for any given fiscal
quarter. There can be no assurance that the Company will be able to achieve
historical revenue levels or maintain its historical growth rate. The Company
has used, and expects to continue to use, price promotions to increase trial,
purchase and use of its products, as well as to increase the overall recognition
of its brands. The effect of such promotions on revenues in a particular period
may be significant and extremely difficult to forecast. Based on the foregoing,
the Company believes that its
 
                                        6
   9
 
quarterly revenues, expenses and operating results could vary significantly in
the future, and that period-to-period comparisons should not be relied upon as
indications of future performance.
 
     Historically, the Company has received a significant portion of its
revenues from a limited number of sales and license agreements. The Company
believes that a customer's decision to purchase its server products or license
its technology is relatively discretionary and, for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any downturn
in the economy or in the business of potential customers could have a material
adverse effect on the Company's revenues and quarterly results.
 
     The Company generally makes available its software products in "beta" form
to the public prior to finalizing product features, functionality and
operability. This may cause certain customers to delay purchasing decisions
until final versions of the products are available, which could have a material
adverse effect on the Company's revenues and quarterly results.
 
     The Company derives a significant portion of its revenues from the sale of
technical support services and software upgrades to its installed customer base.
There can be no assurance that a sufficient number of the Company's customers
will continue to enter into support and upgrade contracts or will renew existing
support and upgrade contracts, or that revenues therefrom will continue to be
significant. The loss of a material portion of such revenues would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     Management has observed that revenues from advertising sales have tended to
be higher in the second and fourth quarters, and retail sales have tended to be
highest in the fourth quarter. The Company typically operates with little or no
backlog. As a result, quarterly sales and operating results depend primarily on
the volume and timing of orders received in the quarter, both of which are
difficult to forecast. The Company typically recognizes a substantial portion of
its revenues in the last month of each quarter.
 
     As a result of the Company's limited operating history, the Company does
not have relevant historical financial data for a significant number of periods
on which to base planned operating expenses. The Company's expense levels are
based in part on its expectations with regard to future revenues. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. As a result, any significant shortfall in demand
for the Company's products and services relative to the Company's expectations
would have an immediate material adverse effect on the Company's business,
financial condition and results of operations. Due to the foregoing factors, it
is likely that in some future quarters the Company's operating results will fall
below the expectations of securities analysts and investors, which would likely
have a material adverse effect on the trading price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
COMPETITION; RELATIONSHIP WITH MICROSOFT
 
     The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company.
 
     The Company engages primarily in the sale and licensing of audio and video
streaming products and services, electronic commerce and Internet advertising.
The Company's principal competitors in the development and distribution of audio
and video streaming solutions include Microsoft Corporation ("Microsoft"),
VXtreme, Inc. ("VXtreme"), VDOnet Corporation ("VDOnet"), Xing Technology
Corporation ("Xing"), Precept Software, Inc. ("Precept"), Cubic VideoComm, Inc.
("Cubic"), Motorola, Inc. ("Motorola"), VivoActive Software, Inc. ("Vivo"),
Vosaic LLC ("Vosaic") and Oracle Corporation ("Oracle"). The Company's RealAudio
and RealVideo system also competes to a lesser degree with non-streaming audio
and video delivery technologies such as AVI and Quicktime, and indirectly with
 
                                        7
   10
 
delivery systems for multimedia content other than audio and video, such as
Flash by Macromedia Inc. ("Macromedia") and Enliven by Narrative Communications
Corp. ("Narrative"). Competitive factors in this market include the quality and
reliability of software; features for creating, editing and adapting content;
ease of use and interactive user features; scaleability and cost per user; and
compatibility with the user's existing network components and software systems.
To expand its user base and further enhance the user experience, the Company
must continue to innovate and improve the performance of its RealAudio and
RealVideo system. The Company is committed to the continued market penetration
of its brand, products and services. The Company may, as a strategic response to
changes in the competitive environment, implement pricing, licensing, service or
marketing changes designed to extend its current brand and technology franchise.
For example, the Company recently made a version of its EasyStart Server, which
had previously sold for $295 to $995, available for download free of charge.
Continued price concessions or the emergence of other pricing or distribution
strategies by competitors may have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The Company derives significant revenues from sales of RealPlayer Plus, an
enhanced version of its free player product. The Company's ability to continue
to generate revenues from sales of RealPlayer Plus is in large part dependent on
its ability to differentiate the features and functionality of RealPlayer Plus
from its own and competitors' free and for sale player products. In addition,
the demand for RealPlayer Plus is in part contingent on the demand for and the
volume of free player products in the market. The Company's failure to continue
to differentiate RealPlayer Plus, or to stimulate demand for its free player or
RealPlayer Plus, may have a material adverse effect on the Company's business,
financial condition or results of operations.
 
     The Company anticipates that consolidation will continue in the streaming
media industry and related industries such as computer software, media and
communications. Competitors may be acquired by, receive investments from or
enter into other commercial relationships with, larger, well-established and
well-financed companies. For instance, Microsoft recently acquired VXtreme, a
direct competitor of the Company in the market for streaming media software.
Microsoft also owns a minority interest in VDOnet, a direct competitor of the
Company in the market for streaming video software. In addition, in June 1997
the Company and Microsoft entered into a strategic agreement pursuant to which
Microsoft purchased a minority interest in the Company. See "-- Department of
Justice Subpoena," "Business -- Microsoft Relationship" and "Certain
Transactions."
 
     In connection with the Microsoft agreement, the Company granted Microsoft a
nonexclusive license to certain substantial elements of the source code of the
Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio/RealVideo Version 4.0 technology to third parties under
certain circumstances. The agreement also provides for substantial refunds to
Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote the Active Streaming Format ("ASF") as a
standard file format for streaming media. The agreement also requires the
Company to provide Microsoft with engineering consultation services, certain
error corrections, and certain technical support over a defined term. As a
result of Microsoft's agreement with the Company, its acquisition of VXtreme and
its investment in VDOnet, Microsoft will be able to augment substantially the
functionality of NetShow, its own streaming media product, which could have a
material adverse effect on the competitiveness of the Company's products. See
"-- Impact of Evolving Standards," "-- Uncertain Protection of Intellectual
Property; Risks Associated With Licensed Third-Party Technology" and
"Business -- Microsoft Relationship."
 
     Microsoft currently competes with the Company in the market for streaming
media server and player software. The Company believes that Microsoft will
compete more directly with the Company in the
 
                                        8
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future. The Company also believes that Microsoft's commitment to and presence in
the streaming media industry will dramatically increase competitive pressure in
the overall market for streaming media software, leading to, among other things,
increased pricing pressure and longer sales cycles. Such pressures may result in
further price reductions in the Company's products and may also materially
reduce the Company's market share. The Company believes that Microsoft will
incorporate streaming media technology in its Web browser software and certain
of its server software offerings, possibly at no additional cost to the user. In
addition, notwithstanding the Company's cooperation with Microsoft regarding
ASF, Microsoft may promote technologies and standards not compatible with the
Company's technology. Microsoft has a longer operating history, a larger
installed base of customers and dramatically greater financial, distribution,
marketing and technical resources than the Company. As a result, there can be no
assurance that the Company will be able to compete effectively with Microsoft
now or in the future, or that the Company's business, financial condition and
results of operations will not be materially adversely affected. In addition, if
considerable industry consolidation occurs, there can be no assurance that the
Company will be able to continue to compete effectively. See "Business -- Sales,
Marketing and Distribution" and "-- Microsoft Relationship."
 
     The Company currently derives significant revenues from the electronic
distribution of certain of its products. The Company recently opened its
RealStore Web site, an online store for the sale of the Company's products,
third-party streaming media tools and utilities, and intranet-based training
products. The Company competes with a variety of Web sites, such as
Buydirect.Com and Software.Net, which also offer software products for download.
To compete successfully in the electronic commerce market, the Company must
attract sufficient commercial traffic to its RealStore Web site by offering
high-quality merchandise in a compelling, easy-to-purchase format. There can be
no assurance that the Company will be able to compete successfully in this
market, and any failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Products and Services" and "-- Competition."
 
     In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue is also growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the Company or that
revenues derived from such advertising will be material. In addition, if the
Company loses advertising customers, fails to attract new customers, is forced
to reduce advertising rates or otherwise modify its rate structure to retain or
attract customers, or loses Web site traffic, the Company's business, financial
condition and results of operations may be materially adversely affected. See
"Business -- Products and Services" and "-- Competition."
 
DEPARTMENT OF JUSTICE SUBPOENA
 
     Shortly after the Company entered into its strategic agreement with
Microsoft, Microsoft acquired VXtreme and announced that it would incorporate
the VXtreme technology, which competes with the Company's technology licensed to
Microsoft, into its NetShow product. In addition, Microsoft owns a minority
interest in VDOnet, a direct competitor of the Company, and has selected VDOnet
as a Microsoft Solution Provider for NetShow-based products. Microsoft's
acquisitions, investments and agreements in the streaming media industry
prompted a U.S. Department of Justice investigation into horizontal merger
activities within the industry. In August 1997, the Department of Justice served
several companies, including the Company and Microsoft, with subpoenas to
produce certain documents. The investigation, including interviews of Company
officers by Department of Justice personnel and document production requests, is
ongoing. The Company is cooperating fully with the Department of Justice's
investigation. See "-- Competition; Relationship With Microsoft" and
"Business -- Microsoft Relationship."
 
     As a result of the investigation, it is possible that the Department of
Justice will require certain actions by the Company, Microsoft or other
companies in the streaming media industry that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The
 
                                        9
   12
 
Department of Justice could decide to take action that could materially and
adversely affect the Company's current relationship with Microsoft or other
companies, that affect Microsoft's obligations with respect to the distribution
of the Company's products, result in certain penalties, require the Company to
refund all or a portion of the license fee paid by Microsoft to the Company,
require Microsoft to limit or divest certain of its acquisitions or investments
in the streaming media industry, including its investment in the Company, and,
if Microsoft were forced to rescind its agreement with the Company, place the
Company at a significant competitive disadvantage within the industry. There can
be no assurance that any such outcome would not have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
 
DEVELOPING MARKET; DEPENDENCE ON THE INTERNET AND INTRANETS AS MEDIUMS OF
COMMERCE AND COMMUNICATIONS
 
     The market for the Company's streaming media products and services,
especially the market for the Company's intranet products and services, has
begun only recently to develop and is evolving rapidly, with continuing new
developments in technology, product distribution methods, and marketing and
licensing relationships. The development of a market for the Company's streaming
media products also depends on increased use of the Internet and intranets for
information, publication, distribution and commerce. Continued growth in the use
of the Internet may depend on potential increases in available bandwidth or
transmission speeds or on other technological improvements. In particular, the
Company believes that continued growth in the market acceptance of streaming
media, especially streaming video, depends on such developments. Changes in
network infrastructure, transmission and content delivery methods and underlying
software platforms, and the emergence of new Internet access devices such as TV
set-top boxes could dramatically change the structure and competitive dynamic of
the market for streaming media solutions. In particular, technological
developments or strategic partnerships that accelerate the adoption of "high
bandwidth" access technologies such as cable modems may have a material adverse
impact on the Company's business. Critical issues concerning use of the Internet
and intranets (including security, reliability, cost, ease of use and quality of
service) remain unresolved and may affect the growth of and the degree to which
business is conducted over the Internet and intranets. If the market for the
Company's products and services fails to grow, develops more slowly than
expected or becomes saturated with competing products or services, the Company's
business, financial condition and results of operations will be materially
adversely affected. See "-- Availability and Quality of Content" and "-- Online
Commerce Security Risks."
 
     Because electronic commerce on the Internet is relatively new and evolving,
it is difficult to predict whether the Internet will be a viable commercial
marketplace or whether the Internet or intranets will be viable mediums of
communication. Although some sales of the Company's products and services will
depend on growth of intranets, sales of the Company's products will continue to
depend in large part on the emergence of the Internet as a viable commercial
marketplace with a strong and reliable infrastructure. The Internet has
experienced substantial growth in the number of users and amount of traffic, and
there can be no assurance that its technological infrastructure will be able to
support the demands placed on it by continued growth. Delays in the development
or adoption of new technological standards and protocols, or increased
governmental regulation, could also affect the degree of use of the Internet. In
addition, developments in Internet infrastructure such as broadband Internet
access may significantly affect the market for streaming media products. There
can be no assurance that the infrastructure or complementary services necessary
to make the Internet a viable commercial medium will be developed or, if
developed, that the Internet will become a viable commercial medium for products
and services such as those offered by the Company. See "Business -- Industry
Background."
 
EVOLVING BUSINESS MODEL; DEVELOPMENT OF NEW PRODUCTS AND OTHER REVENUE SOURCES
 
     The Company's success depends in part on its ability to develop new
products in a timely manner and provide new services that achieve rapid and
broad market acceptance. There can be no assurance
 
                                       10
   13
 
that the Company successfully can identify new product and service opportunities
and develop and bring to market new products and services in a timely manner or
that any such product innovations will achieve the market penetration or price
stability necessary for profitability.
 
     As the online medium continues to evolve, the Company plans to leverage its
technology by developing complementary products and services as additional
sources of revenue. Accordingly, the Company may change its business model to
take advantage of new business opportunities, including business areas in which
the Company does not have extensive experience. For example, the Company
recently focused on, and will continue to devote significant resources to, the
development of its electronic commerce business, as well as its
advertising-supported content aggregation business, as extensions of its
business model. There can be no assurance that the Company will develop
successfully these or other business models.
 
     In addition, the Company must continue to innovate and develop new versions
of its software to remain competitive in the market for streaming media
solutions. The Company's product and software development efforts inherently are
difficult to manage and keep on schedule. The Company on occasion has
experienced development delays and related cost overruns and there can be no
assurance that it will not encounter such problems in the future. In addition,
products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. There can be no
assurance that errors will not occur in current or new products, the result of
which may be adverse publicity, loss of or delay in market acceptance, or claims
by customers against the Company, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     Expansion of the Company's operations to take advantage of new
opportunities and to sustain a leadership position in the market for streaming
media software may require significant additional expenditures and may strain
the Company's management, financial and operational resources. The lack of
market acceptance of new products or services or the Company's inability to
generate satisfactory revenues from such new products and services to offset
their cost could have a material adverse effect on the Company's business,
financial condition and results of operations. "Business -- Strategy."
 
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
 
     The Company's performance depends substantially on the continued services
of its executive officers and key employees, in particular Mr. Glaser, the
Company's Chairman of the Board and Chief Executive Officer. The loss of the
services of Mr. Glaser or any of its other executive officers or key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. None of the Company's executive officers
has a contract that guarantees employment. Other than a $2,000,000 life
insurance policy on the life of Mr. Glaser, the Company does not maintain "key
person" life insurance policies. Given the Company's early stage of development,
the Company depends on its ability to attract, train and retain qualified
personnel, specifically those with management, technical and product development
skills. Competition for such personnel is intense, particularly in geographic
areas recognized as high technology centers such as the Pacific Northwest. There
can be no assurance that the Company will be able to attract, train or retain
additional highly qualified technical and managerial personnel in the future,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
 
CONTROL BY MR. GLASER; ANTITAKEOVER PROVISIONS
 
     Immediately after the closing of the offering, Mr. Glaser, the Company's
founder, will own 14,089,919 shares of the outstanding Common Stock, which will
represent   % of the outstanding Common Stock (approximately      % if the
Underwriters' over-allotment option is exercised in full) and      % of the
outstanding Common Stock if the Series E Warrant is exercised in full,
(approximately      % if the Underwriters' over-allotment option is also
exercised in full). If the holder of the Series E Preferred Stock should instead
elect to receive shares of Special Common Stock on conversion of the Series E
Preferred
 
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   14
 
Stock, and assuming the Series E Warrant is exercised in full for shares of
Special Common Stock, Mr. Glaser will hold   % of the outstanding voting rights
(approximately      % if the Underwriters' over-allotment option is exercised in
full). Accordingly, Mr. Glaser will have significant influence over the election
of directors and matters submitted to a vote of the Company's shareholders.
Control by Mr. Glaser may discourage certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of Common Stock might receive a premium for their shares over
prevailing market prices. See "-- Impact of Exercise of the Series E Warrant;
Election by Microsoft to Receive Common Stock or Special Common Stock" and
"Principal Shareholders."
 
     The Company's Articles provide that on closing of the offering, a Strategic
Transactions Committee of the Board of Directors shall be created, which
committee shall be comprised of three directors. Without the prior approval of
such committee, and subject to certain limited exceptions, the Board of
Directors shall not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the voluntary dissolution of
the Company or (iv) take any action that has the effect of clauses (i) through
(iii). The provisions with respect to the authority of the Strategic
Transactions Committee may be amended only with the approval of 90% of the
shares entitled to vote on an amendment to the Articles. In connection
therewith, the Company entered into an agreement with Mr. Glaser (the "Glaser
Agreement") providing him with a direct contractual right to require the Company
to abide by and perform all terms of the Articles with respect to the Strategic
Transactions Committee. The Glaser Agreement also provides that so long as Mr.
Glaser owns a specified number of shares, the Company shall use its best efforts
to cause Mr. Glaser to be nominated to, not removed from, and elected to, the
Board of Directors. The Glaser Agreement could inhibit or deter a third party
from attempting to acquire the Company. See "Description of Capital Stock" and
"Management."
 
     In addition, the Articles provide that on closing of the offering, Mr.
Glaser shall serve, or shall appoint another officer of the Corporation who
shall serve, as the Company's Policy Ombudsman, with the exclusive authority to
adopt or change the editorial policies of the Company as reflected on the
Company's Web sites or other communications or media where the Company has a
significant editorial or media voice. See "Management -- Policy Ombudsman."
These provisions, as well as those relating to a classified Board of Directors,
the availability of "blank check" preferred stock and certain provisions of
Washington corporate law and of the shareholder rights plan that the Company
intends to adopt prior to closing of the offering, 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 the Company.
See "Description of Capital Stock."
 
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS ASSOCIATED WITH LICENSED
THIRD-PARTY TECHNOLOGY
 
     The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreement in every case. Despite such protections, a third
party could copy or otherwise obtain and use the Company's products or
technology, or develop similar technology independently. There can be no
assurance that the Company's agreements with employees, consultants and others
who participate in product development activities will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or independently developed by
competitors.
 
     The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
 
                                       12
   15
 
applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need to either obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. A significant portion of the Company's
marks begin with the word "Real" (such as RealAudio and RealVideo). The Company
is aware of other companies that use "Real" in their marks alone or in
combination with other words, and the Company does not expect to be able to
prevent all third-party uses of the word "Real" for all goods and services. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S., and effective
patent, copyright, trademark and trade secret protection may not be available in
jurisdictions. The Company licenses certain of its proprietary rights to third
parties, and there can be no assurance that such licensees will not fail to
abide by compliance and quality control guidelines with respect to such
proprietary rights or take actions that would materially adversely affect the
Company's business, financial condition and results of operations.
 
     To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, there can be no assurance that the Company's efforts to protect its
intellectual property rights through patent, copyright, trademark and trade
secret laws will be effective to prevent misappropriation of its technology, or
to prevent the development and design by others of products or technologies
similar to or competitive with those developed by the Company, and the Company's
failure or inability to protect its proprietary rights could materially
adversely affect the Company's business, financial condition and results of
operations.
 
     The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce and protect the Company's
intellectual property or to defend against a claim of infringement or
invalidity. The Company has been and expects to continue to be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement of third-party proprietary rights by
the Company and its licensees. The Company attempts to avoid infringing known
proprietary rights of third parties in its product development efforts. However,
the Company has not conducted and does not conduct comprehensive patent searches
to determine whether the technology used in its products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation could be avoided or settled without
substantial expense and damage awards. Any claims relating to the infringement
of third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could result
in injunctions preventing the Company from distributing certain products. Such
claims could materially adversely affect the Company's business, financial
condition and results of operations.
 
     The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products, to perform key functions. There can
be no assurance that such third-party technology licenses will continue to be
 
                                       13
   16
 
available to the Company on commercially reasonable terms. The loss of any of
these technologies could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, although the
Company is generally indemnified against claims that such third-party technology
infringes the proprietary rights of others, such indemnification is not always
available for all types of intellectual property rights (for example, patents
may be excluded) and in some cases the scope of such indemnification is limited.
Even if the Company receives broad indemnification, third-party indemnitors are
not always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company. There
can be no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology, and claims for indemnification from the
Company's customers resulting from such claims, will not be asserted or
prosecuted against the Company. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays, all of which could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Intellectual Property."
 
AVAILABILITY AND QUALITY OF CONTENT
 
     The availability of compelling content for the Internet and intranets is
critical to the continued and increasing use and sales of the Company's
RealAudio and RealVideo system. The willingness of content providers to offer
and license content that appeals to end users and attracts advertisers is an
important factor in promoting the continued and increasing use of the Company's
products and services. There can be no assurance that such content will continue
to be available on acceptable terms, if at all. Historically, the Company has
recognized increased revenues from sales of RealPlayer Plus in months in which
the Company bundled compelling content. If the Company were unable to bundle
compelling content, license desirable content on favorable terms, or otherwise
offer content that is widely accepted by a broad market audience, the Company's
business, financial condition and results of operations would likely be
adversely affected. It is possible that associations that represent collectives
of content owners may seek to and may successfully establish minimum royalties
or other conditions that apply to the licensing or distribution of content over
the Internet and that may limit the availability of such content or increase the
cost to the Company to use such content. The imposition of any such mandatory
royalty payments may increase the Company's cost of revenues significantly,
which would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business -- Products and
Services -- Media Publishing Products and Services."
 
MANAGEMENT OF GROWTH; ACQUISITION RISKS
 
     The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, technical, operational
and financial resources. None of the Company's executive officers has had senior
management experience in a public company in the position he or she currently
holds. From August 31, 1996 to August 31, 1997, the Company grew from 149
employees to 276 employees, and the Company expects this rapid growth to
continue. To manage its growth, the Company must implement and improve its
operational and financial systems and expand, train and manage its workforce.
The Company will also need to manage an increasing number of complex
relationships with customers, marketing partners and other third parties. In
addition, the Company may pursue the acquisition of new or complementary
businesses, products or technologies, although it has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments. Any such future acquisitions would be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to incorporate successfully acquired technology and
rights into the Company's products, services and media offerings, additional
expense associated with amortization of acquired intangible assets, the
maintenance of uniform standards, controls, procedures and policies, and the
potential impairment of relationships with employees, customers and strategic
partners.
 
                                       14
   17
 
     There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's current or future operations
or that the Company's management will be able to manage effectively the
expansion and still achieve the rapid execution necessary to exploit fully the
market for the Company's products and services. The Company's future operating
results will also depend on its ability to expand its sales and marketing
organizations, implement and manage new distribution channels to penetrate
different and broader markets, including the market for intranet software
products, and expand its support organization accordingly. If the Company were
to fail to manage its growth effectively, its business, financial condition and
results of operations would be materially adversely affected. See "-- Dependence
on Key Personnel; Need for Additional Personnel" and "-- Risk of Capacity
Constraints; Reliance or Internally Developed Systems; System Development
Risks."
 
IMPACT OF EVOLVING STANDARDS
 
     The Company's current streaming media products are based on protocols
designed around certain standards, and the Company's business, financial
condition and results of operations would be materially adversely affected if
any of the Company's competitors were to establish a competing technology as the
de facto industry standard for streaming audio and video transmission. The
Company and Netscape Communications Corporation ("Netscape") co-authored the
Real Time Streaming Protocol ("RTSP"), a proposed protocol for standardizing the
control and delivery of streaming media over the Internet. RTSP can be used with
a broad range of data types and is intended to promote a greater level of
interoperability among various streaming media solutions by providing a standard
way for clients and servers from multiple vendors to stream multimedia content.
RTSP is built on top of a number of other Internet standard protocols and is
complementary with ASF, a file format for streaming media that does not specify
a method of client-server interaction. RTSP provides the client-server
specification necessary to stream ASF files (and many other file types) on the
Internet. There can be no assurance that RTSP will be established as the de
facto industry standard or, if so accepted, that existing competitors and new
entrants would not be able to compete more effectively with the Company's
products. See "-- Competition; Relationship With Microsoft" and
"Business -- Technology."
 
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
 
     The satisfactory performance, reliability and availability of the Company's
Web sites, transaction-processing systems and network infrastructure are
critical to the Company's reputation and ability to attract and retain customers
and maintain adequate customer service. Any system interruptions that result in
the unavailability of the Company's Web sites would adversely affect the
Company's ability to conduct business. The Company's Web sites are complex and
require considerable technical expertise to maintain. Personnel with
technological expertise in this area are in great demand, and there can be no
assurance that the Company can attract, train or retain such personnel. Many of
the software systems used to support the Company's Web sites, including its
electronic commerce operations, were developed internally. These systems will
need to be enhanced over time or replaced with equivalent commercial products,
either of which could entail considerable effort and expense.
 
     The Company's ability to provide a consistent level of high-quality
customer service depends in part on the efficient and uninterrupted operation of
its computer and communications hardware systems. Substantially all of the
Company's computer and communications hardware is located at a single leased
facility in Seattle, Washington. The Company's systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Because
the Company does not presently have fully redundant systems or a formal disaster
recovery plan, there can be no assurance that a system failure would not have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence
 
                                       15
   18
 
of any of the foregoing risks could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Technology."
 
ONLINE COMMERCE SECURITY RISKS
 
     Online commerce and communications depend to a significant extent on the
ability to conduct secure transmission of confidential information over public
networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication intended
to effect secure transmission of confidential information, such as customer
credit card numbers. There can be no assurance that the Company's efforts in
this area or advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect customer transaction
data. Any compromise of the Company's security could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. In addition, there can be no assurance that credit card
companies will not restrict online credit card transactions in the future for
reasons such as fraudulent credit card transactions or other risks associated
with online commerce transactions, which restrictions could have a material
adverse effect on the Company's business, financial condition and results of
operations. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
security breaches could damage the Company's reputation and expose the Company
to a risk of litigation and possible liability. There can be no assurance that
the Company's security measures will prevent security breaches or that the
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, financial condition and results of operations.
 
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
 
     For the year ended December 31, 1996 and the six months ended June 30,
1997, approximately 19% and 27%, respectively, of the Company's total net
revenues were generated from sources outside the U.S. and Canada. As a result,
the Company is subject to the risks of doing business abroad, including
unexpected changes in regulatory requirements, export and import restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
potential adverse tax consequences, exchange rate fluctuations, increased risks
of piracy, limits on the Company's ability to enforce its intellectual property
rights, discontinuity of network infrastructures, limits on repatriation of
funds and political risks that may limit or disrupt international sales. Such
limitations and interruptions could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
operations of the Company's foreign subsidiaries are translated from local
currency into U.S. dollars based on average monthly exchange rates. The Company
currently does not hedge its foreign currency transactions and is therefore
subject to the risk of changes in exchange rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales, Marketing and Distribution."
 
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
 
     The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses, although certain U.S. export controls and import controls of other
countries, including controls on the use of encryption technologies, may apply
to the Company's products. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted in
the U.S. and abroad with particular applicability to the Internet. It is
possible that governments will enact legislation that may be applicable to the
Company to regulate areas such as content, network security, encryption and the
use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges
 
                                       16
   19
 
and retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain. The majority of such laws were
adopted before the widespread use and commercialization of the Internet and, as
a result, do not contemplate or address the unique issues of the Internet and
related technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business or
increase the Company's legal exposure, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although those sections of the Communications Decency Act
of 1996 (the "CDA") that, among other things, proposed to impose criminal
penalties on anyone distributing "indecent" material to minors over the
Internet, were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. While the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined and,
therefore, legislation similar to the CDA could subject the Company to potential
liability, which in turn could have an adverse effect on the Company's business,
financial condition and results of operations. Such laws could also damage the
growth of the Internet generally and decrease the demand for the Company's
products and services, which could adversely affect the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulation" and "-- Intellectual Property."
 
VOLATILITY OF STOCK PRICE
 
     The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations,
or new products or enhancements by the Company or its competitors, sales by
competitors (including sales to the Company's customers), sales of the Common
Stock into the public market (including sales by members of management),
developments in the Company's relationships with its customers, partners,
distributors and suppliers, shortfalls or changes in revenues, gross margins,
earnings or losses or other financial results from analysts' expectations,
regulatory developments, fluctuations in results of operations and conditions in
the Company's market or the markets served by the Company's customers or the
economy could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
market for shares of small capitalization and technology stocks in particular,
has experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. There can be no assurance that
the market price of the Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance. Such fluctuations could materially adversely affect the
market price of the Common Stock.
 
SALES AND OTHER TAXES
 
     The Company currently does not collect sales or similar taxes with respect
to the sale of products, license of technology, or provision of services into
states and countries other than states in which the Company has offices.
However, one or more states or foreign countries may seek to impose sales or
other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or any foreign
country that the Company should collect sales or other taxes on the sale of
products, license of technology or provision of services, or remit payment of
sales or
 
                                       17
   20
 
other taxes for prior periods, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
IMPACT OF EXERCISE OF THE SERIES E WARRANT; ELECTION BY MICROSOFT TO RECEIVE
COMMON STOCK OR SPECIAL COMMON STOCK
 
     In connection with Microsoft's investment in the Company in July 1997, the
Company issued the Series E Warrant. If it is not exercised, the Series E
Warrant will terminate upon the earliest of (i) the closing of an initial public
offering, (ii) completion of a merger in which the Company is not the survivor,
or the sale of substantially all the assets of the Company, (iii) Microsoft's
breach of its agreement with the Company, which breach is not cured, or (iv)
January 21, 2002. Microsoft may elect to convert the shares of Series E
Preferred Stock issuable on exercise of the Series E Warrant into Common Stock
or Special Common Stock or in part into each of such classes. If Microsoft
elects to convert shares of Series E Preferred Stock into $15,000,000 or more of
Common Stock, it may be required to make a filing under the Hart-Scott-Rodino
Antitrust Improvements Act, and obtain approval from the U.S. Department of
Justice and Federal Trade Commission before completing the conversion into
Common Stock. If the Series E Warrant is exercised in full, Microsoft will own
  % of the Company's outstanding capital stock immediately after the offering.
There can be no assurance that Microsoft will exercise any or all of the Series
E Warrant. In addition, there can be no assurance that if the Series E Warrant
is exercised for shares of Series E Preferred Stock, Microsoft will elect to
take any particular percentage of Common Stock or Special Common Stock.
 
     Because the Microsoft Warrant may be exercised at any time until the
closing of the offering, it is impossible to predict with any certainty the
ultimate impact that the exercise thereof would have on the Company's resulting
capitalization, dilution per share to existing and new investors, liquidity and
capital resources, percentage of shares beneficially owned by the Company's
executive officers, directors and significant shareholders, and certain matters
involving corporate control. See "-- Competition; Relationship With Microsoft,"
"-- Department of Justice Subpoena," "-- Control by Mr. Glaser; Antitakeover
Provisions," "Capitalization," "Dilution," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business -- Microsoft
Relationship," "Principal Shareholders" and "Description of Capital Stock."
 
NO SPECIFIC USE OF PROCEEDS
 
     The Company has not designated any specific use for the net proceeds from
the sale of the Common Stock offered hereby. The Company intends to use the net
proceeds primarily for general corporate purposes, including working capital to
fund anticipated operating losses and capital expenditures. Accordingly,
management will have significant flexibility in applying the net proceeds of the
offering. The failure of management to apply such funds effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds."
 
NO PRIOR MARKET FOR COMMON STOCK
 
     Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock in the future.
There can be no assurance that an active trading market will develop or be
sustained after the offering. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
 
POSSIBLE ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK OF SHARES ELIGIBLE FOR
FUTURE SALE AFTER THE OFFERING
 
     On closing of the offering, the Company will have outstanding
shares of Common Stock (          shares if the Underwriters' over-allotment
option is exercised in full), of which           shares
 
                                       18
   21
 
offered hereby (          shares if the Underwriters' over-allotment option is
exercised in full) will be freely transferable in the public market without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except to the extent such shares are held by affiliates
of the Company. The remaining 26,935,621 shares of Common Stock (the "Restricted
Shares") outstanding on completion of the Offering (assuming no exercise of
options or warrants after September 24, 1997) were issued by the Company in
reliance upon exemptions from the registration requirements of the Securities
Act, and public sale thereof is restricted except to the extent they are
registered under the Securities Act or sold in accordance with an exemption from
such registration. The Company and the holders of 26,654,431 of these Restricted
Shares have entered into lock-up agreements (the "Lock-Up Agreements") with the
Underwriters not to sell, offer to sell or otherwise dispose of any shares of
Common Stock owned of record or beneficially as of the date of this Prospectus,
including securities convertible into or exercisable or exchangeable for shares
of Common Stock as of such date, as well as any shares of Common Stock later
acquired by reason of the conversion, exercise or exchange of such securities,
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Underwriters, except that persons other than officers,
directors and holders of 1% or more of the capital stock of the Company will be
free to sell or otherwise dispose of up to 5,000 shares of Common Stock to the
extent permissible under Rule 144 or Rule 701 under the Securities Act. Of the
remaining 281,190 Restricted Shares, 11,947 shares will be eligible for
immediate public sale under Rule 144 under the Securities Act as currently in
effect and the remaining 269,243 shares of Common Stock will be eligible for
public sale subject to compliance with Rule 144, unless earlier registered under
the Securities Act. At September 24, 1997, options for 6,374,214 shares of
Common Stock were outstanding, of which options for 1,708,455 shares may be
exercised during the 180 days following the date of this Prospectus, which
shares potentially will be eligible for public sale 90 days after the date of
this Prospectus pursuant to Rule 701 under the Securities Act; of these shares,
1,312,863 are subject to Lock-Up Agreements. Warrants to purchase an additional
4,707,363 shares of Common Stock, including the Series E Warrant to purchase
3,709,305 shares, which may be exercised in whole or in part for shares of
either Common Stock or Special Common Stock, will be exercisable prior to or on
closing of the offering, and the shares issued upon exercise will be potentially
eligible for public sale under Rule 144. All of these shares are subject to
Lock-Up Agreements. The holders of an aggregate of 16,390,753 shares of Common
Stock (including shares of Common Stock issuable upon exercise of outstanding
warrants and assuming that the Series E Preferred Stock converts into Common
Stock and the Series E Warrant is exercised in its entirety for shares of Common
Stock) have the right to require the Company to register their shares for sale
under the Securities Act beginning six months after the closing of the offering.
Sales of substantial numbers of shares of Common Stock in the public market
following the offering could have a material adverse effect on the market price
for the Common Stock. See "Shares Eligible for Future Sale."
 
DONATION OF NET INCOME TO CHARITY
 
     The Company's philosophy includes a commitment to charitable
responsibility. If sustained profitability is achieved, the Company intends to
donate approximately 5% of its annual net income to charitable organizations. As
a result, the Company's net income will be reduced by the amount of these
charitable donations. See "Business -- Position on Charitable Responsibility"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charitable Donations."
 
ABSENCE OF DIVIDENDS
 
     The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
 
DILUTION
 
     Investors in Common Stock in the offering will experience immediate and
substantial dilution in the net tangible book value of their shares. Assuming an
initial public offering price of $          per share, dilution to new investors
would be $          per share. Additional dilution will occur upon exercise of
outstanding stock options and warrants. See "Dilution."
 
                                       19
   22
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the           shares of
Common Stock offered hereby at an assumed initial public offering price of
$          per share, after deducting the underwriting discount and estimated
offering expenses payable by the Company, are estimated to be $
($          if the Underwriters' over-allotment option is exercised in full).
 
     The principal purposes of the offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to increase the
visibility of the Company in the marketplace and to facilitate future access by
the Company to public equity markets. The Company intends to use the net
proceeds primarily for general corporate purposes, including working capital to
fund anticipated operating losses and capital expenditures. The Company may,
when the opportunity arises, use an unspecified portion of the net proceeds to
acquire or invest in complementary businesses, products and technologies. The
Company has no present understandings, commitments or agreements with respect to
any material acquisition or investment. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in interest-bearing,
investment-grade securities.
 
                                DIVIDEND POLICY
 
     The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operations of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
 
                                       20
   23
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company at June
30, 1997 and as adjusted to give effect to the (i) issuance in July 1997 of
3,338,374 shares of Series E Preferred Stock at $8.99 per share; (ii) conversion
of all outstanding shares of Series A Common Stock, Series B Common Stock,
Series C Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
into Common Stock on closing of the offering; (iii) sale by the Company of the
          shares of Common Stock offered hereby at an assumed initial public
offering price of $          per share (after deducting the underwriting
discount and estimated expenses of the offering); (iv) application of the
estimated net proceeds of the offering; and (v) issuance of 998,058 shares of
Common Stock reflecting exercise of outstanding warrants on the closing of the
offering, except as noted below. See "Use of Proceeds" and Note 8 of Notes to
Consolidated Financial Statements. The information set forth below is unaudited
and should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
 


                                                                           JUNE 30, 1997
                                                                      ------------------------
                                                                       ACTUAL      AS ADJUSTED
                                                                      --------     -----------
                                                                           (IN THOUSANDS)
                                                                             
Note payable........................................................  $    991      $
Redeemable, convertible preferred stock, par value $0.001 per share:
  9,344,306 shares authorized; 8,345,016 shares issued and
  outstanding, actual; no shares issued and outstanding, as
  adjusted(1).......................................................    23,264
Shareholders' equity (deficit):
  Convertible preferred stock, par value $0.001 per share:
     13,713,439 shares authorized; 13,713,439 issued and
     outstanding, actual; no shares issued and outstanding, as
     adjusted(1)....................................................       932
  Preferred stock, undesignated, par value $0.001 per share:
     6,942,255 shares authorized; no shares issued and
     outstanding....................................................        --
  Common stock, par value $0.001 per share: 50,000,000 shares
     authorized; 749,520 shares issued and outstanding, actual;
               shares issued and outstanding, as adjusted(2)........        89
  Additional paid-in capital........................................     1,579
  Foreign currency translation adjustment...........................         8
  Accumulated deficit...............................................   (12,372)
                                                                      --------       --------
     Total shareholders' equity (deficit)...........................    (9,764)
                                                                      --------       --------
          Total capitalization......................................  $ 14,491      $
                                                                      ========       ========

 
- ---------------
 
(1) At June 30, 1997, the Company had 30,000,000 shares of preferred stock
    authorized, of which 13,713,439 shares were designated Series A Preferred
    Stock, 3,059,701 shares were designated Series B Preferred Stock, 3,004,305
    shares were designated Series C Preferred Stock and 3,280,300 shares were
    designated Series D Preferred Stock. On July 21, 1997, 7,127,242 shares were
    designated Series E Preferred Stock. On September 19, 1997, the numbers of
    shares of the Company's authorized preferred stock and common stock were
    increased to 60,000,000 and 300,000,000, respectively.
 
(2) Excludes (i) 6,336,486 shares of Common Stock issuable at a weighted average
    exercise price of $0.67 per share upon exercise of stock options outstanding
    at June 30, 1997, (ii) 4,896,723 shares of Common Stock reserved for future
    issuance under the Company's stock option plans, (iii) 1,000,000 shares of
    Common Stock reserved for issuance under the 1998 Employee Stock Purchase
    Plan, and (iv) up to 3,709,305 shares of Common Stock or Special Common
    Stock (representing additional cash and shareholders' equity of up to
    $50,001,431) issuable on exercise of the Series E Warrant. See
    "Management -- Benefit Plans," "Certain Transactions," "Description of
    Capital Stock -- Warrants to Purchase Preferred Stock and Common Stock" and
    Note 7 of Notes to Consolidated Financial Statements.
 
                                       21
   24
 
                                    DILUTION
 
     The pro forma net tangible book value of the Company at June 30, 1997, as
adjusted to give effect to the (i) issuance in July 1997 of 3,338,374 shares of
Series E Preferred Stock at $8.99 per share; (ii) conversion of all outstanding
shares of Series A Common Stock, Series B Common Stock, Series C Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock into Common Stock upon
closing of the offering; (iii) sale by the Company of the           shares of
Common Stock offered hereby at an assumed initial public offering price of
$          per share, and the receipt by the Company of the estimated net
proceeds therefrom, was approximately $          , or $          per share of
Common Stock; and (iv) exclusion of up to 3,709,305 shares of Common Stock or
Special Common Stock (representing additional cash and shareholders' equity of
up to $50,001,431 and tangible book value per share of $       ) issuable on
exercise of the Series E Warrant. Pro forma net tangible book value per share
represents total tangible assets of the Company less total liabilities divided
by the aggregate number of shares of Common Stock and Special Common Stock
outstanding after closing of the offering. After giving effect to the net
proceeds from the sale of the shares of Common Stock offered hereby, the
adjusted pro forma net tangible book value of the Company at June 30, 1997 would
have been approximately $          , or $          per share of Common Stock and
Special Common Stock. This represents an immediate increase in the pro forma net
tangible book value of $          per share of Common Stock and Special Common
Stock to existing shareholders and an immediate dilution of $          per share
to new investors. The following table illustrates this per share dilution:
 

                                                                                   
Assumed initial public offering price per share............................              $
Pro forma net tangible book value per share before the offering............  $
Increase per share attributable to new investors...........................
                                                                              -------
Adjusted pro forma net tangible book value per share after the offering....
                                                                                          -------
Dilution per share to new investors........................................              $
                                                                                          =======

 
     The following table summarizes on a pro forma basis at June 30, 1997, after
giving effect to the offering, the difference between existing shareholders and
investors in the offering with respect to the number of shares of Common Stock
and Special Common Stock purchased from the Company, the total consideration
paid and the average price paid per share.
 


                                    SHARES PURCHASED(1)(2)      TOTAL CONSIDERATION
                                    ----------------------     ----------------------     AVERAGE PRICE
                                      NUMBER       PERCENT       AMOUNT       PERCENT       PER SHARE
                                    -----------    -------     -----------    -------     -------------
                                                                           
Existing shareholders.............                     . %     $                  . %       $
                                                    -----
New investors.....................                     .                          . 
                                     ----------     -----       ----------     -----
         Total....................                  100.0%     $               100.0%
                                     ==========     =====       ==========     =====

 
- ---------------
 
(1) The table is based on ownership at June 30, 1997, giving effect to (i) the
    issuance in July 1997 of 3,338,374 shares of Series E Preferred Stock and
    (ii) the conversion of all outstanding shares of Series A Common Stock,
    Series B Common Stock, Series C Common Stock, Series A Preferred Stock,
    Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
    and Series E Preferred Stock into Common Stock, and assumes no exercise of
    the Underwriters' over-allotment option. Exercise of the over-allotment
    option in full would (i) reduce the proportion of shares held by existing
    shareholders to   . % of the total number of shares outstanding after the
    offering and (ii) increase the number of shares held by investors in the
    offering to           shares, or   . % of the total number of shares.
 
(2) Excludes (i) 6,336,486 shares of Common Stock issuable at a weighted average
    exercise price of $0.67 per share upon exercise of stock options outstanding
    at June 30, 1997, (ii) 4,896,723 shares of Common Stock reserved for future
    issuance under the Company's stock option plans, (iii) 1,000,000 shares of
    Common Stock reserved for issuance under the 1998 Employee Stock Purchase
    Plan, and (iv) 998,058 shares of Common Stock issuable upon exercise of
    outstanding warrants, and (v) up to 3,709,305 shares of Common Stock or
    Special Common Stock (representing additional cash and shareholders' equity
    of up to $50,001,431) issuable on exercise of the Series E Warrant. See
    "Management -- Benefit Plans," "Certain Transactions," "Description of
    Capital Stock -- Warrants to Purchase Preferred Stock and Common Stock" and
    Note 7 of Notes to Consolidated Financial Statements.
 
                                       22
   25
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The selected
consolidated financial data as of December 31, 1994, and for the period from
February 9, 1994 (inception) to December 31, 1994, and as of and for the years
ended December 31, 1995 and 1996 are derived from the Consolidated Financial
Statements of the Company audited by KPMG Peat Marwick LLP, independent
accountants. The selected consolidated financial data as of June 30, 1997 and
for the six months ended June 30, 1996 and 1997 are derived from unaudited
consolidated financial statements prepared by the Company on a basis consistent
with the Company's audited Consolidated Financial Statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for such periods.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for any other interim period or
for the year ending December 31, 1997.
 


                                                  PERIOD FROM
                                                FEBRUARY 9, 1994          YEAR ENDED              SIX MONTHS ENDED
                                                 (INCEPTION) TO          DECEMBER 31,                 JUNE 30,
                                                  DECEMBER 31,       ---------------------     -----------------------
                                                      1994            1995          1996        1996          1997
                                                ----------------     -------       -------     -------       -------
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                                     (UNAUDITED)
                                                                                            
STATEMENT OF OPERATIONS DATA:
Net revenues:
  Software license fees.......................       $   --          $ 1,782       $11,876     $ 3,768       $10,070
  Advertising.................................           --               --         1,016         170         1,107
  Service revenues............................           --               30         1,120         306         2,189
                                                      -----          -------       -------     -------       -------
         Total net revenues...................           --            1,812        14,012       4,244        13,366
Cost of revenues:
  Software license fees.......................           --               29         1,343         143         1,134
  Advertising.................................           --               --           288         105           308
  Service revenues............................           --               33           554         147         1,612
                                                      -----          -------       -------     -------       -------
         Total cost of revenues...............           --               62         2,185         395         3,054
                                                      -----          -------       -------     -------       -------
    Gross profit..............................           --            1,750        11,827       3,849        10,312
Operating expenses:
  Research and development....................          202            1,380         4,812       1,739         5,463
  Selling and marketing.......................           47            1,218         7,540       2,264         9,161
  General and administrative..................          296              747         3,491       1,412         2,496
                                                      -----          -------       -------     -------       -------
         Total operating expenses.............          545            3,345        15,843       5,415        17,120
                                                      -----          -------       -------     -------       -------
    Operating loss............................         (545)          (1,595)       (4,016)     (1,566)       (6,808)
Net other income..............................           --               94           227         117           436
                                                      -----          -------       -------     -------       -------
Net loss......................................       $ (545)         $(1,501)      $(3,789)    $(1,449)      $(6,372)
                                                      =====          =======       =======     =======       =======
Pro forma net loss per share..................                                     $   (  )                  $   (  )
Shares used to compute pro forma net loss per
  share(1)....................................

 


                                                                               DECEMBER 31,
                                                                     ---------------------------------      JUNE 30,
                                                                      1994          1995        1996          1997
                                                                     -------       -------     -------     -----------
                                                                                      (IN THOUSANDS)       (UNAUDITED)
                                                                                               
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...............     $    --       $ 6,116     $19,595       $11,496
Working capital (deficit).......................................         (49)        5,948      16,893         8,879
Total assets....................................................          64         7,574      26,468        22,148
Redeemable, convertible preferred stock.........................          --         7,655      23,153        23,264
Shareholders' equity (deficit)..................................          15        (1,111)     (3,320)       (9,764)

 
- ---------------
 
(1) For an explanation of the number of shares used to compute pro forma net
    loss per share, see Note 1 of Notes to Consolidated Financial Statements.
 
                                       23
   26
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus.
 
OVERVIEW
 
     RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of advertising-
supported content aggregation Web sites.
 
     The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. From inception through December 31, 1995, the
Company's operating activities related primarily to recruiting personnel,
raising capital, purchasing operating assets, conducting research and
development, building the RealAudio brand and establishing the market for
streaming audio. During 1996, the Company continued to invest heavily in
research and development, marketing, building domestic and international sales
channels and general and administrative infrastructure. In August 1996, the
Company began selling RealPlayer Plus, a premium version of its RealPlayer
product. RealPlayer continues to be available for free download from the
Company's Web sites. In February 1997, the Company released a beta version of
its RealVideo product and since that time has worked to build the market for
streaming video.
 
     The Company has a limited operating history on which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in rapidly evolving markets such as media delivery and electronic commerce over
the Internet and intranets. To achieve and sustain profitability, the Company
must, among other things, establish widespread market acceptance of its existing
products, successfully develop new products and services, respond quickly and
effectively to competitive, market and technological developments, expand sales
and marketing operations, broaden customer support capabilities, control
expenses and continue to attract and retain qualified personnel. There can be no
assurance that the Company will achieve or sustain profitability.
 
     The Company has incurred significant losses since its inception, and as of
June 30, 1997 had an accumulated deficit of $12,372,000. The Company believes
that its success will depend largely on its ability to extend its technological
leadership and continue to build its brand position. Accordingly, the Company
intends to invest heavily in research and development and sales and marketing.
The Company expects to continue to incur substantial operating losses for the
foreseeable future. In view of the rapidly evolving nature of the Company's
business and its limited operating history, the Company believes that
period-to-period comparisons of its revenues and operating results, including
its gross profit margin and operating expenses as a percentage of total net
revenues, are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has experienced
significant percentage growth in total net revenues, it does not believe that
its historical growth rates are sustainable or indicative of future growth. The
Company has used, and expects to continue to use, price promotions to increase
trial, purchase and use of its products, as well as to increase overall
recognition of its brands. The effect of such promotions on revenues in a
particular period may be significant and extremely difficult to forecast.
 
                                       24
   27
 
     The following table sets forth certain financial data for the periods
indicated as a percentage of total net revenues:
 


                                                  YEAR ENDED           SIX MONTHS ENDED
                                                 DECEMBER 31,              JUNE 30,
                                              ------------------      ------------------
                                               1995        1996        1996        1997
                                              ------      ------      ------      ------
                                                                      
        Net revenues:
          Software license fees............     98.4%       84.8%       88.8%       75.3%
          Advertising......................       --         7.2         4.0         8.3
          Service revenues.................      1.6         8.0         7.2        16.4
                                               -----       -----       -----       -----
                  Total net revenues.......    100.0       100.0       100.0       100.0
                                               -----       -----       -----       -----
        Cost of revenues:
          Software license fees............      1.6         9.6         3.4         8.5
          Advertising......................       --         2.0         2.4         2.3
          Service revenues.................      1.8         4.0         3.5        12.1
                                               -----       -----       -----       -----
                  Total cost of revenues...      3.4        15.6         9.3        22.9
                                               -----       -----       -----       -----
             Gross profit..................     96.6        84.4        90.7        77.1
        Operating expenses:
          Research and development.........     76.2        34.3        41.0        40.9
          Selling and marketing............     67.2        53.8        53.3        68.5
          General and administrative.......     41.2        24.9        33.3        18.7
                                               -----       -----       -----       -----
                  Total operating
                    expenses...............    184.6       113.0       127.6       128.1
                                               -----       -----       -----       -----
             Operating loss................    (88.0)      (28.6)      (36.9)      (51.0)
        Other income (expense):
          Interest income, net.............      5.2         2.1         3.5         3.3
          Other expense....................       --        (0.5)       (0.7)        0.0
                                               -----       -----       -----       -----
        Net other income...................      5.2         1.6         2.8         3.3
                                               -----       -----       -----       -----
        Net loss...........................    (82.8)%     (27.0)%     (34.1)%     (47.7)%
                                               =====       =====       =====       =====

 
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 AND 1997
 
     REVENUES
 
     The Company generates revenues primarily from three sources: software
license fees, advertising and services. Software license fees are recognized
upon delivery, net of allowances for estimated future returns, provided that no
significant obligations of the Company remain and collection of the resulting
receivable is deemed probable. Revenues from software license agreements with
original equipment manufacturers ("OEM") are recognized when the OEM delivers
its product incorporating the Company's software to the end user. In the case of
prepayments from an OEM, the Company generally recognizes revenues based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue generally is recognized on the
straight-line method over the term of the contract. The Company recognizes
revenues from software license agreements with value-added resellers ("VAR")
upon delivery to the VAR, provided necessary conditions are met. If these
conditions are not met, revenue is recognized upon redistribution by the VAR to
the end user. Advertising revenues are recognized over the period in which the
advertisement is displayed on one of the Company's Web pages. To the extent
minimum guaranteed page impression deliveries are not met, the Company defers
recognition of the corresponding advertising revenues until guaranteed page
impression delivery levels are achieved. Service revenues include support and
upgrade contracts, commissions from electronic sales of third-party products,
consulting, content hosting and fees from user conferences. Support and upgrade
revenues are recognized ratably over the term of the contract, which typically
is 12 months. Payments for
 
                                       25
   28
 
support and upgrade contracts are generally made in advance and are
nonrefundable. Other service revenues are recognized when the service is
performed.
 
     Software License Fees.  Software license fees were $3,768,000 and
$10,070,000 for the six months ended June 30, 1996 and 1997, respectively. The
increase was primarily due to growing market acceptance of the Company's server
and player products, including the introduction of RealPlayer Plus in August
1996 and RealVideo in February 1997, successful product promotions and
diversification of the Company's sales channels, including electronic
distribution. Server product sales were $3,616,000 and $5,484,000 for the six
months ended June 30, 1996 and 1997, respectively. Player product sales were
$152,000 and $4,586,000 over the same respective periods. The Company began
selling products electronically from its Web site in August 1996. Electronic
sales of both server and player products for the six months ended June 30, 1997
were $3,934,000, or 39% of software license fees in the period. The Company has
used price promotions to increase the trial, purchase and use of its software
products. In February 1997, the Company reduced the prices of its server
products. In July 1997, the Company made its EasyStart Server available to
customers to download free of charge.
 
     Advertising Revenues.  Advertising revenues were $170,000 and $1,107,000
for the six months ended June 30, 1996 and 1997, respectively. The Company began
selling advertising space on its Web sites in March 1996. Increased revenues in
1997 were due in large part to a full period of advertising sales and the
Company's success in attracting a greater number of advertisers.
 
     Service Revenues.  Service revenues were $306,000 and $2,189,000 for the
six months ended June 30, 1996 and 1997, respectively. Revenues from upgrade and
support contracts were $306,000 and $1,473,000 for the six months ended June 30,
1996 and 1997, respectively. This increase was primarily due to a greater
installed base of the Company's products. Service revenues for the six months
ended June 30, 1997 also included fees of $498,000 related to the Company's
first RealMedia conference.
 
     International Revenues.  International revenues were 19% and 27% of total
net revenues for the six months ended June 30, 1996 and 1997, respectively. The
increase in international revenues was due in part to the creation of the
Company's three foreign subsidiaries. The Company incorporated its French and
Japanese subsidiaries in November 1996 and its U.K. subsidiary in February 1997.
Substantially all international revenue was generated in Europe and Asia. The
functional currency of the Company's foreign subsidiaries is the local currency
in the country in which the subsidiary is incorporated. Operations of the
Company's foreign subsidiaries are translated from local currency into U.S.
dollars based on average monthly exchange rates. The Company currently does not
hedge its foreign currency transactions and is therefore subject to the risk of
changes in exchange rates.
 
     COST OF REVENUES
 
     Cost of Software License Fees.  Cost of software license fees includes cost
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology and fees paid to third-party vendors for order fulfillment.
Cost of software license fees was $143,000 and $1,134,000 for the six months
ended June 30, 1996 and 1997, respectively, and 4% and 11%, respectively, of
software license fees. The increase in absolute dollars was primarily due to
higher sales volume. The increase in percentage terms was due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels, and the utilization of a third-party order
fulfillment agency.
 
     Cost of Advertising Revenues.  Cost of advertising revenues includes
personnel associated with content creation and bandwidth expenses related to the
Company's Web sites. Cost of advertising revenues was $105,000 and $308,000 for
the six months ended June 30, 1996 and 1997, respectively, and 62% and 28%,
respectively, of advertising revenues. The increase in absolute dollars was
primarily due to increased head count associated with content creation and
higher bandwidth expenses. The decrease in percentage terms was due to revenues
growing at a faster rate than expenses.
 
                                       26
   29
 
     Cost of Service Revenues.  Cost of service revenues includes in-house and
contract personnel providing services, bandwidth expenses for hosting services
and user conference expenses. Cost of service revenues was $147,000 and
$1,612,000 for the six months ended June 30, 1996 and 1997, respectively, and
48% and 74%, respectively, of service revenues. The increase in absolute dollars
was primarily due to increased staff and other costs associated with providing
these services to a greater number of customers, and, in March 1997, the Company
incurred $1,000,000 of costs associated with its RealMedia conference. No such
costs were incurred in the comparable period in 1996. Excluding the effects of
the RealMedia conference, cost of service revenues was 48% and 36% of service
revenues for the six months ended June 30, 1996 and 1997, respectively. This
decrease was primarily attributable to better utilization of service personnel
associated with an increased customer base.
 
     Gross margins may be affected by the mix of distribution channels used by
the Company, the mix of products sold, the mix of product revenues versus
service revenues and the mix of international versus U.S. and Canada revenues.
The Company typically realizes higher gross margins on direct channel sales
relative to indirect channels and higher gross margins on software license fees
relative to service revenues. If sales through indirect channels increase as a
percentage of total net revenues, or if, as the Company anticipates, service
revenues increase as a percentage of total net revenues, the Company's gross
margins will be adversely affected.
 
     OPERATING EXPENSES
 
     Research and Development.  Research and development expenses consist
primarily of salaries and consulting fees paid to support product development.
To date, all research and development costs have been expensed as incurred
because technological feasibility of the Company's products is established upon
completion of a working model. To date, costs incurred between completion of a
working model and general release of products have been insignificant. The
Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development expenses to increase significantly. Research and
development expenses were $1,739,000 and $5,463,000 for the six months ended
June 30, 1996 and 1997, respectively, and 41% of total net revenues for both
periods. The increase in absolute dollars was due primarily to increases in
internal development personnel, travel, and consulting expenses. Research and
development expenses incurred for the six months ended June 30, 1997 were
related primarily to enhancements to existing products and development of new
technology and products.
 
     Selling and Marketing.  Selling and marketing expenses consist primarily of
salaries, commissions, consulting fees paid, trade show expenses, advertising
and cost of marketing collateral. The Company intends to continue its aggressive
branding and marketing campaign and therefore expects selling and marketing
expenses to increase significantly. Selling and marketing expenses were
$2,264,000 and $9,161,000 for the six months ended June 30, 1996 and 1997,
respectively, and 53% and 69%, respectively, of total net revenues. The
increases were due in large part to growth in sales personnel, commissions and
costs related to the continued development and implementation of the Company's
branding and marketing campaigns. During the six months ended June 30, 1997, the
Company also incurred approximately $694,000 in marketing expenses related to
the launch of RealVideo.
 
     General and Administrative.  General and administrative expenses consist
primarily of salaries and fees for professional services. The Company expects
general and administrative expenses to increase as the Company expands its
staff, incurs additional costs related to growth of its business, and becomes a
publicly traded company. General and administrative expenses were $1,412,000 and
$2,496,000 for the six months ended June 30, 1996 and 1997, respectively, and
33% and 19%, respectively, of total net revenues. The increase in absolute
dollars was primarily a result of increased personnel and facility expenses
necessary to support the Company's growth. The decrease in percentage terms was
a result of revenues growing at a faster rate than expenses.
 
                                       27
   30
 
     NET OTHER INCOME
 
     Other income and expenses consist primarily of earnings on the Company's
cash and cash equivalents and short-term investments. Net other income was
$117,000 and $436,000 for the six months ended June 30, 1996 and 1997,
respectively. The increase was due primarily to interest income resulting from
additional invested cash and cash equivalents and short-term investments.
 
     INCOME TAXES
 
     The Company has had a net operating loss for each period since inception.
As of June 30, 1997, the Company had approximately $7,800,000 of net operating
loss carryforwards for federal income tax purposes that will expire in 2010
through 2012 if not utilized. See Note 4 of Notes to Consolidated Financial
Statements.
 
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996
 
     REVENUES
 
     Software License Fees.  Software license fees were $1,782,000 and
$11,876,000 for 1995 and 1996, respectively. The Company first began recognizing
revenues from software license fees in July 1995. The increase in software
license fees in 1996 was primarily due to a full period of sales, growing market
acceptance of the Company's products, the introduction of RealPlayer Plus in
August 1996 and diversification of sales channels, including electronic
distribution. All of the Company's software license fees in 1995 were from the
sale of its server software. In 1996, server product sales were $8,188,000 and
player product sales were $3,688,000.
 
     Advertising Revenues.  Advertising revenues were $1,016,000 for 1996. The
Company began selling advertising space on its Web sites in March 1996, and, as
a result no advertising revenues were generated in 1995.
 
     Service Revenues.  Service revenues were $30,000 and $1,120,000 for 1995
and 1996, respectively. The increase in service revenues in 1996 was primarily
due to support and upgrade contracts associated with a larger installed base of
the Company's products. Consulting, content hosting and user conference revenues
were not significant in either period.
 
     International Revenues.  International revenues as a percentage of total
net revenues were 15% and 19% for 1995 and 1996, respectively. Substantially all
international revenues were generated in Europe and Asia.
 
     COST OF REVENUES
 
     Cost of Software License Fees.  Cost of software license fees was $29,000
and $1,343,000 for 1995 and 1996, respectively, and 2% and 11%, respectively, of
software license fees. The increase in absolute dollars was primarily due to
higher sales volume. The increase in percentage terms was due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels, and the utilization of a third-party order
fulfillment agency.
 
     Cost of Advertising Revenues.  Cost of advertising revenues was $288,000
for 1996, and was 28% of advertising revenues. Since the Company did not begin
selling advertising until 1996, all content creation costs in 1995 were charged
to research and development and selling and marketing expenses.
 
     Cost of Service Revenues.  Cost of service revenues was $33,000 and
$554,000 for 1995 and 1996, respectively, and was 110% and 49%, respectively, of
service revenues. The increase in absolute dollars was due primarily to
increased staff and other costs associated with providing these services to a
greater number of customers. The decrease in percentage terms was due to better
utilization of service personnel associated with an increased customer base.
 
                                       28
   31
 
     OPERATING EXPENSES
 
     Research and Development.  Research and development expenses were
$1,380,000 and $4,812,000 for 1995 and 1996, respectively, and 76% and 34%,
respectively, of total net revenues. The increase in absolute dollars was
attributable primarily to increased personnel and related costs associated with
enhancement of existing products and development of new products. The decrease
in percentage terms was a result of revenues growing at a faster rate than
research and development expenses.
 
     Selling and Marketing.  Selling and marketing expenses were $1,218,000 and
$7,540,000 for 1995 and 1996, respectively, and 67% and 54%, respectively, of
total net revenues. The increase in absolute dollars was due primarily to
increased salaries, direct sales personnel, commissions, costs associated with
international expansion and promotional expenses. The decrease in percentage
terms was a result of revenues growing at a faster rate than selling and
marketing expenses.
 
     General and Administrative.  General and administrative expenses were
$747,000 and $3,491,000 for 1995 and 1996, respectively, and 41% and 25%,
respectively of total net revenues. The increase in absolute dollars was
primarily a result of increased salaries and related expenses associated with
the hiring of additional personnel and increased facilities expenses. The
decrease in percentage terms was a result of revenues growing at a faster rate
than general and administrative expenses.
 
     NET OTHER INCOME
 
     Net other income was $94,000 and $227,000 for 1995 and 1996, respectively.
The increase was due primarily to interest income resulting from higher invested
cash and cash equivalents and short-term investments.
 
     INCOME TAXES
 
     The Company has had a net operating loss for each period since inception.
As of December 31, 1996, the Company had approximately $2,700,000 of net
operating loss carryforwards for federal income tax purposes that will expire in
2010 and 2011 if not utilized. See Note 4 of Notes to Consolidated Financial
Statements.
 
                                       29
   32
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth certain unaudited quarterly statement of
operations data for the five quarters ended June 30, 1997. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited Consolidated Financial Statements appearing elsewhere in this
Prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results. The quarterly data should be read in
conjunction with the audited Consolidated Financial Statements of the Company
and the Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
 


                                                               QUARTER ENDED
                                       --------------------------------------------------------------
                                       JUNE 30,     SEPT. 30,     DEC. 31,     MARCH 31,     JUNE 30,
                                         1996         1996          1996         1997          1997
                                       --------     ---------     --------     ---------     --------
                                                               (IN THOUSANDS)
                                                                              
Total net revenues..................   $ 2,479       $ 4,030      $ 5,738       $ 6,356      $ 7,010
Total cost of revenues..............       249           575        1,216         2,021        1,033
                                          ----        ------      -------       -------      -------
  Gross profit......................     2,230         3,455        4,522         4,335        5,977
Operating expenses:
     Research and development.......       989         1,334        1,739         2,725        2,738
     Selling and marketing..........     1,445         2,125        3,151         4,350        4,811
     General and administrative.....       820           906        1,173         1,171        1,325
                                          ----        ------      -------       -------      -------
          Total operating
            expenses................     3,254         4,365        6,063         8,246        8,874
                                          ----        ------      -------       -------      -------
  Operating loss....................    (1,024)         (910)      (1,541)       (3,911)      (2,897) 
Net other income....................        68            43           67           205          231
                                          ----        ------      -------       -------      -------
Net loss............................   $  (956)      $  (867)     $(1,474)      $(3,706)     $(2,666) 
                                          ====        ======      =======       =======      =======

 


                                                   AS A PERCENTAGE OF TOTAL NET REVENUES
                                       --------------------------------------------------------------
                                       JUNE 30,     SEPT. 30,     DEC. 31,     MARCH 31,     JUNE 30,
                                         1996         1996          1996         1997          1997
                                       --------     ---------     --------     ---------     --------
                                                                              
Total net revenues..................   100.0 %      100.0 %       100.0 %      100.0 %       100.0 %
  Total cost of revenues............      10.0         14.3          21.2         31.8          14.7
                                         -----        -----         -----        -----         -----
     Gross profit...................      90.0         85.7          78.8         68.2          85.3
Operating expenses:
  Research and development..........      39.9         33.1          30.3         42.9          39.1
  Selling and marketing.............      58.3         52.7          54.9         68.4          68.6
  General and administrative........      33.1         22.5          20.5         18.4          18.9
                                         -----        -----         -----        -----         -----
          Total operating
            expenses................     131.3        108.3         105.7        129.7         126.6
                                         -----        -----         -----        -----         -----
     Operating loss.................     (41.3)       (22.6)        (26.9)       (61.5)        (41.3)
Net other income....................       2.7          1.1           1.2          3.2           3.3
                                         -----        -----         -----        -----         -----
Net loss............................     (38.6)%      (21.5)%       (25.7)%      (58.3)%       (38.0)%
                                         =====        =====         =====        =====         =====

 
     The Company's total net revenues have increased in all quarters presented
as a result of increasing market acceptance of the Company's direct products,
diversification of the Company's sales channels, including electronic
distribution, expansion of the Company's direct sales efforts, and continued
increases in its installed customer base. In the third quarter of 1996, the
Company released RealPlayer Plus. During the first quarter of 1997, the Company
released a beta version of RealVideo and began recognizing revenues upon the
final release of RealVideo in the second quarter of 1997. The increases in total
cost of revenues as a percentage of total net revenues in the third and fourth
quarters of 1996 were due to a shift in product mix toward RealPlayer Plus
products, a greater percentage of sales through indirect channels and the
utilization of a third-party order fulfillment agency. In the first quarter of
1997,
 
                                       30
   33
 
the Company held its first RealMedia conference and recognized revenues and cost
of revenues of $498,000 and $1,000,000, respectively, which increased total cost
of revenues as a percentage of total net revenues.
 
     Operating expenses increased in each quarter reflecting increased spending
on developing, selling, marketing and supporting the Company's products, as well
as building the Company's market presence. Research and development expenses
have increased as a result of continued enhancements to existing products and
development of new products. Selling and marketing expenses increased as a
result of increased sales personnel and commissions. In the first and second
quarters of 1997, the Company increased marketing activities associated with the
release of RealVideo. The trend of increasing general and administrative
expenses is due primarily to additional personnel and facilities costs.
 
FACTORS AFFECTING OPERATING RESULTS
 
     As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
accurately its revenues. The Company's expense levels are based in part on its
expectations with regard to future revenues. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
As a result, any significant shortfall in demand for the Company's products and
services relative to the Company's expectations would have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Further, as a strategic response to changes in the competitive
environment, the Company may from time to time implement pricing, service or
marketing changes that could have a material adverse effect on its business,
financial condition and results of operations. See "Risk
Factors -- Unpredictability of Future Revenues; Potential Fluctuation in
Quarterly Operating Results," "-- Competition; Relationship With Microsoft" and
"Business -- Competition."
 
     The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control, including (i) demand for the Company's products
and services, (ii) introduction or enhancement of products and services by the
Company and its competitors, (iii) market acceptance of new products and
services of the Company and its competitors, (iv) price reductions by the
Company or its competitors or changes in how products and services are priced
(such as the Company's recent decision to distribute free of charge a version of
its basic EasyStart Server, which previously sold for $295 to $995), (v) the mix
of products and services sold by the Company and its competitors, (vi) the mix
of distribution channels through which the Company's products are licensed and
sold, (vii) the mix of international and North American revenues, (viii) costs
of litigation and intellectual property protection, (ix) the growth in the use
of the Internet, (x) the Company's ability to attract and retain qualified
personnel, (xi) the amount and timing of operating costs and capital
expenditures related to expansion of the Company's business, operations and
infrastructure, (xii) technical difficulties with respect to the use of the
Company's products, (xiii) governmental regulations and (xiv) general economic
conditions and economic conditions specifically related to the Internet. It is
often difficult to forecast what the effect of such factors would be, or the
effect that any such factors or any combination thereof would have on the
Company's results of operations for any given fiscal quarter. The Company has
used, and expects to continue to use, price promotions to increase trial,
purchase and use of its products, as well as to increase the overall brand
awareness of RealNetworks. The effect of such promotions on revenues in a
particular period may be significant and extremely difficult to forecast. Based
on the foregoing, the Company believes that its quarterly revenues, expenses and
operating results could vary significantly in the future, and that period-
to-period comparisons should not be relied upon as indications of future
performance.
 
     Management has observed that revenues from advertising sales have tended to
be higher in the second and fourth quarters, and retail sales have tended to be
highest in the fourth quarter. The Company typically operates with little or no
backlog. As a result, quarterly sales and operating results depend primarily on
the volume and timing of orders received in the quarter, both of which are
difficult to forecast. The Company typically recognizes a substantial portion of
its revenues in the last month of each quarter.
 
                                       31
   34
 
     Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse affect on the
trading price of the Common Stock.
 
DONATION OF NET INCOME TO CHARITY
 
     The Company's philosophy includes a commitment to charitable
responsibility. If sustained profitability is achieved, the Company intends to
donate approximately 5% of its annual net income to charitable organizations. As
a result, the Company's net income will be reduced by the amount of these
charitable donations. See "Business -- Position on Charitable Responsibility."
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock and contributions of capital
by the Company's founder. Net proceeds from these sales and contributions
totaled $25,611,000.
 
     Net cash used in operating activities was $1,240,000 and $635,000 in 1995
and 1996, respectively. Cash used in operating activities in 1995 was primarily
attributable to a net loss of $1,501,000. For 1996, cash used in operating
activities resulted primarily from a net loss of $3,789,000 and an increase of
$2,608,000 in trade accounts receivable, largely offset by increases of
$2,267,000 in deferred revenue, $2,220,000 in accounts payable and $822,000 in
accrued expenses. Net cash used in operating activities was $5,658,000 for the
six months ended June 30, 1997. This was attributable primarily to a net loss of
$6,372,000, a decrease in accounts payable of $862,000 and an increase of
$1,049,000 in trade accounts receivable, partially offset by increases of
$801,000 in accrued expenses and $620,000 in deferred revenue.
 
     Net cash used in investing activities of $3,660,000, $4,837,000, and
$5,107,000 for the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997, respectively, was primarily related to purchases of
property and equipment and increases in short-term investments.
 
     Cash provided by financing activities of $8,029,000 in 1995 consisted
primarily of $7,405,000 in net proceeds from the issuance of Series B and C
Preferred Stock and a capital contribution by the founder of $372,000. Cash
provided by financing activities of $17,091,000 in 1996 was primarily from net
proceeds of $17,047,000 from the issuance of Series D Preferred Stock. Cash
flows provided by financing activities of $1,009,000 for the six months ended
June 30, 1997 were primarily from $991,000 of proceeds from the issuance of a
note payable.
 
     As of June 30, 1997, the Company had $4,972,000 of cash and cash
equivalents and $6,524,000 in short-term investments. As of June 30, 1997, the
Company's principal commitments consisted of obligations outstanding under
operating leases and a $991,000 note payable. Although the Company has no
material commitments for capital expenditures, it anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.
 
     In October 1996, the Company established a $1,000,000 line of credit and a
$1,500,000 term loan with Silicon Valley Bank. The line of credit and term loan
bear interest at the prime rate plus 0.75% and 1.0% per annum, respectively. In
December 1996, Silicon Valley Bank amended the agreements to waive the financial
covenants applicable thereunder. There were no borrowings outstanding under the
line of credit or the term loan as of December 31, 1996 and June 30, 1997.
 
     Since inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of the Company's cash resources.
The Company believes that the net proceeds from the offering, together with its
current cash, cash equivalents and short-term investments, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures for
at least the next 12 months.
 
                                       32
   35
 
RECENT DEVELOPMENTS
 
     In June 1997, the Company and Microsoft entered into a strategic agreement
pursuant to which the Company granted Microsoft a nonexclusive license to
certain substantial elements of the source code of the Company's
RealAudio/RealVideo Version 4.0 technology, including its basic RealPlayer and
substantial elements of its EasyStart Server products, and related Company
trademarks. In July 1997, the Company received a $30,000,000 prepayment related
to the license agreement. The agreement requires the Company to provide
Microsoft with engineering consultation services, certain error corrections and
certain technical support over a defined term. In connection with the agreement,
Microsoft purchased a minority interest in the Company in the form of 3,338,374
shares of Series E Preferred Stock for $30,000,000, plus a warrant to purchase
up to 3,709,305 shares of Series E Preferred Stock at an exercise price of
$13.48 per share.
 
     In August 1997, the U.S. Department of Justice commenced an investigation
into horizontal merger activities within the streaming media industry. The
Department of Justice served several companies, including the Company and
Microsoft, with subpoenas to produce certain documents. As a result of the
investigation, it is possible that the Department of Justice will require
certain actions by the Company, Microsoft or other companies in the streaming
media industry that could, among other things, affect Microsoft's obligations
with respect to the distribution of the Company's products, require the Company
to refund all or a portion of the license fee paid by Microsoft to the Company,
require Microsoft to limit or divest certain of its acquisitions or investments
in the streaming media industry, including its investment in the Company, and,
if Microsoft were forced to rescind its agreement with the Company, place the
Company at a significant competitive disadvantage within the industry. There can
be no assurance that any such outcome would not have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Department of Justice Subpoena."
 
     In September 1997, the Company terminated its line of credit and term loan
with Silicon Valley Bank.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("Statement 128"). Statement 128 establishes standards for the computation,
presentation and disclosure of earnings per share ("EPS"), replacing the
presentation of the currently required Primary EPS with a presentation of Basic
EPS. It also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for entities with complex capital structures. Basic EPS
is based on the weighted average number of common shares outstanding during the
period. Diluted EPS is based on the potential dilution that would occur upon
exercise or conversion of securities into common stock using the treasury stock
method. Statement 128 is effective for financial statements for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of Statement 128 to be material to its reported EPS amounts.
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not determined the manner in
which it will present the information required by Statement 130.
 
     In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. The Company has not determined the manner in which it
will present the information required by Statement 131.
 
                                       33
   36
 
                                    BUSINESS
 
THE COMPANY
 
     RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of advertising-
supported content aggregation Web sites. As the Web continues to evolve as a
mass communications medium, the Company believes that an increasing amount of
the types of content currently delivered through traditional media, such as
radio and television, will be delivered over the Internet. The Company believes
that streaming media technology is essential to this transition because it
enables a more compelling user experience, allowing the Internet to compete more
effectively with traditional media for audience share.
 
     From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 18 million copies of its
RealPlayer software have been downloaded and that over 200,000 copies of its
premium client product, RealPlayer Plus, have been sold electronically in the
product's first year of distribution. In addition, the Company believes that
more than 55,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. The Company's customers, including
ABC Radio Net, Bloomberg Online, The Boeing Company, Dow Jones & Company, Inc.
("Dow Jones"), NBC Desktop, News Corporation ("News Corp."), Starwave
Corporation ("Starwave") and 3Com Corporation ("3Com"), use its software
products and services to deliver a broad range of streaming audio and video
news, sports, entertainment and corporate information over the Internet and
intranets.
 
INDUSTRY BACKGROUND
 
     The Internet has grown rapidly in recent years, driven by the development
of the Web and graphically intuitive Web browsers, the proliferation of
multimedia PCs, increasingly robust network architectures and the emergence of
compelling Web-based content and commerce applications. The broad acceptance of
the standard Internet Protocol ("IP") has also led to the emergence of intranets
and the development of a wide range of non-PC devices that allow users to access
the Internet and intranets. International Data Corporation ("IDC") estimates
that the number of Web users worldwide will continue to grow rapidly from 28
million in 1996 to an estimated 175 million in 2001. In addition, users are
spending an increasing amount of time on the Web. A recent study by the Georgia
Institute of Technology indicates that 51% of total Internet users access the
Internet for 10 or more hours per week as of April 1997, compared with 29% as of
April 1995.
 
     The development of the Web has contributed to the transition of the
Internet from a text and e-mail-focused data-sharing network to a richer
environment, capable of delivering graphical and interactive content. The Web
has a number of features unavailable in traditional media and commerce channels
that attract online users, content providers, advertisers and merchants. The
relatively low barriers to publishing content on the Web have led to an
explosion of Web-based content and the development of a large and diverse group
of Web-based communication channels. As an interactive, searchable,
user-controlled medium, the Web provides a highly engaging user experience and
allows users to access this broad range of online content on demand and at their
convenience. The narrow-casting capabilities of the Web enable content providers
and advertisers to establish customized, personalized interactions with
consumers.
 
     The development of streaming media technology has further enhanced the
graphical capabilities of the Internet and intranets. Streaming technology
enables the transmission and playback of continuous "streams" of multimedia
content, such as audio and video, and represents a significant advancement over
earlier technologies. Prior to the advent of streaming technology, users could
not initiate the
 
                                       34
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playback of audio or video clips until such content was downloaded in its
entirety, resulting in significant waiting times. As a result, live broadcasts
of audio and video content over the Internet or intranets were not possible.
 
MARKET OPPORTUNITY
 
     The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium and has accelerated the
adoption of corporate intranets as a means to improve communications within
enterprises. Many businesses and content providers now offer interactive audio,
video and other multimedia content as a means of enriching and differentiating
their Web sites. The Company believes that more than 55,000 hours per week of
live audio and video content are broadcast over the Web using RealAudio and
RealVideo technology, with a substantially greater amount of recorded media
available on demand.
 
     These enhanced multimedia capabilities, combined with the unique
interactive properties of the Internet, are attracting a large and expanding
audience, a growing number of advertisers and an increasing breadth and depth of
content and online commercial applications. The market for Web advertising
revenues is expected to grow from $180 million in 1996 to $2.9 billion in 2000,
according to IDC. Overall usage growth, together with the Internet's unique
interactive properties, has also led to a rapidly evolving online commerce
opportunity. IDC estimates that worldwide revenues generated by Web-based
commerce will grow from $2.6 billion in 1996 to $223 billion in 2001. As a
result of the growth in business opportunities on the Internet, the market for
software solutions that focus on the Internet and intranets is also growing
rapidly. IDC estimates that Internet-focused software revenues will grow from
$359 million in 1996 to $4.3 billion in 2000.
 
     As the Web continues to evolve as a mass communications medium, the Company
believes that an increasing amount of the types of content currently delivered
through traditional media, such as radio and television, will be delivered over
the Internet. The Company believes that streaming media technology is essential
to this evolution because it provides a more compelling user experience,
allowing the Internet to compete more effectively with traditional media for
audience share.
 
     The Company believes that to successfully capitalize on this opportunity,
streaming media providers must address the following challenges:
 
     DELIVER COMPELLING STREAMING MEDIA CONTENT IN BANDWIDTH CONSTRAINED
ENVIRONMENTS. The Internet was designed to transmit discrete packets of data and
is not inherently well suited to the delivery of continuous streams of
multimedia data without additional software. In addition, bandwidth is limited
in Internet and intranet environments, posing significant technological
challenges for delivery of high-quality streaming audio and video content.
 
     ENABLE BROAD-BASED ACCESS TO STREAMING MEDIA TECHNOLOGY. Online content
providers, advertisers and merchants must make a significant investment to
create and deliver streaming media content and need to reach a sufficiently
large audience to generate an adequate return on such investment. As a result,
content providers must consider the popularity and quality of a particular
streaming media solution before committing resources to delivering content using
that solution. The Company believes that Internet users prefer client software
that has widespread market acceptance and is compatible with substantial amounts
of encoded content.
 
     DRIVE CONSUMER USAGE. The Company believes that consumer interest in
streaming media content is driven in large part by the ability to locate and
experience such content easily. As a result, the Company believes that the
development of well-marketed, compelling Web sites that aggregate streaming
media content is central to the continued growth of multimedia content on the
Web.
 
     The Company believes that a substantial opportunity exists to provide
software solutions and content aggregation and delivery services that address
these challenges and support the development of large and growing advertising
and electronic commerce markets on the Web.
 
                                       35
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THE REALNETWORKS SOLUTION
 
     RealNetworks enables and promotes the transmission of real-time streaming
media content over the Internet and intranets. The Company provides an
integrated suite of branded streaming media software products and services,
including its RealAudio and RealVideo system, an electronic commerce Web site
designed to promote the proliferation of streaming media products and a network
of advertising-supported content aggregation Web sites. Each of the Company's
products and services has been designed to address the technological and market
development challenges that confront streaming media content providers.
 
     STREAMING MEDIA TECHNOLOGY. RealNetworks has been a pioneer in the
development of streaming technology and continues to offer leading streaming
media software solutions. The Company's products use advanced compression and
error-correction technologies to deliver acceptable performance even in
bandwidth-constrained environments. The Company has won numerous awards for its
technology, including a PC Magazine Editor's Choice award for streaming video in
October 1997. The Company's software runs on a broad range of operating systems
and hardware platforms, enabling content providers to reach a broad audience and
enterprises to deliver intranet content in heterogeneous computing environments.
 
     REALPLAYER UBIQUITY AND BRAND STRENGTH. From its inception, the Company has
strategically chosen to offer its RealPlayer software to individual users free
of charge to promote the widespread adoption of its client software and speed
the acceptance of Internet multimedia. The Company estimates that more than 18
million copies of its RealPlayer software have been downloaded and that more
than 150,000 Web pages use the Company's software. In addition, over 1,200
third-party developers have joined the Company's Real Developer Program. To
continue the broad market adoption of its server products, the Company now
offers its basic server free of charge to accelerate the delivery of RealAudio
and RealVideo content. As a result of these activities and the Company's
aggressive promotional programs, the Company believes that the "Real" brand has
become one of the most widely recognized brands on the Internet.
 
     ELECTRONIC COMMERCE DISTRIBUTION CHANNEL. The Company has pursued an
electronic commerce distribution strategy designed to further accelerate product
adoption and drive upgrade and cross-selling opportunities among its existing
installed user base. The Company's online distribution efforts have resulted in
electronic sales of over 200,000 copies of the Company's RealPlayer Plus in its
first year of distribution and the collection of a database of information of
over 7 million names. Recently, the Company opened its RealStore Web site, an
online store for the sale of the Company's products, third-party multimedia
tools and utilities, and intranet-based training products. The Company believes
that it will be able to continue to facilitate the adoption and growth of
streaming media content by providing a concentrated marketplace and a low-cost
distribution mechanism for emerging streaming media tools and their developers.
 
     STREAMING MEDIA CONTENT AND AGGREGATION. The Company's
advertising-supported Web sites, including Timecast, LiveConcerts.com, and
Film.com, aggregate, organize and provide streaming media programming, in order
to build consumer awareness and Web site traffic for streaming media content.
According to I/Pro, the Company's network of Web sites attracted on average over
380,000 visitors and generated over two million page impressions per day. The
Company's Daily Briefing and Destination Button services provide one-click
access to a range of third-party programming. In addition to generating
advertising revenues, these sites and services stimulate demand for and creation
of streaming media content and the Company's RealAudio and RealVideo system.
 
BUSINESS STRATEGY
 
     The Company's objective is to be the leading streaming media company,
providing software and services that enable the delivery of a broad range of
multimedia content over the Internet and intranets, thereby facilitating the
evolution of the Internet into a mass communications and commerce medium. To
achieve this objective, the Company's strategy includes the following key
elements:
 
                                       36
   39
 
     EXTEND TECHNOLOGY LEADERSHIP.  The Company has established a reputation as
a leader in streaming media technology and intends to continue to maintain its
reputation for quality and innovation by expanding the features and breadth of
its audio and video product offerings. The Company believes that the fundamental
architecture of its products can also be expanded to support synchronized
streaming of a wide variety of other time-based data types, such as MIDI,
images, animation and multimedia presentations. As part of this strategy, the
Company has devoted and will continue to commit significant resources to the
development of technologies that increase the scaleability of streaming media
solutions.
 
     MAXIMIZE MARKET PENETRATION AND BRAND NAME RECOGNITION.  The Company
believes that it is the recognized leader in the streaming media technology and
that its "Real" brand is one of the most widely recognized brand names on the
Internet. Since its inception, the Company has sought to achieve rapid and broad
adoption of its technologies and strong brand recognition. This strategy has
been pursued through various means, such as offering the Company's RealPlayer to
individual users free of charge over the Internet, bundling the Company's
products with those of other major vendors and using multiple distribution
channels, including both direct sales and indirect OEM and retail relationships.
The Company has recently intensified its efforts to proliferate its streaming
technology by offering its basic EasyStart Server free of charge and entering
into a licensing and distribution agreement with Microsoft. The Company also
intends to continue to promote the adoption of industry standards that are
either based on or compatible with its technologies. For example, the Company is
one of the principal co-authors of RTSP, a proposed industry standard for the
control and delivery of streaming media.
 
     LEVERAGE MARKET POSITION TO EXPAND BUSINESS MODEL.  Management believes
that the Company's technology leadership, market position and brand name are
significant assets that the Company can leverage to maintain and increase its
market share and diversify its revenue base. The Company intends to leverage
these assets as follows:
 
     - GROW STREAMING MEDIA SOFTWARE BUSINESS.  The Company intends to
       capitalize on the growth in demand for streaming media software by
       continuing to develop, market and support industry-leading products and
       services. The Company also plans to strengthen its marketing, sales and
       customer support efforts as the size of its market opportunity and
       customer base increases.
 
     - EXPAND INTERNET COMMERCE BUSINESS.  The Company's Web sites provide
       product information and fulfillment resources for streaming media content
       users and developers. The Company recently opened its RealStore Web site,
       an online store for the sale of the Company's products, third-party
       multimedia tools and utilities and intranet-based training products. The
       Company believes that it will be able to continue to facilitate the
       adoption and growth of streaming media content by providing a
       concentrated marketplace and a low-cost distribution mechanism for
       emerging streaming media tools and their developers.
 
     - OFFER LEADING CONTENT AGGREGATION SITES FOR STREAMING MEDIA.  The Company
       has developed a network of Web sites that aggregate links to third-party
       streaming media programming. The Company plans to continue building Web
       site traffic from these activities to increase Web site advertising
       revenues, increase visibility and sales of the Company's products,
       promote the use of streaming media content on the Internet or intranets
       and promote the Company's Internet commerce platform.
 
     DEVELOP AND MARKET STREAMING MEDIA SOLUTIONS FOR A VARIETY OF PLATFORMS AND
BANDWIDTHS.  The Company's rapid growth is attributable in part to the wide
acceptance of the streaming media solutions it has developed for PCs networked
in low-bandwidth environments. However, significant efforts are underway to make
the Internet available on a wider range of platforms, including non-PC Internet
appliances, and over higher-speed connections, including cable modems.
Accordingly, the Company has designed its solutions to add value in a range of
bandwidth environments and to be flexible enough to port easily to new
platforms. As a result, management believes that the Company is positioned to
capitalize on possibly significant platform and bandwidth changes.
 
                                       37
   40
 
     STRENGTHEN STRATEGIC RELATIONSHIPS.  The Company has established strategic
relationships with a variety of industry participants, including software and
hardware vendors, entertainment companies, content publishers and broadcast
media companies. The Company's relationship with Microsoft enables wider
distribution of the Company's products and promotes interoperability among
numerous streaming media technologies. In addition to its relationship with
Microsoft, the Company has formed strategic distribution relationships with
several other companies, including Starlight Networks Inc. ("Starlight") and
Macromedia, has formed a joint venture in Japan with NTT PC Communications, Inc.
("NTT"), Kokusai Denshin Denwa Co., Ltd. ("KDD") and Trans Cosmos, Inc. ("Trans
Cosmos") and has entered into a pilot program with MCI Communications
Corporation ("MCI") to distribute the RealNetwork broadcast service. The Company
pursues strategic relationships for a variety of purposes, such as maximizing
rapid penetration, validation and adoption of its technologies; aiding the
development of compelling content to build consumer demand for streaming media
over the Internet; and expanding the range of commercial activities based on its
technology and brand name. The Company has also collaborated with other industry
leaders for the purpose of developing software protocols for proposed adoption
as industry standards. Although the Company has not engaged in significant joint
technology development relationships to date, it anticipates that it may form
third-party development relationships in the future as it seeks to expand the
fundamental architecture of its technology and influence the direction of
technological developments in the industry.
 
PRODUCTS AND SERVICES
 
     The Company develops and markets software products and services that enable
the delivery of streaming audio and video content over the Internet and
intranets. The Company also conducts electronic commerce and sells advertising
through its Web sites, provides audio and video broadcast services to third
parties, and provides various other services designed to promote widespread
usage of the Company's technology.
 
     MEDIA SYSTEM
 
     The Company's streaming media system allows content providers to encode
content such as live music, video or other multimedia programming into discrete
data packets that can be broadcast to large numbers of simultaneous users.
 
     EASYSTART SERVERS.  The Company offers a basic EasyStart Server free of
charge from its Web site. This product enables content providers to stream both
audio and video to as many as 60 simultaneous users.
 
     PROFESSIONAL SERVERS.  The Professional Server is designed for use by
commercial Web sites, including media content providers that distribute audio
and/or video content over the Internet to a broad base of consumers. This server
can be purchased for either audio-only or both audio and video broadcasting
purposes. In addition to the basic streaming features of the EasyStart Server,
the Professional Server offers advanced administrative features and the ability
to reach a larger audience. Professional Server licenses start at $4,995 and are
priced based on the number of streams licensed.
 
     INTRANET SYSTEMS.  The Intranet System is a Professional Server designed
specifically for use in intranet applications. The Intranet System includes a
site license for the RealPlayer. A 10-user Intranet System is available free of
charge from the Company's Web site. Larger system licenses start at $6,995 and
are priced according to the number of licensed users.
 
     REALENCODERS.  The Company's RealEncoders enable content providers to
convert live or recorded audio and video programming into the Company's
proprietary file format. This highly compressed file format increases the
efficiency of limited-bandwidth transmissions and is readable by the Company's
players. The RealEncoder is distributed free of charge from the Company's Web
site.
 
     REALNETWORK BROADCAST SERVICE.  The Company operates the RealNetwork
broadcast service, which uses the Company's splitter technology to broadcast
content to thousands of simultaneous users
 
                                       38
   41
 
through IP multicasting or traditional unicasting. In August 1997, the Company
and MCI announced that they had commenced a pilot program in which the Company's
technology will be incorporated into MCI's Internet backbone. The RealNetwork
broadcast service will enable broadcasters to reach up to 50,000 users
simultaneously by combining MCI's nationwide network of datalines and computer
centers with the Company's streaming media and splitter technologies. Current
content providers using the RealNetwork broadcast service include ABC News,
Inc., Atlantic Recording Corporation, ESPN, Inc., and Major League Baseball
teams, including the Los Angeles Dodgers and the Seattle Mariners. The Company
often uses the RealNetwork broadcast service to host its own content. In select
cases, the Company has and will continue to enter into relationships with
content providers in which the providers' content is hosted on the RealNetwork
broadcast service at the Company's expense in exchange for a share of the
advertising or other revenue generated.
 
     In May 1997, the Company entered into a joint venture with NTT, KDD and
Trans Cosmos in Japan to establish J-Stream Co. Inc. ("J-Stream"), which, like
the Company's RealNetwork broadcast service, streams audio and video content to
users through IP multicasting or traditional unicasting. The Company supplies
its RealAudio and RealVideo system and technical support for the operation of
the J-Stream broadcast network. The Company holds a 24% interest in the joint
venture.
 
     CONSULTING.  The Company provides a range of consulting services that
principally relate to the creation and maintenance of streaming media networks
based on the Company's technology. Commonly provided services include sound
editing, video production assistance and network design.
 
     CONSUMER PRODUCTS AND ELECTRONIC COMMERCE
 
     The Company's player enables a user to listen to or view content from Web
sites that use the Company's server products. The player decompresses and
decodes audio and video packets transmitted by the server, reassembles them in
the correct order, identifies and requests retransmission of any missing data
packets, and then plays back the reassembled audio or video content for the user
in real-time. The players can be easily installed and used by nontechnical
computer users, even using dial-up modems over standard voice-grade telephone
lines.
 
     REALPLAYER.  RealPlayer, the Company's standard player, can be downloaded
free of charge from the Company's Web site and currently is distributed by a
number of third parties in combination with their own products. RealPlayer
offers basic functions such as play, stop, fast-forward, rewind and volume
adjustment, as well as the ability to program six Destination Buttons, which
provide one-click access to preprogrammed audio and video content.
 
     REALPLAYER PLUS.  The RealPlayer Plus is an enhanced player that can be
downloaded from the Company's Web site or purchased in a retail store for a
suggested price of $29.95. RealPlayer Plus not only offers basic RealPlayer
functions, but also features a scan function and 40 programmable buttons that
allow users to preset favorite content. Customers who purchase a RealPlayer Plus
also have access to special content available only to RealPlayer Plus users.
 
     ELECTRONIC COMMERCE AND REALSTORE.  Since August 1996, the Company has sold
its products electronically. On September 8, 1997, it opened its RealStore Web
site, an online store for the sale of the Company's products, third-party
streaming media tools and utilities and intranet-based corporate training
products. Through this distribution channel, the Company is able to offer a
broad selection of products with little inventory risk or merchandising expense.
 
     MEDIA PUBLISHING PRODUCTS AND SERVICES
 
     The Company's network of Web sites aggregates, organizes and provides
streaming media programming through a variety of navigational and theme-oriented
content sites. These sites derive revenues from the sale of advertising to third
parties such as General Motors Corporation, International Business Machines
Corporation, AT&T Corp. and Microsoft. The Company has been instrumental in
pioneering new forms of Internet advertising, including in-stream advertising,
in which streamed audio and video advertisements are inserted into selected
programming.
 
                                       39
   42
 
     In addition to its main Web site, the Company's network of Web sites
includes:
 
          Timecast, a guide to RealAudio and RealVideo content that offers
     programming information from and links to over 2,500 Web sites, including
     over 500 radio and television stations;
 
          LiveConcerts.com, which, in cooperation with House of Blues, offers
     live streamed music concerts using the Company's products as well as access
     to services, including up-to-date concert schedules;
 
          Film.com, which the Company began hosting in September 1997, provides
     in-depth information about, and streaming media clips of, movies, including
     reviews and previews; and
 
          Daily Briefing allows customers to design their own custom streaming
     media newscasts from over 35 short programs in the areas of news, sports,
     entertainment, weather and business/technology, and to receive the custom
     newscasts daily. Daily Briefing providers include NBC News, The Weather
     Channel, CBS/SportsLine, and Warner Bros.
 
TECHNOLOGY
 
     The Company's client/server software system is designed to optimize the
delivery of streaming media over the Internet, intranets or any IP-based
network. The system is based on open industry standards and works with a broad
range of operating systems, hardware platforms and media types.
 
     CODECS
 
     The Company's system uses multiple compression/decompression algorithms (or
"codecs") to translate time-based data-intensive content such as audio and video
data into discrete data packets and then broadcast (or "stream") the packets to
the client (or "player"). The player then reassembles the packets in the correct
order and plays back the streaming media content in real-time. The compression
process enables the data to be streamed to the player even in very low bandwidth
(14.4 kbps) or congested network environments by reducing the amount of data to
be streamed.
 
     TRANSMISSION TECHNOLOGY AND PROTOCOLS
 
     Neither of the two basic Internet transport protocols, User Datagram
Protocol ("UDP") and Transport Control Protocol ("TCP"), was originally designed
to handle the transmission of real-time content. UDP is able to transmit data
packets efficiently and without delays, but is not generally robust enough to
ensure delivery of all data packets. TCP generates robust and reliable
transmissions, but is not designed for efficient and continuous real-time
delivery of content. Higher level Internet protocols, such as File Transfer
Protocol ("FTP") and Hypertext Transfer Protocol ("HTTP"), were designed
originally for one-way continuous transmissions and as such do not efficiently
allow the player to communicate back to the server to activate functions such as
fast forward, pause and rewind or to select a particular portion of a clip for
playing.
 
     To address the inherent limitations of the Internet with respect to
multimedia delivery, the Company has developed its own client/server software
architecture based on advanced transmission technologies and protocols. Key
elements of the Company's technology solution include:
 
     - BUFFERING:  Because the streaming of continuous, time-based content such
      as audio or video must occur in real-time and with minimal transmission
      loss, the Company's technology incorporates a time delay (or "buffering")
      feature that allows the player extra time to accumulate data packets and,
      if any are missing, request retransmission of particular packets. As a
      result, transmission and playback quality can be optimized, even in highly
      congested transmission environments.
 
     - BIDIRECTIONAL COMMUNICATION:  The Company's server and player communicate
      during transmission regarding the bandwidth and quality of the user's
      connection to optimize the transmission by using the system's bandwidth
      negotiation and dynamic connection management capabilities. For
 
                                       40
   43
 
example, the system is able to detect the available bandwidth and the extent of
packet loss and performance degradation.
 
     - ERROR-MITIGATION:  To the extent that buffering and packet retransmission
      efforts are insufficient to maintain acceptable quality of user
      experience, the Company's system draws on several techniques designed to
      mitigate performance degradation, including interpolation methods that
      "reconstruct" lost data packets based on approximations regarding adjacent
      or closely related data packets, UDP-based retransmission of lost packets
      and forward error correction.
 
     - SMART NETWORKING:  This feature allows a server to stream content to the
      player via unicasting or IP multicasting and automatically select the
      appropriate transmission protocol (UDP, TCP or HTTP) depending on current
      network conditions and the presence of firewalls or proxies.
 
     - VIDEO-OPTIMIZED TRANSMISSION:  Because video transmissions are more
      data-intensive than audio transmissions, the encoding of video streams for
      low bandwidth requires a higher compression ratio. In addition to standard
      compression techniques, the Company uses a technique known as interframe
      compression, which reduces unnecessary repetition of redundant background
      data in neighboring video frames, thereby reducing the number of data
      packets being transmitted. The system also incorporates "stream thinning"
      technology that responds to episodes of performance degradation by
      dynamically reducing the amount of video content being streamed to the
      user, thereby preserving bandwidth for audio packets to maintain the
      continuity of the audio stream, which is often more central to the user
      experience than video.
 
     In addition to its core client/server technology, the Company has adopted
RTSP, a proposed protocol for standardizing the control and delivery of
streaming media over the Internet. RTSP is a unified standard for a broad range
of media data types and is intended to promote a greater level of
interoperability among various streaming media solutions. RTSP is built on top
of a number of other Internet standard protocols such as HTTP, TCP/IP and Real
Transport Protocol, and is complementary with ASF, a file format for streaming
media that does not specify a method of client-server interaction. RTSP provides
the client-server specification necessary to stream ASF files (and many other
file types) on the Internet. RTSP was submitted to the IETF in October 1996 with
the support of over 40 companies. See "-- Microsoft Relationship" and "Risk
Factors -- Impact of Evolving Standards."
 
     NETWORKED MULTIMEDIA FOR LARGE-SCALE DELIVERY
 
     The Company's splitter technology allows broadcasters to transmit large
numbers of simultaneous streams. Traditionally, a standalone server sends a
separate signal to each individual user, which is an inefficient use of network
bandwidth because the same signal is often being distributed through many of the
same links on the network.
 
     The Company's splitter technology enables one "central" server to broadcast
a signal to a set of servers distributed around a network, which servers then
transmit the signal to the end user, thereby minimizing the use of the network
backbone and improving signal quality. The Company uses this technology in its
RealNetwork broadcasting service, as well as in its J-Stream joint venture in
Japan. See "-- Business Strategy -- Strengthen Strategic Relationships" and
"-- Products and Services -- Media System."
 
RESEARCH AND DEVELOPMENT
 
     The Company devotes a substantial portion of its resources to developing
new products and product features, expanding and improving its fundamental
streaming technology, and strengthening its technological expertise. During the
fiscal year ended December 31, 1996, and the six months ended June 30, 1997, the
Company expended approximately 34% and 41%, respectively, of its total net
revenues on research and development activities. The Company intends to continue
to devote substantial resources toward research and development for the next
several years. At August 31, 1997, the Company had 90 employees, or 32% of its
workforce, engaged in research and development activities. The Company must
 
                                       41
   44
 
hire additional skilled software engineers to further its research and
development efforts. The Company's business, financial condition and results of
operations could be adversely affected if it is not able to hire and retain the
required number of engineers.
 
SALES, MARKETING AND DISTRIBUTION
 
     The Company believes that any individual or company that desires to
transmit or receive streaming media content over the Internet or intranets is a
potential Company customer. To reach as many customer segments as possible, the
Company markets its products and services through several direct and indirect
distribution channels, including over the Internet, through a direct sales
force, through OEMs and VARs, and internationally through distributors and the
J-Stream joint venture. As of August 31, 1997, the Company employed 98 sales and
marketing personnel worldwide.
 
     ELECTRONIC COMMERCE.  The Company's Consumer and E-Commerce Divisions are
responsible for electronic commerce sales and marketing of the Company's
products as well as third-party multimedia development products sold on the
Company's RealStore Web site. Substantially all of the Company's products may be
downloaded directly from the Company's Web sites, with over 18 million product
downloads to date. The Company sells third-party products on its RealStore Web
site on a consignment basis and, accordingly, incurs no inventory risk with
respect to such products. Electronic distribution provides the Company with a
low-cost, globally accessible, 24-hour sales channel.
 
     DIRECT SALES FORCE.  The Company's direct sales force markets the Company's
products and services primarily to corporate customers worldwide. The direct
sales force is comprised of the Major Accounts, National Accounts and Telesales
groups of the Company's Media Systems Division. The Major Accounts and National
Accounts groups market and sell to corporate customers primarily interested in
server products for commercial Internet Web sites or intranets. The Telesales
group develops and pursues leads generated from inquiries on the Company's Web
sites and from downloads of its EasyStart Server.
 
     OEMS AND VARS.  The Strategic Channels, OEM and Consulting groups of the
Company's Media Systems Division market and establish indirect distribution
agreements. The Company has entered into various distribution relationships with
third parties pursuant to which the Company's products are incorporated into, or
bundled with, the third party's products for delivery by the third party to end
users. Such third parties include Creative Labs, Inc., Apple Computer, Inc.,
Network Computer, Inc., WebTV Networks, Inc. and Microsoft.
 
     ADVERTISING SALES.  The Company's Advertising Sales group markets and sells
advertising on the Company's Web sites and within media streams that the Company
hosts on behalf of its corporate customers.
 
     INTERNATIONAL SALES.  The Company has three international subsidiaries that
market and sell the Company's products outside the U.S. and Canada. The Company
distributes its products internationally through a direct sales force and
distribution arrangements.
 
     MARKETING PROGRAMS.  The Company participates in trade shows, conferences
and seminars, provides product information through the Company's Web sites,
promotes and co-promotes special events, places advertising for the Company's
products and services in print and electronic media, and sponsors special
programs for software developers, including its own conference. The Company's
marketing programs are aimed at informing distributors and end users about the
capabilities and benefits of the Company's products and services, increasing
brand name awareness, stimulating demand across all market segments and
encouraging independent software developers to develop products and applications
that are compatible with the Company's products and technology.
 
MICROSOFT RELATIONSHIP
 
     In June 1997, the Company entered into a strategic agreement with
Microsoft, pursuant to which the Company granted Microsoft a nonexclusive
license to certain substantial elements of the source code of
 
                                       42
   45
 
the Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio and RealVideo Version 4.0 technology to third parties
under certain circumstances. The agreement also provides for substantial refunds
to Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote ASF as a standard file format for streaming
media. The agreement also requires the Company to provide Microsoft with
engineering consultation services, certain error corrections and certain
technical support over a defined term.
 
     In connection with the agreement, Microsoft also purchased a minority
interest in the Company. Microsoft currently offers its own streaming media
product, NetShow. In addition, Microsoft recently acquired VXtreme, a direct
competitor of the Company in the market for streaming media software. Microsoft
also owns a minority interest in VDOnet, a direct competitor of the Company in
the market for streaming video software. As a result of Microsoft's agreement
with the Company, its acquisition of VXtreme, and is investment in VDOnet,
Microsoft will be able to augment substantially the functionality of NetShow,
its streaming media product, which could have a material adverse effect on the
competitiveness of the Company's products. See "Risk Factors -- Department of
Justice Subpoena."
 
     Microsoft currently competes with the Company in the market for streaming
media server and player software. The Company believes that Microsoft will
compete more directly with the Company in the future. The Company also believes
that Microsoft's commitment to and presence in the streaming media industry will
dramatically increase competitive pressure in the overall market for streaming
media software, leading to, among other things, increased pricing pressure and
longer sales cycles. Such pressures may result in further price reductions in
the Company's products and may also materially reduce the Company's market
share. The Company believes that Microsoft will incorporate streaming media
technology in its Web browser software and certain of its server software
offerings, possibly at no additional cost to the user. In addition,
notwithstanding the Company's cooperation with Microsoft regarding ASF,
Microsoft may promote technologies and standards not compatible with the
Company's technology. Microsoft has a longer operating history, a larger
installed base of customers and dramatically greater financial, distribution,
marketing and technical resources than the Company. As a result, there can be no
assurance that the Company will be able to compete effectively with Microsoft
now or in the future, or that the Company's financial condition and results of
operations will not be materially adversely affected. In addition, if
considerable consolidation occurs, there can be no assurance that the Company
will be able to continue to compete effectively.
 
CUSTOMERS
 
     Since the Company's inception, the following companies have paid $45,000 or
more to the Company for the purchase of products or services or the license of
technology: ABC Radio Net, Apple Computer, Inc., Bandai Digital Entertainment
Corporation, Bloomberg L.P., Boeing-Inform, Cisco Systems, Inc., Creative Labs,
Inc., Dow Jones, Forefront Graphics Corporation, Internet Canada, Merrill Lynch
& Co. Inc, Microsoft, Multiple Zones, Muzak, Navio Communications, Inc., NBC
Desktop, NetRadio Network, Network Computer Inc., News Corp., Prodigy Services
Company, Starwave, Tele2 Danmark A/S, Teledanmark In, Telia Data AB, 3Com,
United Technologies Corp., WavePhore, Inc. and WebTV Networks, Inc. The
Company's customers consist primarily of resellers and users located in the U.S.
and Canada and various foreign countries. Sales to customers outside the U.S.
and Canada, primarily Asia and Europe, were approximately 15%, 19% and 27% of
total net revenues in the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, respectively.
 
                                       43
   46
 
CUSTOMER SUPPORT
 
     The Company's customers have a choice of support options depending on the
level of service desired. The Company maintains a technical support hotline to
answer inquiries and provides an online database of technical information. The
Company's support staff also responds to e-mail inquiries. The Company tracks
all support requests through a series of customer databases, including current
status reports and historical customer interaction logs. The Company uses
customer feedback as a source of ideas for product improvements and
enhancements. As of August 31, 1997, the Company employed 10 technical
representatives to respond to customer requests for support.
 
COMPETITION
 
     The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company. The Company's principal competitors in the
development and distribution of audio and video streaming solutions include
Microsoft, VXtreme, VDOnet, Xing, Precept, Cubic, Motorola, Vivo, Vosaic and
Oracle. The Company's RealAudio and RealVideo system also competes to a lesser
degree with non-streaming audio and video delivery technologies such as AVI and
Quicktime, and indirectly with delivery systems for multimedia content other
than audio and video, such as Flash by Macromedia and Enliven by Narrative.
Competitive factors in this market include the quality and reliability of
software; features for creating, editing and adapting content; ease of use and
interactive user features; scaleability and cost per user; and compatibility
with the user's existing network components and software systems. To expand its
user base and further enhance the user experience, the Company must continue to
innovate and improve the performance of its RealAudio and RealVideo system. The
Company anticipates that consolidation will continue in the streaming media
industry and related industries such as computer software, media and
communications. Consequently, competitors may be acquired by, receive
investments from or enter into other commercial relationships with, larger,
well-established and well-financed companies. There can be no assurance that the
Company can establish or sustain a leadership position in this market segment.
See "-- Microsoft Relationship."
 
     The Company is committed to the continued market penetration of its brand,
products and services, which, as a strategic response to changes in the
competitive environment, may require pricing, licensing, service or marketing
changes intended to extend its current brand and technology franchise. By way of
example, the Company recently decided to distribute free of charge a version of
its EasyStart Server, which previously sold for $295 to $995. Continued price
concessions or the emergence of other pricing or distribution strategies by
competitors may have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     The Company derives significant revenues from the electronic distribution
of certain of its products. The Company recently opened its RealStore Web site,
an online store for the sale of the Company's products, third-party streaming
media tools and utilities and Internet-based training products. The Company
competes with a variety of Web sites, such as Buydirect.Com and Sofware.Net,
which also offer software products for download. To compete successfully in the
electronic commerce market, the Company must attract sufficient commercial
traffic to its RealStore Web site by offering high-quality merchandise in a
compelling, easy-to-purchase format. There can be no assurance that the Company
will be able to compete successfully in this market, and any failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue is also growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the
 
                                       44
   47
 
Company or that revenues derived from such advertising will be material. In
addition, if the Company loses advertising customers, fails to attract new
customers, is forced to reduce advertising rates or modify its rate structure to
retain or attract customers, or loses Web site traffic, the Company's business,
financial condition and results of operations may be materially adversely
affected.
 
POSITION ON CHARITABLE RESPONSIBILITY
 
     Immediately subsequent to the offering, Mr. Glaser will contribute 5% of
his Common Stock to charitable organizations. In addition, Mr. Jacobsen will
also make a sizable contribution of his Common Stock to charitable
organizations. The Company is strongly committed to charitable responsibility,
as evidenced by its donations of software to charitable organizations. If
sustained profitability is achieved, the Company intends to donate approximately
5% of its annual net income to charitable organizations. The Company hopes to
encourage employee giving by using a portion of its intended contribution to
match charitable donations made by employees. See "Risk Factors -- Position on
Charitable Responsibility."
 
GOVERNMENTAL REGULATION
 
     The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses, although certain U.S. export controls and import controls of other
countries, including controls on the use of encryption technologies, may also
apply to the Company's products. However, due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted in the U.S. and abroad with particular applicability to the Internet. It
is possible that governments will enact legislation that may be applicable to
the Company in areas such as content, network security, encryption and the use
of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain. The majority of such laws were
adopted before the widespread use and commercialization of the Internet and, as
a result, do not contemplate or address the unique issues of the Internet and
related technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business or
increase the Company's legal exposure, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although those sections of the Communications Decency Act
of 1996 ("CDA") that, among other things, proposed to impose criminal penalties
on anyone distributing "indecent" material to minors over the Internet, were
held to be unconstitutional by the U.S. Supreme Court, there can be no assurance
that similar laws will not be proposed and adopted. While the Company does not
currently distribute the types of materials that the CDA may have deemed
illegal, the nature of such similar legislation and the manner in which it may
be interpreted and enforced cannot be fully determined and, therefore,
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, financial
condition and results of operations.
 
                                       45
   48
 
INTELLECTUAL PROPERTY
 
     The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreements in every case. Despite such protections, a third
party could, without authorization, copy or otherwise obtain and use the
Company's products or technology to develop similar technology independently.
There can be no assurance that the Company's agreements with employees,
consultants and others who participate in product development activities will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or
independently developed by competitors.
 
     The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need either to obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. As of September 19, 1997, the Company had
9 registered U.S. trademarks or service marks, and had applications pending for
an additional 26 U.S. trademarks. A significant portion of the Company's marks
begin with the word "Real" (such as RealAudio and RealVideo). The Company is
aware of other companies that use "Real" in their marks alone or in combination
with other words, and the Company does not expect to be able to prevent all
third-party uses of the word "Real" for all goods and services. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the U.S., and effective patent, copyright,
trademark and trade secret protection may not be available in such
jurisdictions. The Company licenses certain of its proprietary rights to third
parties, and there can be no assurance that such licensees will not fail to
abide by compliance and quality control guidelines with respect to such
proprietary rights or take actions that would materially adversely affect the
Company's business, financial condition and results of operations.
 
     To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, there can be no assurance that the Company's efforts to protect its
intellectual property rights through patent, copyright, trademark and trade
secret laws will be effective to prevent misappropriation of its technology, or
to prevent the development and design by others of products or technologies
similar to or competitive with those developed by the Company, and the Company's
failure or inability to protect its proprietary rights could materially
adversely affect the Company's business, financial condition and results of
operations.
 
     The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce and protect the Company's
intellectual property and trade secrets or to defend against a claim of
infringement or invalidity. The Company has been and expects to continue to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of third-party
proprietary rights by the Company and its licensees. The Company attempts to
avoid infringing known
 
                                       46
   49
 
proprietary rights of third parties in its product development efforts. However,
the Company has not conducted and does not conduct comprehensive patent searches
to determine whether the technology used in its products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation could be avoided or settled without
substantial expense and damage awards. Any claims relating to the infringement
of third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could result
in injunctions preventing the Company from distributing certain products. Such
claims could materially adversely affect the Company's business, financial
condition and results of operations.
 
     The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products, to perform key functions. There can
be no assurance that such third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of any of
these technologies could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, although the
Company is generally indemnified against claims that such third-party technology
infringes the proprietary rights of others, such indemnification is not always
available for all types of intellectual property rights (for example, patents
may be excluded) and in some cases the scope of such indemnification is limited.
Even if the Company receives broad indemnification, third-party indemnitors are
not always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company. There
can be no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology, and claims for indemnification from the
Company's customers resulting from such claims, will not be asserted or
prosecuted against the Company. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays, all of which could
materially adversely affect the Company's business, financial condition or
results of operations. See "Risk Factors -- Uncertain Protection of Intellectual
Property; Risks Associated with Licensed Third-Party Technology."
 
EMPLOYEES
 
     At August 31, 1997, the Company had 276 full-time employees and two
part-time employees, 250 of whom were based at the Company's executive offices
in Seattle, Washington, 21 of whom were based at the Company's offices in Japan,
England or France and five of whom were salespersons based at other locations.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company believes that its relations with its employees are good.
 
FACILITIES
 
     The Company's executive offices are located in downtown Seattle, Washington
in an office building in which, as of September 30, 1997, the Company leases an
aggregate of 80,345 square feet at a current monthly rental of $122,411. The
lease agreement terminates on April 30, 2001. The Company has an option to
extend the lease agreement for two additional five-year terms.
 
     The Company anticipates that it will require additional space within the
next 12 months, but that suitable additional space will be available on
commercially reasonable terms, although there can be no assurance in this
regard. The Company does not own any real estate.
 
                                       47
   50
 
LEGAL PROCEEDINGS
 
     From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business,
including claims of alleged infringement of third-party trademarks and other
intellectual property rights by the Company and its licensees. Such claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources. In August 1997, the Company was subpoenaed by the
Department of Justice in connection with its investigation into horizontal
merger activity in the streaming media industry. The investigation, including
interviews by the Department of Justice of Company officers, and document
production requests, is ongoing. As a result of the investigation, it is
possible that the Department of Justice will require certain actions by the
Company or other companies in the streaming media industry, which could have a
material adverse effect on the Company's competitive position, and on its
business, financial condition and results of operations. The Company is
cooperating in the investigation. The Company is not aware of any other legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, financial condition or
results of operations. See "Risk Factors -- Department of Justice Subpoena" and
"-- Uncertain Protection of Intellectual Property; Risks Associated With
Licensed Third-Party Technology."
 
                                       48
   51
 
                                   MANAGEMENT
 
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
 
     The executive officers, directors and key employees of the Company as of
September 26, 1997 are as follows:
 


           NAME               AGE                              POSITION
- --------------------------    ---     ----------------------------------------------------------
                                
Robert Glaser(1)..........    35      Chairman of the Board, Chief Executive Officer, Secretary
                                      and Treasurer
Bruce Jacobsen(2).........    37      President, Chief Operating Officer and Director
Mark Klebanoff............    35      Chief Financial Officer
Len Jordan................    31      Senior Vice President -- Media Systems
Phillip Barrett...........    44      Senior Vice President -- Media Systems
Maria Cantwell............    38      Senior Vice President -- Consumer and E-Commerce
James Higa................    39      Vice President -- Asia/Rest of World ("ROW")
John Atcheson.............    38      Vice President -- Media Publishing
James Wells...............    50      Vice President -- Sales
Kelly Jo MacArthur........    33      Vice President and General Counsel
Erik Moris................    38      Vice President -- Marketing
James Breyer(1)(2)........    36      Director
Mitchell Kapor(1)(2)......    46      Director

 
- ---------------
 
(1) Member of the Compensation Committee.
 
(2) Member of the Audit Committee.
 
     Set forth below is certain information regarding the business experience
during the past five years for each of the above-named persons.
 
     ROBERT GLASER has served as Chairman of the Board, Chief Executive Officer
and Treasurer of the Company since its inception in February 1994, and as
Secretary since March 1995. On closing of the offering, he will also serve as
the Company's Policy Ombudsman, with the exclusive authority to adopt or change
the editorial policies of the Company as reflected on the Company's Web sites or
other communications or media where the Company has a significant editorial or
media voice. See "Description of Capital Stock -- Certain Voting and Other
Matters." From 1983 to 1993, Mr. Glaser was employed at Microsoft, most recently
as Vice President of multimedia and consumer systems, where he focused on the
development of new businesses related to the convergence of the computer,
consumer electronics and media industries. Mr. Glaser holds a B.A. and an M.A.
in Economics and a B.S. in Computer Science from Yale University.
 
     BRUCE JACOBSEN has served as President and Chief Operating Officer of the
Company since February 1996 and as a Director since August 1997. From April 1995
to February 1996, Mr. Jacobsen was Chief Operating Officer of Dreamworks
Interactive, a joint venture between Microsoft and Dreamworks SKG, a partnership
among Steven Spielberg, Jeffery Katzenberg and David Geffen. From August 1986 to
April 1995, Mr. Jacobsen was employed at Microsoft in a number of capacities,
including General Manager of the Kids/Games business unit. Mr. Jacobsen
graduated summa cum laude with Honors from Yale University and holds an M.B.A.
from Stanford University.
 
     MARK KLEBANOFF has served as Chief Financial Officer of the Company since
June 1996. From May 1992 to June 1996, Mr. Klebanoff was Vice President of
Finance and Operations of Industrial Systems, Inc., a client/server process
information management software vendor, which merged with Aspen Technology, Inc.
in 1995. From 1989 to 1992, Mr. Klebanoff worked in a number of general
management capacities for the Japanese trading company Itochu Corporation. Mr.
Klebanoff holds a B.A. from Yale University and a Masters degree from the Yale
School of Management.
 
                                       49
   52
 
     LEN JORDAN has served as Senior Vice President -- Media Systems of the
Company since January 1997. From November 1993 to November 1996, Mr. Jordan was
employed at Creative Multimedia, Inc., a developer and publisher of
CD-ROM/Internet products in a number of capacities, most recently as President.
From September 1989 to November 1993, Mr. Jordan was employed at Central Point
Software, Inc., a utility software publisher. Mr. Jordan graduated magna cum
laude from the Eccles School of Business at the University of Utah with B.S.
degrees in Finance and Economics.
 
     PHILLIP BARRETT has served as Senior Vice President -- Media Systems of the
Company since January 1997, and from November 1994 to January 1997 as Vice
President -- Software Development. From March 1986 to October 1994, Mr. Barrett
was a Development Group Manager at Microsoft, where he led development efforts
for Windows 386, Windows 3.0 and Windows 3.1. Mr. Barrett holds an A.B. in
Mathematics from Rutgers University and an M.S. in Computer Sciences from the
University of Wisconsin, Madison.
 
     MARIA CANTWELL has served as Senior Vice President -- Consumer and
E-Commerce of the Company since July 1997. From April 1995 to July 1997, Ms.
Cantwell served as Vice President -- Marketing of the Company. From February
1995 to April 1995, Ms. Cantwell was a consultant to the Company. From 1992 to
January 1995, Ms. Cantwell served as a member of the 103rd Congress. Ms.
Cantwell holds a B.A. in Public Administration from Miami University.
 
     JAMES HIGA has served as Vice President -- Asia/ROW of the Company since
September 1996. From January 1989 to August 1996, Mr. Higa was the Director for
Asia/Pacific for NeXT Software, Inc. From 1986 to 1989, Mr. Higa served as
Director of Product Marketing at Apple Japan, Inc. Mr. Higa holds a B.A. in
Political Science from Stanford University.
 
     JOHN ATCHESON has served as Vice President -- Media Publishing of the
Company since January 1997. From March 1990 to May 1996, Mr. Atcheson was
President and Chief Executive Officer of MNI Interactive, Inc., a developer and
distributor of consumer interactive services. Mr. Atcheson holds a B.A. from
Brown University and an M.B.A. from the Stanford Graduate School of Business.
 
     JAMES WELLS has served as Vice President -- Sales of the Company since May
1995. From March 1994 to April 1995, Mr. Wells served as a consultant in sales,
marketing and product strategy at Aldus Corporation, a developer and marketer of
publishing software. From January 1991 to February 1994, Mr. Wells served in
various senior sales and marketing positions with Apple Computer, Inc. Mr. Wells
holds a B.S. in Engineering from Lamar University and an M.B.A. from the
University of Delaware.
 
     KELLY JO MACARTHUR has served as Vice President and General Counsel of the
Company since October 1996. From January 1995 to March 1996, Ms. MacArthur
served as General Counsel and Director of Business Affairs for Compton's
NewMedia, Inc., which was acquired by Learning Co., Inc. in 1996. From July 1989
to December 1994, Ms. MacArthur was an attorney at Sidley & Austin. Ms.
MacArthur graduated summa cum laude from the University of Illinois at
Champaign-Urbana and holds a J.D. from Harvard Law School.
 
     ERIK MORIS has served as Vice President -- Marketing of the Company since
August 1997. From April 1997 to July 1997, Mr. Moris served as a Product Manager
for the Company. From September 1996 to April 1997, Mr. Moris was a consultant
to the Company. From May 1995 to August 1996, Mr. Moris was employed at
Microsoft, where he managed advertising for the Windows 95 launch and was Group
Manager for the Internet Platform and Tools Division. From 1985 to 1994, Mr.
Moris was a Senior Vice President at McCann-Erickson Advertising. Mr. Moris
holds a B.A. in Communications and Business from Western Washington University.
 
     JAMES BREYER has been a Director of the Company since October 1995. Mr.
Breyer has served as a Managing Partner of Accel Partners L.P. in Palo Alto/San
Francisco since November 1995 and as a general partner from 1990 to 1995. At
Accel Partners L.P., Mr. Breyer has sponsored investments in over a dozen
companies that have completed public offerings or successful mergers.
Previously, Mr. Breyer was a management consultant at McKinsey & Company, and
worked in product management and
 
                                       50
   53
 
marketing at Apple Computer, Inc. and Hewlett-Packard Corporation. Mr. Breyer
holds a B.S. from Stanford University and an M.B.A. from Harvard University,
where he was named a Baker Scholar.
 
     MITCHELL KAPOR has been a Director of the Company since October 1995. From
1990 to 1993, Mr. Kapor was President, from 1993 to 1995 he was Chairman and
from 1995 to 1996 he was a director, of the Electronic Frontier Foundation, a
nonprofit public Internet organization that he co-founded in 1990. Mr. Kapor
designed Lotus 1-2-3, and founded Lotus Development Corporation in 1982 and
served as its President and Chief Executive Officer from April 1982 to July
1986. Mr. Kapor holds a B.A. in Cybernetics from Yale University and an M.A. in
Psychology from Beacon College.
 
NUMBER, TERM AND ELECTION OF DIRECTORS
 
     The Company's Articles provide that the number of directors shall be
determined in the manner provided by the Company's Bylaws. The Bylaws provide
that the number of directors shall not be less than one, with the precise number
to be determined by resolution of the Board of Directors. The Board of Directors
has determined that the number of directors shall be seven. Four directors
currently serve on the Board, with three vacancies currently existing.
 
     Prior to September 1997, each director was elected to serve until the next
annual meeting of shareholders and the election and qualification of his or her
successor or until his or her earlier resignation or removal. In September 1997,
the Company established a classified Board of Directors with three classes
(Class 1, Class 2 and Class 3), each class as nearly equal in number of
directors as possible. Each of the current directors was elected in September
1997 to one of these three classes. Commencing with the annual shareholders
meeting in 1998 and thereafter, each director shall serve for a term ending at
the third annual meeting of shareholders following such director's election. Mr.
Kapor was elected to Class 1 with a term expiring at the annual shareholders
meeting in 1998; Messrs. Breyer and Jacobsen were elected to Class 2 with terms
expiring at the annual shareholders meeting in 1999; and Mr. Glaser was elected
to Class 3 with a term expiring at the annual shareholders meeting in 2000.
 
CONTRACTUAL ARRANGEMENTS
 
     Pursuant to the terms of a Second Amended and Restated Investors' Rights
Agreement (the "Investors' Rights Agreement"), the holders of Series B Preferred
Stock are entitled to nominate one member to the Board of Directors, the holders
of Series C Preferred Stock are entitled to nominate one member to the Board of
Directors and the holders of Series E Preferred Stock are entitled to nominate
one member to the Board of Directors. Mr. Kapor is the director nominated by the
holders of the Series B Preferred Stock, Mr. Breyer is the director nominated by
the holders of the Series C Preferred Stock, and the holders of the Series E
Preferred Stock currently have not nominated a director. The right to nominate
directors pursuant to the Investors' Rights Agreement will terminate on closing
of the offering.
 
     Under a voting agreement (the "Voting Agreement") entered into in September
1997 among the Company, Accel IV L.P. ("Accel IV") and Messrs. Jacobsen, Kapor
and Glaser, each of Accel IV and Messrs. Jacobsen and Kapor have agreed,
effective on closing of the offering, to vote all shares of stock of the Company
owned by such shareholders to elect Mr. Glaser to the Board of Directors of the
Company in each election in which he is a nominee. The obligations under the
Voting Agreement terminate with respect to shares transferred by the parties
thereto. The Voting Agreement terminates upon the death of Mr. Glaser.
 
     Pursuant to the terms of the Glaser Agreement, the Company granted to Mr.
Glaser a direct contractual right to require the Company to abide by and perform
all terms of the Articles with respect to strategic transactions. The agreement
also provides that so long as Mr. Glaser owns a specified number of shares, the
Company shall use its best efforts to cause Mr. Glaser to be nominated to, not
removed from, and elected to, the Board of Directors.
 
                                       51
   54
 
COMPENSATION OF DIRECTORS
 
     Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending Board of
Directors meetings. The Company has not made option grants to outside directors,
but intends to make such grants to outside directors.
 
BOARD COMMITTEES
 
     The Company has established an Audit Committee, a Compensation Committee
and a Strategy Committee. In addition, the Articles provide that, following the
closing of the offering, the Company will establish a Strategic Transactions
Committee. Following the closing of the offering, the Company also intends to
establish a Nominating Committee.
 
     The Audit Committee consists of Messrs. Breyer, Jacobsen and Kapor. The
functions of the Audit Committee are to make recommendations to the Board of
Directors regarding the selection of independent auditors, review the results
and scope of the audit and other services provided by the Company's independent
auditors and evaluate the Company's internal controls.
 
     The Compensation Committee consists of Messrs. Breyer, Glaser and Kapor.
The functions of the Compensation Committee are to review and approve the
compensation and benefits for the Company's executive officers, administer the
Company's stock option and stock purchase plans and make recommendations to the
Board of Directors regarding such matters.
 
     The Strategy Committee consists of Messrs. Breyer, Glaser, Jacobsen and
Kapor. The functions of the Strategy Committee are to make recommendations to
the Board of Directors regarding the overall strategic goals of the Company and
review significant business transactions that affect the future strategic
direction of the Company.
 
     The Strategic Transactions Committee will be comprised of three directors,
who shall initially be Messrs. Glaser, Breyer and Kapor. Without the prior
approval of such committee, and subject to certain limited exceptions, the Board
of Directors shall not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the Company's voluntary
dissolution or (iv) take any action that has the effect of clauses (i) through
(iii). Any vacancy on the Committee shall be filled by the remaining members of
the Committee. If two members of the Committee remain and they are unable to
agree on an individual to fill the vacancy, the vacancy may be filled by the
member who holds or controls, directly or indirectly, the larger percentage of
the outstanding shares of the Company's capital stock. The Committee, by vote of
the Chairman of the Committee and one additional member, may limit the powers of
the Committee or may terminate the Committee. The existence and powers of the
Committee shall terminate when the members in the aggregate cease to hold or
control, directly or indirectly, at least 10% of the outstanding shares of the
Company's capital stock.
 
     The Nominating Committee will be comprised of the Company's Chief Executive
Officer and certain other directors of the Company. The function of the
Nominating Committee will be to recommend persons for election to the Board of
Directors.
 
POLICY OMBUDSMAN
 
     Under the Articles, Mr. Glaser shall serve, or shall appoint another
officer of the Company who shall serve, as the Company's Policy Ombudsman, with
the exclusive authority to adopt or change the editorial policies of the Company
as reflected on the Company's Web sites or other communications or media where
the Company has a significant editorial or media voice. Upon the death,
resignation or removal of Mr. Glaser as the Policy Ombudsman, the Chief
Executive Officer shall serve or appoint another officer of the Company to serve
as his or her successor.
 
                                       52
   55
 
EXECUTIVE COMPENSATION
 
     The following table sets forth information concerning the compensation
received for services rendered to the Company in all capacities during the year
ended December 31, 1996 by the Company's Chief Executive Officer and by the
other three executive officers of the Company whose salary and bonus exceeded
$100,000 in 1996 (the "Named Executive Officers").
 
                           SUMMARY COMPENSATION TABLE
 


                                                                                   LONG-TERM
                                                                                 COMPENSATION
                                                                                    AWARDS
                                                                                 -------------
                                                      ANNUAL COMPENSATION         SECURITIES
                                                   --------------------------     UNDERLYING
          NAME AND PRINCIPAL POSITION              SALARY($)(1)      BONUS($)     OPTIONS(#)
- ------------------------------------------------   ------------      --------    -------------
                                                                        
Robert Glaser...................................     $100,000         $   --              --
  Chairman, Chief Executive Officer, Secretary
  and Treasurer
Bruce Jacobsen..................................      118,158             --       1,176,367
  President and Chief Operating Officer
James Wells.....................................       90,000         23,625              --
  Vice President -- Sales
Andrew Sharpless................................      102,295             --         125,000(2)
  Senior Vice President

 
- ---------------
 
(1) The current annual salaries for Messrs. Glaser, Jacobsen and Wells are
    $100,000, $135,000 and $90,000, respectively.
 
(2) Mr. Sharpless resigned as an officer of the Company effective August 2,
    1996, after which time he served as a Vice President of the Company until
    February 1997, when he terminated his employment with the Company. Mr.
    Sharpless exercised this option with respect to 12,500 shares on April 8,
    1997, after terminating his employment with the Company. The remainder of
    the shares subject to this option were unvested as of his termination date,
    and therefore were canceled.
 
     The following table shows information concerning stock options granted to
the Named Executive Officers in 1996 and reflects the conversion of Series B
Common Stock and Series C Common Stock underlying such options into Common Stock
on closing of the offering.
 
                             OPTION GRANTS IN 1996
 


                                        INDIVIDUAL GRANTS                          POTENTIAL REALIZABLE
                     -------------------------------------------------------              VALUE
                       NUMBER OF     % OF TOTAL                                  AT ASSUMED ANNUAL RATES
                      SECURITIES      OPTIONS                                     OF STOCK APPRECIATION
                      UNDERLYING     GRANTED TO     EXERCISE                        FOR OPTION TERM(3)
                        OPTIONS      EMPLOYEES       PRICE       EXPIRATION      ------------------------
        NAME         GRANTED(#)(1)    IN 1996     ($/SHARE)(2)      DATE          5%($)          10%($)
- -------------------- -------------   ----------   ------------   -----------     --------      ----------
                                                                             
Robert Glaser.......          --           --            --               --     $     --      $       --
Bruce Jacobsen......   1,176,367        31.2%        $ 0.20        2/16/2016      388,977       1,347,528
James Wells.........          --           --            --               --           --              --
Andrew Sharpless....     125,000         3.3%        $ 0.20        5/29/1997(4)    41,332         143,187

 
- ---------------
 
(1) All options granted to the Named Executive Officers in 1996 were
    nonqualified stock options that vest with respect to 20% of the shares on
    the first anniversary of the date of grant and thereafter at a rate of 10%
    for each six months of services rendered by the optionee to the Company,
    except for one option granted to Mr. Jacobsen on February 16, 1996 for the
    purchase of 470,544 shares of Common Stock, of which 50% vests one year from
    date of grant and 25% vests every six months thereafter.
 
                                       53
   56
 
(2) The exercise price of each option was the estimated fair market value of the
    underlying securities on the date of grant, as determined by the Board.
 
(3) Based on the estimated fair market value of the underlying securities on the
    date of grant and assumed appreciation over the original 20-year option term
    at the respective annual rates of stock appreciation shown. Potential gains
    are net of the exercise price but before taxes associated with the exercise.
    The 5% and 10% assumed annual rates of compounded stock price appreciation
    are mandated by the rules of the Securities and Exchange Commission (the
    "Commission") and do not represent the Company's estimate of the future
    price of the Common Stock. Actual gains, if any, on stock option exercises
    depend on the future financial performance of the Company and overall market
    conditions. The actual value realized may be greater or less than the
    potential realizable value set forth in the table.
 
(4) Mr. Sharpless exercised this option with respect to 12,500 shares on April
    8, 1997, after terminating his employment with the Company. The remainder of
    the shares subject to this option were unvested as of his termination date
    and therefore were canceled.
 
     The following table sets forth information regarding option exercises, and
the fiscal year-end values of stock options held, by each of the Named Executive
Officers during the year ended December 31, 1996. The table reflects the
conversion of Series B Common Stock and Series C Common Stock underlying such
options into Common Stock on closing of the offering.
 
         AGGREGATED OPTION EXERCISES IN 1996 AND YEAR END OPTION VALUES
 


                                                                 NUMBER OF SECURITIES    VALUE OF UNEXERCISED
                                                                UNDERLYING UNEXERCISED   IN-THE-MONEY OPTIONS
                                                                      OPTIONS AT           AT DECEMBER 31,
                            SHARES        VALUE REALIZED($)      DECEMBER 31, 1996(#)          1996($)
                           ACQUIRED        (MARKET PRICE AT     ----------------------   --------------------
                              ON            EXERCISE LESS            EXERCISABLE/            EXERCISABLE/
         NAME           EXERCISE(#)(1)     EXERCISE PRICE)         UNEXERCISABLE(3)        UNEXERCISABLE(4)
- ----------------------  --------------   --------------------   ----------------------   --------------------
                                                                             
Robert Glaser.........           --            $     --               --/--                 $  --/--
Bruce Jacobsen........           --                  --            --/1,176,367             --/941,094
James Wells...........           --                  --           82,500/192,500          76,725/179,025
Andrew Sharpless(2)...      300,000              87,750           12,500/112,500  (5)      10,000/90,000

 
- ---------------
 
(1) Does not include options exercised in 1997.
 
(2) The fair market value of the underlying securities at the close of business
    on the dates of exercise of Mr. Sharpless' options to purchase 225,000
    shares and 75,000 shares were estimated to be approximately $0.20 and $0.85
    per share, respectively, as determined by the Company's Board of Directors.
 
(3) Does not include options granted in 1997.
 
(4) The fair market value of the underlying securities at the close of business
    on December 31, 1996 was estimated to be approximately $1.00 per share, as
    determined by the Company's Board of Directors.
 
(5) Mr. Sharpless exercised this option with respect to 12,500 shares on April
    8, 1997, after terminating his employment with the Company. The remainder of
    the shares subject to this option were unvested as of his termination date,
    and therefore were canceled.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
     The Company's Articles limit the liability of the Company's directors to
the full extent permitted by Washington law. The Washington Business Corporation
Act (the "Washington Act") provides that a corporation's articles of
incorporation may contain a provision eliminating or limiting the personal
liability of directors for monetary damages for breach of their fiduciary duty
as directors, except for liability for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law, (ii) unlawful
 
                                       54
   57
 
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 23B.08.310 of the Washington Act ("Washington Act") or (iii) any
transaction from which the director derived an improper personal benefit. The
Articles provide that the Company shall indemnify its directors and officers,
and may indemnify its employees and agents, to the fullest extent permitted by
law.
 
     The Company has entered into agreements with its directors and executive
officers that, among other things, indemnify them for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such persons in any action or proceeding, including any action by or in the
right of the Company, arising out of such person's services as a director or
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
The Company believes that these provisions and agreements are necessary to
attract and retain qualified directors and officers. These agreements also
provide officers with the same limitation of liability for monetary damages that
the Washington Act and the Articles provide to directors.
 
BENEFIT PLANS
 
     1995 STOCK OPTION PLAN.  The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors, and approved by the Company's
shareholders, in March 1995. The 1995 Plan provides for the grant of
nonqualified options to purchase up to an aggregate of 3,600,000 shares of
Common Stock to employees, officers, directors, consultants and independent
contractors of the Company. As of June 30, 1997, options to purchase 2,122,545
shares of Common Stock were outstanding under the 1995 Plan, with exercise
prices ranging from $0.07 to $1.00 per share, options to purchase 864,236 shares
were available for grant and options to purchase 613,219 shares had been
exercised. The Company has resolved to not grant any additional options under
the 1995 Plan, and has amended its Amended and Restated 1996 Stock Option Plan
to provide for an increase in the number of shares reserved for issuance
thereunder. See "-- Amended and Restated 1996 Stock Option Plan."
 
     The provisions of the 1995 Plan with respect to the administration of the
1995 Plan and options granted thereunder, the term and termination of options
granted, including any provision regarding the acceleration of exercisability
thereof, are as set forth below with respect to the Amended and Restated 1996
Stock Option Plan.
 
     AMENDED AND RESTATED 1996 STOCK OPTION PLAN. The Company's Amended and
Restated 1996 Stock Option Plan (the "1996 Plan") was originally adopted by the
Board of Directors in February 1996, and will be approved by the Company's
shareholders in October 1997. The 1996 Plan provides for the grant of incentive
and non-qualified options to purchase up to an aggregate of 9,692,736 shares of
Common Stock to employees, officers, directors, consultants and independent
contractors of the Company or any of its affiliates (the "Initial Option
Amount"). The Initial Option Amount can be increased to up to 11,233,209 shares
after taking into account 1,540,473 shares of Common Stock subject to options
outstanding under the 1995 Plan on September 24, 1997, to the extent that such
options terminate without having been exercised in full. As of June 30, 1997,
options to purchase 4,213,941 shares of Common Stock were outstanding under the
1996 Plan, with exercise prices ranging from $0.20 to $2.75 per share, options
to purchase 1,456,956 shares of Common Stock were available for grant and
options to purchase 129,103 shares of Common Stock had been exercised.
 
     The 1996 Plan is administered by the Board of Directors, which has the
authority to grant options and to specify the terms and conditions of each
option so granted, including the number of shares covered by the option, the
type of option, the exercise price and the vesting provisions.
 
     Options granted under the 1996 Plan must be exercised within three months
of the termination of the optionee's employment with, or service to, the
Company, or within one year after the optionee's termination due to death or
disability, but in no event later than the expiration of the option term.
Options granted under the 1996 Plan are not transferable by the optionee except
by will or the laws of descent and distribution and generally are exercisable
during the optionee's lifetime only by the optionee.
 
                                       55
   58
 
     In the event of a sale of all or substantially all of the Company's assets,
a merger or reorganization in which the Company is not the surviving
corporation, or the sale or other transfer of shares representing more than 50%
of the combined voting power of the then outstanding securities of the Company
(each, a "Terminating Event"), the Board may determine whether provision will be
made for assumption of, or substitution for, the stock options granted under the
1996 Plan by the successor corporation. If, with respect to a Terminating Event
that has been approved by the Board, the Board determines that no such
assumption or substitution will be made, then all options will become fully
vested, and each optionee will have the right to exercise any unexercised
options prior to closing of the Terminating Event. All options not so exercised
will expire upon closing of the Terminating Event.
 
     1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "ESPP"), which was adopted by the Board of Directors and
approved by the Company's shareholders in September 1997, will become effective
on January 1, 1998. The Company has reserved 1,000,000 shares of Common Stock
for issuance under the ESPP. The ESPP is intended to qualify for favorable tax
treatment under Section 423 of the Internal Revenue Code of 1986, as amended.
The ESPP will be implemented through a series of offering periods of six months'
duration, with new offering periods commencing on January 1 and July 1 of each
year. The ESPP will be administered by the Compensation Committee of the Board
of Directors of the Company. Each eligible employee of the Company or of any
majority-owned subsidiary of the Company who has been employed by the Company or
such majority-owned subsidiary of the Company for at least 90 days will be
eligible to participate in the ESPP if such employee is employed by the Company
or any such subsidiary for more than 20 hours per week and more than five months
per year. The ESPP permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of their compensation, at a price
equal to 85% of the lower of the fair market value of the Common Stock at the
beginning or end of the offering period. Employees may terminate their
participation in the ESPP any time during the offering period; provided,
however, that employees may not change their level of participation in the ESPP
at any time during the offering period. Participation in the ESPP terminates
automatically on the employee's termination of employment with the Company.
 
     401(k) PLAN. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit-sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors. The Company has not made any
such contribution to date and currently has no plans to do so. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 20% of their compensation, subject to maximum limits on contributions
prescribed by law.
 
                                       56
   59
 
                              CERTAIN TRANSACTIONS
 
SALES OF PREFERRED STOCK
 
     Since the Company's inception in February 1994, the Company has issued, in
private placement transactions, shares of Preferred Stock as follows: (i) in
April 1995, an aggregate of 2,686,567 shares of Series B Preferred Stock at
$0.67 per share, (ii) in October 1995, an aggregate of 2,904,305 shares of
Series C Preferred Stock at approximately $1.96 per share, (iii) in November
1996, an aggregate of 2,381,010 shares of Series D Preferred Stock at $7.53 per
share and (iv) in July 1997, an aggregate of 3,338,374 shares of Series E
Preferred Stock at $8.99 per share. In addition, in connection with these
private placements, the Company issued warrants as follows: (i) in April 1995, a
warrant to purchase up to 373,134 shares of Series B Preferred Stock at an
exercise price of $0.67 per share, which warrant was exercised in October 1995,
(ii) in October 1995, warrants to purchase up to 100,000 shares of Series C
Preferred Stock at an exercise price of approximately $1.96 per share and
warrants to purchase up to 183,755 shares of Series B Common Stock at an
exercise price of approximately $0.20 per share, (iii) in November 1996,
warrants to purchase up to 714,303 shares of Series D Preferred Stock at an
exercise price of approximately $9.41 per share and (iv) in July 1997, warrants
to purchase up to 3,709,305 shares of Series E Preferred Stock at an exercise
price of $13.48 per share. In April 1995, in connection with the Company's
Series B Preferred Stock financing, Mr. Glaser exchanged 10,000 shares of the
capital stock of the Company for one share of Series A Common Stock and
13,713,439 shares of Series A Preferred Stock to reflect capital contributions
made by Mr. Glaser of approximately $0.07 per share. The purchasers of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock and the accompanying warrants to purchase Series B
Common Stock and Series C, Series D and Series E Preferred Stock included, among
others, the following 5% shareholders, executive officers, directors and
entities associated with directors:
 


                                                         PREFERRED STOCK
                        ---------------------------------------------------------------------------------
         NAME              SERIES B              SERIES C             SERIES D              SERIES E
- ----------------------  ---------------     ------------------     ---------------     ------------------
                                                                           
Robert Glaser.........       287,313                50,825              39,841
Mitchell Kapor........     1,492,537               656,172              66,401
Accel Entities(1).....                           2,037,282              66,401
Microsoft
  Corporation.........                                                                      3,338,374
Phillip Barrett.......       373,134

 


                                                            WARRANTS
                        ---------------------------------------------------------------------------------
                           SERIES B              SERIES C             SERIES D              SERIES E
         NAME           COMMON STOCK(2)     PREFERRED STOCK(2)     PREFERRED STOCK     PREFERRED STOCK(2)
- ----------------------  ---------------     ------------------     ---------------     ------------------
                                                                           
Robert Glaser.........                                                  11,952
Mitchell Kapor........        33,755                                    19,920
Accel Entities(1).....       150,000               100,000              19,921
Microsoft
  Corporation.........                                                                      3,709,305

 
- ---------------
 
(1) The "Accel Entities" include Accel IV L.P., Accel Investors '95 L.P., Accel
    Keiretsu L.P. and Ellmore C. Patterson Partners. James Breyer, a director of
    the Company, is affiliated with the Accel Entities. See "Principal
    Shareholders."
 
(2) These warrants terminate automatically on closing of the offering.
 
     In addition, members of Mr. Glaser's immediate family purchased an
aggregate of 223,881 shares of Series B Preferred Stock in April 1995, and an
aggregate of 39,498 shares of Series C Preferred Stock in October 1995, in each
case on the same terms as the other investors.
 
     Pursuant to the terms of the Investors' Rights Agreement, the holders of
Series B Preferred Stock are entitled to nominate one member to the Board of
Directors, the holders of Series C Preferred Stock are entitled to nominate one
member to the Board of Directors and the holders of Series E Preferred Stock are
entitled to nominate one member to the Board of Directors. In addition, all
holders of preferred stock hold
 
                                       57
   60
 
preemptive rights to purchase their pro rata share of new securities issued by
the Company. The rights to nominate directors and the preemptive rights will
terminate on closing of the offering. In addition, the Investors' Rights
Agreement provides registration rights obligating it, under certain
circumstances, to effect a registration under the Securities Act of any common
stock issued upon conversion of the Preferred Stock, and the Common Stock issued
pursuant to the exercise of the Series B Common Stock warrants. See "Shares
Eligible for Future Sale -- Registration Rights." All shares of Preferred Stock
will be converted into an equivalent number of shares of Common Stock or Special
Common Stock on closing of the offering.
 
     The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
 
MICROSOFT CORPORATION
 
     The Company and Microsoft entered into an agreement in June 1997 pursuant
to which the Company granted Microsoft a nonexclusive license to certain
substantial elements of the source code of the Company's core
RealAudio/RealVideo Version 4.0 technology, including its basic RealPlayer and
substantial elements of its EasyStart Server products. Under the agreement,
Microsoft may sublicense its rights to the RealAudio and RealVideo Version 4.0
technology to third parties under certain conditions. The agreement also
provides for substantial refunds to Microsoft under prescribed circumstances
that are solely within the Company's control. The amount of these refunds
diminishes over time. In addition, the Company may not assign the agreement
without Microsoft's consent. Microsoft is obligated to distribute the Company's
RealPlayer Version 4.0 for a defined term as long as the Company's player
supports certain Microsoft architectures. The Company also agreed to work with
Microsoft and several other companies to author and promote ASF as a standard
file format for streaming media. The agreement also requires the Company to
provide Microsoft with engineering consultation services, certain error
corrections, and certain technical support over a defined term. In connection
with the agreement, Microsoft purchased 3,338,374 shares of nonvoting Series E
Preferred Stock at approximately $8.99 per share for approximately $30,000,000.
Each share of Series E Preferred Stock is convertible at the option of Microsoft
into either one share of Common Stock or one share of Special Common Stock.
Microsoft also received a warrant to purchase 3,709,305 shares of Series E
Preferred Stock at an exercise price of $13.48 per share. If exercised, each
share of Series E Preferred Stock acquired upon exercise will be automatically
converted, at the election of the holder, into either one share of Common Stock
or one share of Special Common Stock. If Microsoft elects to convert shares of
Series E Preferred Stock into $15,000,000 or more of Common Stock, it may be
required to make a filing under the Hart-Scott-Rodino Antitrust Improvements Act
and obtain approval from the Department of Justice and the Federal Trade
Commission before completing the conversion into Common Stock. This warrant
terminates on closing of the offering. In connection with its equity investment,
Microsoft also granted a limited proxy to the Company. See "Risk
Factors -- Competition; Relationship With Microsoft," "-- Department of Justice
Subpoena," "Business -- Microsoft Relationship" and "Description of Capital
Stock -- Certain Voting and Other Matters."
 
JAPANESE JOINT VENTURE
 
     Trans Cosmos is the beneficial owner of 1,381,142 shares of Common Stock of
the Company. In May 1997, Trans Cosmos, the Company and two other parties
entered into a joint venture agreement with respect to the establishment and
management of J-Stream to operate an Internet streaming business in Japan. Trans
Cosmos owns 28% of J-Stream and each of the Company and the other two parties
own 24%. Trans Cosmos is responsible for managing J-Stream, and the Company
supplies J-Stream with software and technology for streaming on Internet
networks. Trans Cosmos contributed approximately $1,165,000 for its 28% interest
and the Company contributed approximately $998,000 for its 24% interest in
J-Stream, Trans Cosmos loaned the Company the amount of the Company's
contribution, and the Company may, under certain circumstances, tender its 24%
interest to Trans Cosmos as repayment of the loan.
 
                                       58
   61
 
CHANGES TO CAPITAL STRUCTURE
 
     In connection with the offering, the Board recommended, and the Company's
shareholders approved, amendments to the Company's Articles that, among other
things, reduced the number of series of authorized Common Stock from five to
two: voting Common Stock and nonvoting Special Common Stock. A majority of the
previously authorized series were owned by certain of the Company's directors
and executive officers. The amendments to the Articles also establish the
Strategic Transactions Committee and provide for a Policy Ombudsman with
authority to determine certain matters related to editorial policies of the
Company. See "Management -- Policy Ombudsman" and "Description of Capital
Stock -- Certain Voting and Other Matters."
 
TRANS COSMOS RELATIONSHIP
 
     The Company and Trans Cosmos are parties to a Master Distribution Agreement
pursuant to which the Company granted Trans Cosmos a nonexclusive,
nontransferable license to reproduce and distribute RealPlayer and RealPlayer
Plus, and distribute the Company's server products, in Japan. Trans Cosmos is
required to comply with certain marketing requirements, personnel commitments
and specified minimum distribution requirements. Under the distribution
agreement, Trans Cosmos paid the Company license fees of $820,000 in 1996, and
approximately $467,000 from January 1, 1997 through August 31, 1997. The
distribution agreement became effective on July 22, 1996 and terminated pursuant
to the terms of the agreement on July 22, 1997; however, the Company and Trans
Cosmos have continued to adhere to the terms of the agreement and are currently
renegotiating the agreement.
 
                                       59
   62
 
                             PRINCIPAL SHAREHOLDERS
 
     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 19, 1997, assuming the conversion
of all shares of Series A Common Stock, Series B Common Stock, Series C Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock into Common Stock,
and as adjusted to reflect the sale of           shares of Common Stock in the
offering for (i) each person known to the Company to own beneficially more than
5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all executive officers and directors as a
group.
 


                                                                       COMMON STOCK
                                                        -------------------------------------------
                                                           NUMBER
                                                             OF               PERCENT OWNERSHIP
                                                           SHARES          ------------------------
                                                        BENEFICIALLY        BEFORE         AFTER
                         NAME                             OWNED(1)         OFFERING     OFFERING(2)
- ------------------------------------------------------  ------------       --------     -----------
                                                                               
Accel IV L.P..........................................     2,373,604(3)        8.7%            %
  c/o Accel Partners L.P.
  One Embarcadero Center
  Suite 3820
  San Francisco, CA 94111
Mitchell Kapor........................................     2,258,785(4)        8.4
  Kapor Enterprises, Inc.
  238 Main Street
  Cambridge, MA 02142
Robert Glaser.........................................    14,101,871(5)       52.3
  c/o RealNetworks, Inc.
  1111 Third Avenue
  Suite 2900
  Seattle, WA 98101
Microsoft Corporation.................................     7,047,679**        23.0
  One Microsoft Way
  Redmond, WA 98052-6399
Trans Cosmos USA, Inc.................................     1,381,142(6)        5.1
  4040 Lake Washington Blvd. N.E.
  Suite 205
  Kirkland, WA 98033
Bruce Jacobsen........................................       492,073(7)        1.8
James W. Breyer.......................................     2,373,604(8)        8.7
James Wells...........................................       137,500(9)          *            *
Andrew Sharpless......................................       312,500           1.2
All directors and executive officers as a group (13
  persons)(10)........................................    20,255,867          73.2%            %

 
- ---------------
 
  * Less than 1%.
 
 ** Includes 3,709,305 shares of Common Stock issuable on exercise of the Series
    E Warrant. The Series E Warrant has an exercise price of $13.48 per share
    and, if not exercised, will automatically terminate on closing of the
    offering. Excluding shares subject to the Series E Warrant, Microsoft
    currently owns 12.1% of the common stock. Assuming the Series E Warrant is
    not exercised prior to closing of the offering, Microsoft will own only
         % of the common stock immediately after closing. See "Risk
    Factors -- Competition; Relationship With Microsoft," "Business -- Microsoft
    Relationship" and "Description of Capital Stock -- Warrants to Purchase
    Preferred Stock and Common Stock."
 
(1) Beneficial ownership is determined in accordance with rules of the
    Commission and includes shares over which the beneficial owner exercises
    voting or investment power. Shares of Common Stock
 
                                       60
   63
 
    subject to options or warrants currently exercisable or exercisable within
    60 days of September 19, 1997 are deemed outstanding for the purpose of
    computing the percentage ownership of the person holding the options or
    warrants, but are not deemed outstanding for the purpose of computing the
    percentage ownership of any other person. Except as indicated, and subject
    to community property laws where applicable, the Company believes, based on
    information provided by such persons, that the persons named in the table
    above have sole voting and investment power with respect to all shares of
    Common Stock shown as beneficially owned by them.
 
 (2) In the event that Microsoft elects to exercise the Series E Warrant in its
     entirety for the purchase of shares of Common Stock, the resulting
     ownership percentages on the closing of the offering for the other
     shareholders listed in the table would be as follows: Accel IV L.P. --   %;
     Mr. Kapor --   %; Mr. Glaser --   %; Trans Cosmos USA, Inc. ("TCI") --   %;
     Mr. Jacobsen --   %; Mr. Breyer --   %; Mr. Wells --   %; Mr.
     Sharpless --   %; and all directors and executive officers as a
     group --   %.
 
 (3) Includes 1,926,973 shares owned by Accel IV L.P., 39,970 shares owned by
     Accel Keiretsu L.P., 90,459 shares owned by Accel Investors '95 L.P. and
     46,281 shares owned by Ellmore C. Patterson Partners (together the "Accel
     Group"). Also includes 247,247 shares, 5,129 shares, 11,607 shares, and
     5,938 shares of Common Stock issuable on exercise of warrants owned by
     Accel IV L.P., Accel Keiretsu L.P., Accel Investors '95 L.P. and Ellmore C.
     Patterson Partners, respectively.
 
 (4) Includes 53,675 shares of Common Stock issuable on exercise of warrants.
 
 (5) Includes 11,952 shares of Common Stock issuable on exercise of a warrant.
 
 (6) Includes 796,813 shares of Common Stock owned by Trans Cosmos USA, Inc.
     ("TCI") and 265,604 shares of Common Stock owned by Encompass Group, Inc.,
     an affiliate of TCI ("Encompass"). Also includes 239,043 and 79,682 shares
     of Common Stock issuable on exercise of warrants owned by TCI and
     Encompass, respectively.
 
 (7) Includes 292,073 shares of Common Stock issuable on exercise of options.
 
 (8) Mr. Breyer may be deemed to be the beneficial owner of the 2,373,604 shares
     of Common Stock beneficially owned by the Accel Group because he is a
     general partner of Accel Partners L.P., which is the general partner of
     Accel IV L.P.  Mr. Breyer disclaims beneficial ownership of these shares
     except to the extent of his pecuniary interest therein. See footnote (3)
     above.
 
 (9) Includes 27,500 shares of Common Stock issuable on exercise of options.
 
(10) Does not include shares owned by Mr. Sharpless, who terminated his
     employment with the Company in February 1997. Includes an aggregate of
     415,473 shares and 335,548 shares, respectively, of Common Stock issuable
     upon exercise of options and warrants.
 
                                       61
   64
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The following description of the capital stock of the Company and certain
provisions of the Articles and the Bylaws is a summary and is qualified in its
entirety by reference to the provisions of the Articles and the Bylaws, copies
of which have been filed with the Commission as exhibits to the Company's
Registration Statement, of which this Prospectus forms a part. The descriptions
of the Common Stock and preferred stock reflect an amendment to the Articles,
which amendment will be effective prior to the closing of the offering.
 
     The authorized capital stock of the Company consists of 300,000,000 shares
of common stock and 60,000,000 shares of preferred stock.
 
COMMON STOCK
 
     Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of Common Stock is entitled to one vote per share.
Holders of Common Stock on the applicable record date are entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment or providing for the payment
of liabilities and the liquidation preference of any outstanding preferred
stock. Holders of Common Stock have no cumulative voting rights or preemptive
rights to purchase or subscribe for any shares of Common Stock or other
securities of the Company.
 
     The Company has 7,047,679 authorized shares of Special Common Stock that
have identical rights to the Common Stock, except that they have voting rights
only to the extent provided by applicable law. The Special Common Stock may only
be converted into common stock on the prior written consent of the Board of
Directors.
 
PREFERRED STOCK
 
     The Company's Board of Directors has the authority to issue shares of
preferred stock in one or more series and to fix and determine the relative
rights and preferences of the shares constituting any series to be established,
without any further vote or action by the shareholders. Any shares of preferred
stock so issued may have priority over the Common Stock with respect to dividend
or liquidation rights or both. On closing of the offering, no shares of
preferred stock will be outstanding. The Company has no current intention to
issue any shares of preferred stock.
 
WARRANTS TO PURCHASE PREFERRED STOCK AND COMMON STOCK
 
     At August 30, 1997, the Company had outstanding warrants to purchase
183,755 shares of Series B Common Stock at an exercise price of approximately
$0.20 per share, warrants to purchase 100,000 shares of Series C Preferred Stock
at an exercise price of approximately $1.96 per share, warrants to purchase
714,303 shares of Series D Preferred Stock at an exercise price of approximately
$9.41 per share and a warrant to purchase 3,709,305 shares of Series E Preferred
Stock at an exercise price of $13.48 per share. The warrants to purchase shares
of Series B Common Stock, Series C Preferred Stock and Series E Preferred Stock
will expire on closing of the offering. The warrants to purchase shares of
Series D Preferred Stock expire on November 27, 1998 and, following the
offering, will be exercisable for an equivalent number of shares of Common
Stock. All of the Company's outstanding warrants currently are exercisable.
 
CERTAIN VOTING AND OTHER MATTERS
 
     Holders of preferred stock or other capital stock hereafter issued by the
Company may be entitled to vote in connection with certain mergers and share
exchanges or certain proposals to sell substantially all of the Company's assets
and for certain other actions and separate approval may be required to the
extent class voting rights are accorded to the holders of other capital stock of
the Company.
 
                                       62
   65
 
Amendments to the Articles must be approved by the Board of Directors and the
holders of a majority of the outstanding shares of Common Stock in most
instances.
 
ARTICLES AND BYLAWS
 
     Under the Articles, Mr. Glaser shall serve, or shall appoint another
officer of the Company to serve, as the Company's Policy Ombudsman, with the
exclusive authority to adopt or change the editorial policies of the Company as
reflected on the Company's Web sites or other communications or media where the
Company has a significant editorial or media voice. Upon the death, resignation
or removal of Mr. Glaser as the Policy Ombudsman, the Chief Executive Officer
shall serve or appoint another officer of the Company to serve as his or her
successor. The provisions delineating the authority of the Policy Ombudsman may
be amended only with the approval of 90% of the shares entitled to vote on an
amendment to the Articles.
 
     In addition, the Articles provide for a Strategic Transactions Committee
comprised of three directors, who shall initially be Messrs. Glaser, Breyer and
Kapor. Without the prior approval of such committee, and subject to certain
limited exceptions, the Board of Directors shall not have the authority to (i)
adopt a plan of merger, (ii) authorize the sale, lease, exchange or mortgage of
(A) assets representing more than 50% of the book value of the Company's assets
prior to the transaction or (B) any other asset or assets on which the long-term
business strategy of the Company is substantially dependent, (iii) authorize the
Company's voluntary dissolution or (iv) take any action that has the effect of
clauses (i) through (iii). Any vacancy on the Committee shall be filled by the
remaining members of the Committee. If two members of the Committee remain and
they are unable to agree on an individual to fill the vacancy, such vacancy may
be filled by the member who holds or controls, directly or indirectly, the
larger percentage of the outstanding shares of the Company's capital stock. The
Committee, by vote of the Chairman of the Committee and one additional member,
may limit the powers of the Committee or may terminate the Committee. The
existence and powers of the Committee shall terminate when the members in the
aggregate cease to hold or control, directly or indirectly, at least 10% of the
outstanding shares of the Company's capital stock. The provisions with respect
to the authority of the Strategic Transactions Committee may be amended only
with the approval of 90% of the shares entitled to vote on an amendment to the
Articles.
 
     Special meetings of the shareholders may be called only by the Board of
Directors, the Chairman of the Board, the President or the holders of at least
25% of all votes entitled to be cast on any issues proposed to be considered at
such special meeting. The Company's Bylaws provide that shareholders seeking to
bring business before, or to nominate directors at, any meeting of shareholders
must provide timely notice thereof in writing. To be timely, a shareholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than 70 days prior to the date of the meeting,
or the tenth day after notice of the meeting is first given to shareholders,
whichever is later, if the meeting is an annual meeting or a special meeting at
which directors are to be elected. The Bylaws also contain specific requirements
for the form of a shareholder's notice. These provisions may preclude or deter
some shareholders from bringing matters before the shareholders or from making
nominations for directors.
 
CONTRACTUAL AGREEMENTS
 
     On July 21, 1997, the Company and Microsoft entered into a Limited Proxy
and Voting Agreement (the "Proxy Agreement") that gives Mr. Glaser, or Mr.
Jacobsen if Mr. Glaser is unable to act, an irrevocable proxy with respect to
the future voting of Microsoft's shares of the Company's nonvoting capital
stock. The Proxy Agreement does not apply to voting with respect to certain
matters, such as certain amendments to the Articles in which the class of shares
held by Microsoft is treated adversely or disproportionately relative to other
classes. The Proxy Agreement terminates upon the earliest of (i) the date on
which Microsoft no longer holds any nonvoting shares, (ii) the conversion of the
Series E Preferred Stock into Common Stock and (iii) July 21, 2007.
 
                                       63
   66
 
     Under the Voting Agreement entered into in September 1997 among the
Company, Accel IV and Messrs. Jacobsen, Kapor and Glaser, each of Accel IV and
Messrs. Jacobsen and Kapor have agreed, effective on closing of the offering, to
vote all shares of their or its stock of the Company owned by such shareholders
to elect Mr. Glaser to the Board of Directors of the Company in each election in
which he is a nominee. The obligations under the Voting Agreement terminate with
respect to shares transferred by the parties thereto. The Voting Agreement
terminates upon the death of Mr. Glaser.
 
     The Company, Mr. Glaser and certain holders of Series B Common Stock and
Series C Common Stock (together, the "Shares") have entered into a Shareholders'
Buy-Sell Agreement dated March 31, 1995 (the "Buy-Sell Agreement") that
restricts the free transferability of Shares held by parties to the Buy-Sell
Agreement. The Buy-Sell Agreement gives the Company and the parties to the
Buy-Sell Agreement a right of first refusal with respect to another party's
proposed transfer of Shares, other than transfers to the Company, to certain
family members and to trusts that are created and administered for the exclusive
benefit of certain family members. The Buy-Sell Agreement is terminable upon the
written agreement of the Company and the holders of two-thirds of the Shares on
the dissolution, bankruptcy or insolvency of the Company, or at such time as
there is only one remaining party to the Buy-Sell Agreement.
 
WASHINGTON ANTITAKEOVER STATUTE
 
     Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Act prohibits the Company, with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. The Company may not exempt itself from coverage of this statute.
These statutory provisions may have the effect of delaying, deterring or
preventing a change in control of the Company.
 
SHAREHOLDER RIGHTS PLAN
 
     The Company currently is contemplating entering into a Shareholder Rights
Plan (the "Rights Plan") by and between the Company and a rights agent to be
selected by the Company that would be adopted prior to the closing of the
offering. Under the proposed Rights Plan, the Board would declare and distribute
to the shareholders of record of the Company as of the date selected by the
Board a dividend of one right ("Right") for each outstanding share of Common
Stock and Special Common Stock, if any. Shares of Common Stock issued in the
offering (assuming no triggering event) would automatically receive the Rights.
The Rights would not be exercisable or transferable separately from shares of
Common Stock and Special Common Stock, if any, until the earlier of: (i) 10 days
following a public announcement that a person or group has acquired, or obtained
the right to acquire, beneficial ownership of a designated percentage of the
outstanding shares of the Common Stock and (ii) 10 days following the
commencement or announcement of an intention to make a tender or exchange offer
that would result in an acquiring person or group beneficially owning a
designated percentage of outstanding shares of Common Stock, unless the Board
sets a later date (the earlier of such dates, the "Distribution Date"). The
Board would have the option to redeem the Rights at a nominal cost or prevent
the Rights from being triggered by designating offers for all outstanding Common
Stock as a permitted offer. Prior to the Distribution Date, the Company would be
able to amend or supplement the Rights Plan without the consent of any of the
holders of the Rights. Following the Distribution Date, the Rights Plan could be
amended to cure any ambiguity, to correct or supplement any inconsistent
provision or any other provision so long as such amendment or supplement would
not adversely affect the holders of the Rights (other than an acquiring person
or group). The Rights would expire 10 years after the date of adoption of the
Rights Plan by the Board unless earlier redeemed by the Company.
 
                                       64
   67
 
     The Rights, when exercisable, would entitle their holders (other than those
held by an acquiring person or group) to purchase a specified fraction of a
share of preferred stock (subject to adjustment) or, in certain instances, other
securities of the Company. In certain circumstances, if the Company, in a merger
or consolidation, is not the surviving entity or disposes of more than 50% of
the Company's assets or earnings power, the Rights would also entitle their
holders (other than an acquiring person or group) to purchase the highest
priority voting shares in the surviving entity or its affiliates having a market
value of two times the exercise price of the Rights.
 
     The Rights Plan is intended to encourage a potential acquiring person or
group to negotiate directly with the Board, but may have certain antitakeover
effects. The Rights Plan, if adopted, could significantly dilute the interests
in the Company of an acquiring person or group. The Rights Plan could therefore
have the effect of delaying, deterring or preventing a change in control of the
Company.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, Ridgefield Park, New Jersey.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after this offering. Sales of
substantial amounts of Common Stock in the public market after this offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
 
     On closing of the offering, the Company will have outstanding
shares of Common Stock (          shares if the Underwriters' over-allotment
option is exercised in full), of which           shares offered hereby
(          shares if the Underwriters' over-allotment option is exercised in
full) will be freely transferable in the public market without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subjected to the resale limitations of Rule
144 adopted under the Securities Act. The remaining 26,935,621 shares
outstanding on completion of the offering (assuming no exercise of options or
warrants after September 24, 1997) and held by existing shareholders will be
"Restricted Securities" as that term is defined under Rule 144 (the "Restricted
Shares"). The Restricted Shares were issued in private transactions in reliance
on exemptions from registration under the Securities Act. Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act, which rules are summarized below.
 
     Pursuant to the Lock-Up Agreements, persons who hold approximately
26,654,431 shares of Common Stock, including all officers and directors and
certain existing shareholders of the Company, have agreed with the
representatives of the Underwriters that, for a period of 180 days following the
date of this Prospectus, they will not sell, offer to sell or otherwise dispose
of any shares of Common Stock owned of record or beneficially by such persons as
of the date of this Prospectus, including securities convertible into or
exercisable or exchangeable for Common Stock as of said date, as well as any
shares of Common Stock later acquired by reason of the conversion, exercise or
exchange of such securities, except that persons other than officers, directors
and holders of 1% or more of the capital stock of the Company each will be free
to sell or otherwise dispose of up to 5,000 shares of Common Stock to the extent
permissible under Rule 144 or Rule 701. The Lock-Up Agreements may be released
at any time as to all or any portion of the shares subject to such agreements at
the sole discretion of Goldman, Sachs & Co. on behalf of the Underwriters.
 
     Based on the provisions of the Lock-Up Agreements and the provisions of
Rules 144 and 701 of the Securities Act, additional shares will be available for
sale in the public market as follows:
 
                                       65
   68
 
(i) 11,947 shares will be available for immediate sale in the public market on
the date of this Prospectus, (ii)268,243 shares issued upon exercise of options
prior to September 24, 1997 not subject to Lock-Up Agreements will be eligible
for sale in the public market in accordance with Rules 144 and 701 as soon as 90
days after the date of this Prospectus, (iii) 4,707,363 shares issuable upon the
exercise of warrants (assuming all outstanding warrants are exercised) will not
be available for sale until various dates after 180 days following the date of
this Prospectus, (iv) 26,654,431 currently outstanding shares will be eligible
for sale upon expiration of Lock-Up Agreements (of which 23,909,137 shares will
be subject to certain volume, manner of sale and other limitations under Rule
144); and (v) 1,000 remaining shares will be eligible for sale pursuant to Rule
144 on the expiration of a one-year holding period. As of September 24, 1997,
options for 6,374,214 shares of Common Stock were outstanding, of which options
for 1,708,455 shares may be exercised during the 180 days following the date of
the Prospectus, which shares potentially will be eligible for public sale 90
days after the date of this Prospectus pursuant to Rule 701 under the Securities
Act; of these shares, 1,312,863 are subject to Lock-Up Agreements.
 
     In general, Rule 144 provides that any person who has beneficially owned
shares for at least one year, including an "affiliate" (as defined in Rule 144),
is generally entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the shares of Common Stock then
outstanding (approximately           shares immediately after the offering) or
the reported average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
sent to the Commission. Sales under Rule 144 are subject to certain manner of
sale restrictions, notice requirements and availability of current public
information concerning the Company. A person who is not an affiliate of the
Company, and who has not been an affiliate within three months prior to the
sale, generally may sell shares without regard to the limitations of Rule 144
provided that the person has held such shares for a period of at least two
years.
 
     Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.
 
REGISTRATION RIGHTS
 
     Pursuant to the Investors' Rights Agreement, which provides registration
rights to certain holders of shares of the Company's capital stock, holders of
16,390,753 shares of Common Stock or their permitted transferees (assuming (i)
exercise of all outstanding warrants to purchase shares of Common Stock, (ii)
conversion of the Series E Preferred Stock into Common Stock and (iii) exercise
of the Series E Warrant in its entirety for shares of Common Stock
(collectively, the "Registrable Shares") have certain rights with respect to the
registration of the Registrable Shares under the Securities Act. Under the terms
of the Investors' Rights Agreement, if the Company proposes to register any of
its securities under the Securities Act for its own account or for the account
of others, Registrable Shares may be included, subject to any limitation set by
the underwriters on the number of shares included in such registration. Holders
of not less than 30% of the Registrable Shares may also require the Company, not
more than twice, to file a registration statement under the Securities Act, at
the Company's expense, with respect to any Registrable Shares holders desire to
include. In addition, Holders of Registrable Shares may require the Company to
file up to three registration statements on Form S-3, at the expense of the
holders, for public offerings of Registrable Shares, provided that the aggregate
offering price for such registration is not less than $250,000. The Company is
required to use its best efforts to effect all such registrations, subject to
certain conditions and limitations.
 
                                       66
   69
 
                                 LEGAL MATTERS
 
     The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP/Riddell Williams P.S., Seattle,
Washington. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Perkins Coie, Seattle, Washington.
 
                                    EXPERTS
 
     The consolidated balance sheets at December 31, 1995 and 1996 and the
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from February 9, 1994 (inception) to December 31, 1994, and
for the years ended December 31, 1995 and 1996 included in this Prospectus and
in the Registration Statement of which this Prospectus forms a part have been
included herein in reliance on the report of KPMG Peat Marwick LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement or the exhibits thereto in accordance with the rules
and regulations of the Commission, and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or documents
and are not necessarily complete. Reference is made to each such exhibit for a
more complete description of the matters involved and such statements shall be
deemed qualified in their entirety by such reference. The Registration Statement
and the exhibits thereto filed with the Commission may be inspected, without
charge, and copies may be obtained at prescribed rates, at the public reference
facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. The Registration Statement and other information filed by the
Company with the Commission are also available at the Web site maintained by the
Commission on the World Wide Web at http://www.sec.gov. For further information
pertaining to the Company and the Common Stock offered by this Prospectus,
reference is made to the Registration Statement.
 
     The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial statements.
 
                                       67
   70
 
                      REALNETWORKS, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

                                                                                      
Report of KPMG Peat Marwick LLP, Independent Accountants..............................   F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
  (unaudited).........................................................................   F-3
Consolidated Statements of Operations for the period from February 9, 1994 (inception)
  to December 31, 1994, the years ended December 31, 1995 and 1996, and the six months
  ended June 30, 1996 and 1997 (unaudited)............................................   F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period from February
  9, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and
  1996, and the six months ended June 30, 1997 (unaudited)............................   F-5
Consolidated Statements of Cash Flows for the period from February 9, 1994 (inception)
  to December 31, 1994, the years ended December 31, 1995 and 1996, and the six months
  ended June 30, 1996 and 1997 (unaudited)............................................   F-6
Notes to Consolidated Financial Statements............................................   F-7

 
                                       F-1
   71
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
RealNetworks, Inc.:
 
We have audited the accompanying consolidated balance sheets of RealNetworks,
Inc. (formerly Progressive Networks, Inc.) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from February 9,
1994 (inception) to December 31, 1994, and the years ended December 31, 1995 and
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RealNetworks, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the period from February 9, 1994 (inception)
to December 31, 1994, and the years ended December 31, 1995 and 1996 in
conformity with generally accepted accounting principles.
 
                                                           KPMG Peat Marwick LLP
 
March 14, 1997
Seattle, Washington
 
                                       F-2
   72
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 


                                                                      DECEMBER 31,
                                                               ---------------------------       JUNE 30,
                                                                  1995            1996             1997
                                                               -----------     -----------     ------------
                                                                                               (UNAUDITED)
                                                                                      
CURRENT ASSETS:
  Cash and cash equivalents................................    $ 3,129,394     $14,737,806     $  4,971,916
  Short-term investments...................................      2,986,493       4,857,163        6,523,710
  Trade accounts receivable, net of allowance for doubtful         667,847       3,275,518        4,352,334
    accounts and sales returns of $129,869 in 1995,
    $383,350 in 1996 and $581,219 in 1997..................
  Other receivables........................................         48,568         105,888          149,628
  Inventory................................................          3,218          60,543           80,270
  Prepaid expenses and other current assets................        143,328         491,348          457,428
                                                               -----------     -----------     ------------
         Total current assets..............................      6,978,848      23,528,266       16,535,286
Property and equipment, net................................        594,042       2,678,798        4,019,255
Investment in joint venture................................             --              --          998,208
Other assets...............................................            836         261,094          595,105
                                                               -----------     -----------     ------------
                                                               $ 7,573,726     $26,468,158     $ 22,147,854
                                                               ===========     ===========     ============
                                   LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable.........................................    $   185,368     $ 2,405,490     $  1,557,017
  Accrued compensation.....................................         49,981         346,011          784,484
  Other accrued expenses...................................        149,909         971,499        1,774,847
  Deferred revenue.........................................        645,416       2,911,922        3,540,235
                                                               -----------     -----------     ------------
         Total current liabilities.........................      1,030,674       6,634,922        7,656,583
                                                               -----------     -----------     ------------
  Note payable.............................................             --              --          991,268
  Redeemable, convertible preferred stock, no par value.
    Authorized 9,344,306 shares; issued and outstanding          7,654,528      23,153,494       23,264,467
       5,964,006 shares at December 31, 1995, and 8,345,016
       shares at December 31, 1996 and June 30, 1997
       (aggregate liquidation preference of $7,752,312 at
       December 31, 1995 and $34,645,820 at December 31,
       1996 and June 30, 1997 and aggregate redemption
       value of $7,752,312 at December 31, 1995 and
       $25,681,317 at December 31, 1996 and June 30,
       1997)...............................................
SHAREHOLDERS' DEFICIT:
  Convertible preferred stock, no par value.
    Authorized, issued and outstanding; 13,713,439 shares          932,385         932,385          932,385
       at December 31, 1995 and 1996, and June 30, 1997
       (aggregate liquidation preference of $999,710 at
       December 31, 1995 and 1996, and June 30, 1997)......
  Preferred stock, undesignated series, no par value.
    Authorized 6,942,255 shares; no shares issued and                   --              --               --
       outstanding.........................................
  Common stock, no par value.
    Authorized 50,000,000 shares; issued and outstanding;            2,680          46,450           88,617
       36,948 shares at December 31, 1995, 535,491 shares
       at December 31, 1996 and 749,520 shares at
       June 30, 1997.......................................
  Additional paid-in capital...............................             --       1,579,000        1,579,000
  Foreign currency translation adjustment..................             --         (11,307)           7,886
  Accumulated deficit......................................     (2,046,541)     (5,866,786)     (12,372,352)
                                                               -----------     -----------     ------------
         Total shareholders' deficit.......................     (1,111,476)     (3,320,258)      (9,764,464)
Commitments and contingencies
                                                               -----------     -----------     ------------
                                                               $ 7,573,726     $26,468,158     $ 22,147,854
                                                               ===========     ===========     ============

 
          See accompanying notes to consolidated financial statements.
 
                                       F-3
   73
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 


                                      PERIOD FROM
                                      FEBRUARY 9,
                                          1994
                                     (INCEPTION) TO       YEAR ENDED DECEMBER 31,        SIX MONTHS ENDED JUNE 30,
                                      DECEMBER 31,      ---------------------------     ---------------------------
                                          1994             1995            1996            1996            1997
                                     --------------     -----------     -----------     -----------     -----------
                                                                                        (UNAUDITED)     (UNAUDITED)
                                                                                         
NET REVENUES:
  Software license fees..........      $       --       $ 1,781,763     $11,875,945     $ 3,767,785     $10,070,075
  Advertising....................              --                --       1,015,964         170,102       1,106,582
  Service revenues...............              --            29,835       1,120,479         306,055       2,189,520
                                        ---------        ----------      ----------      ----------      ----------
         Total net revenues......              --         1,811,598      14,012,388       4,243,942      13,366,177
COST OF REVENUES:
  Software license fees..........              --            29,194       1,342,942         142,984       1,134,446
  Advertising....................              --                --         288,024         104,752         307,751
  Service revenues...............              --            32,940         554,558         146,913       1,612,080
                                        ---------        ----------      ----------      ----------      ----------
         Total cost of                         --            62,134       2,185,524         394,649       3,054,277
           revenues..............
                                        ---------        ----------      ----------      ----------      ----------
    Gross profit.................              --         1,749,464      11,826,864       3,849,293      10,311,900
OPERATING EXPENSES:
  Research and development.......         201,847         1,379,727       4,812,188       1,738,867       5,462,851
  Selling and marketing..........          47,181         1,217,900       7,539,924       2,264,285       9,160,905
  General and administrative.....         296,211           746,645       3,491,296       1,412,120       2,495,695
                                        ---------        ----------      ----------      ----------      ----------
         Total operating                  545,239         3,344,272      15,843,408       5,415,272      17,119,451
           expenses..............
                                        ---------        ----------      ----------      ----------      ----------
    Operating loss...............        (545,239)       (1,594,808)     (4,016,544)     (1,565,979)     (6,807,551)
OTHER INCOME (EXPENSE):
  Interest income, net...........              --            93,506         296,427         147,505         437,249
  Other expense..................              --                --         (69,128)        (30,620)         (1,484)
                                        ---------        ----------      ----------      ----------      ----------
    Net other income.............              --            93,506         227,299         116,885         435,765
                                        ---------        ----------      ----------      ----------      ----------
    Net loss.....................      $ (545,239)      $(1,501,302)    $(3,789,245)    $(1,449,094)    $(6,371,786)
                                        =========        ==========      ==========      ==========      ==========
  Pro forma net loss per share...
  Shares used to compute pro
    forma net loss per share.....

 
          See accompanying notes to consolidated financial statements.
 
                                       F-4
   74
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 


                                                                                                                        TOTAL
                              PREFERRED STOCK         COMMON STOCK       ADDITIONAL   CUMULATIVE                    SHAREHOLDERS'
                           ---------------------   -------------------    PAID-IN     TRANSLATION    ACCUMULATED       EQUITY
                             SHARES      AMOUNT    SHARES     AMOUNT      CAPITAL     ADJUSTMENT       DEFICIT        (DEFICIT)
                           ----------   --------   -------   ---------   ----------   -----------   -------------   -------------
                                                                                            
Sale of common stock.....          --   $     --    10,000   $  72,838   $       --    $      --    $          --    $    72,838
Contribution of capital
  by founder.............          --         --        --     487,357           --           --               --        487,357
  Net loss...............          --         --        --          --           --           --         (545,239)      (545,239)
                           ----------   --------   --------  ---------    ---------     --------      -----------    -----------
Balances at December 31,
  1994...................          --         --    10,000     560,195           --           --         (545,239)        14,956
Contribution of capital
  by
  founder................          --         --        --     372,283           --           --               --        372,283
Exchange of common stock
  for Series A preferred
  stock..................  13,713,439    932,385    (9,999)   (932,385)          --           --               --             --
Exercise of common stock
  options................          --         --    30,750       2,153           --           --               --          2,153
Issuance of common stock
  in exchange for
  services...............          --         --     6,197         434           --           --               --            434
  Net loss...............          --         --        --          --           --           --       (1,501,302)    (1,501,302)
                           ----------   --------   --------  ---------    ---------     --------      -----------    -----------
Balances at December 31,
  1995...................  13,713,439    932,385    36,948       2,680           --           --       (2,046,541)    (1,111,476)
Exercise of common stock
  options................          --         --   498,543      43,770           --           --               --         43,770
Issuance of preferred
  stock warrants.........          --         --        --          --    1,579,000           --               --      1,579,000
Translation adjustment...          --         --                    --           --      (11,307)              --        (11,307)
Accretion of redemption
  value of redeemable,
  convertible preferred
  stock..................          --         --        --          --           --           --          (31,000)       (31,000)
  Net loss...............          --         --        --          --           --           --       (3,789,245)    (3,789,245)
                           ----------   --------   --------  ---------    ---------     --------      -----------    -----------
Balances at December 31,
  1996...................  13,713,439    932,385   535,491      46,450    1,579,000      (11,307)      (5,866,786)    (3,320,258)
Exercise of common stock
  options (unaudited)....          --         --   213,029      40,167           --           --               --         40,167
Issuance of common stock
  in exchange for
  services (unaudited)...          --         --     1,000       2,000           --           --               --          2,000
Accretion of redemption
  value of redeemable,
  convertible preferred
  stock (unaudited)......          --         --        --          --           --           --         (133,780)      (133,780)
Translation adjustment
  (unaudited)............          --         --        --          --           --       19,193               --         19,193
  Net loss (unaudited)...          --         --        --          --           --           --       (6,371,786)    (6,371,786)
                           ----------   --------   --------  ---------    ---------     --------      -----------    -----------
Balances at June 30, 1997
  (unaudited)............  13,713,439   $932,385   749,520   $  88,617   $1,579,000    $   7,886    $ (12,372,352)   $(9,764,464)
                           ==========   ========   ========  =========    =========     ========      ===========    ===========

 
          See accompanying notes to consolidated financial statements.
 
                                       F-5
   75
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                                                PERIOD FROM
                                              FEBRUARY 9, 1994            YEAR ENDED                   SIX MONTHS ENDED
                                               (INCEPTION) TO            DECEMBER 31,                      JUNE 30,
                                                DECEMBER 31,      ---------------------------    ----------------------------
                                                    1994             1995            1996            1996            1997
                                              ----------------    -----------    ------------    ------------    ------------
                                                                                                 (UNAUDITED)     (UNAUDITED)
                                                                                                  
Cash flows from operating activities:
  Net loss.................................      $ (545,239)      $(1,501,302)   $ (3,789,245)   $ (1,449,094)   $ (6,371,786)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization..........           5,295            93,265         699,087         162,468         841,432
    Common stock issued in exchange for
      services.............................              --               434              --              --           2,000
    Change in certain assets and
      liabilities:
      Trade accounts receivable............              --          (667,847)     (2,607,671)     (1,122,513)     (1,049,378)
      Other receivables....................              --                --         (57,320)         31,274         (43,740)
      Inventory............................              --            (3,218)        (57,325)        (17,114)        (19,727)
      Prepaid expenses and other current
         assets............................              --          (143,328)       (348,723)       (234,271)         33,600
      Other assets.........................              --                --         (78,298)            137         (44,881)
      Accounts payable.....................              --           185,368       2,220,292         641,150        (861,716)
      Accrued compensation.................          15,817            34,164         296,030         123,752         435,002
      Other accrued expenses...............          33,217           116,692         821,590         224,338         801,381
      Deferred revenue.....................              --           645,416       2,266,506         972,875         620,148
                                                   --------        ----------      ----------      ----------      ----------
         Net cash used in operating
           activities......................        (490,910)       (1,240,356)       (635,077)       (666,998)     (5,657,665)
                                                   --------        ----------      ----------      ----------      ----------
Cash flows from investing activities:
  Purchases of property and equipment......         (67,542)         (624,503)     (2,783,994)     (1,300,315)     (2,162,479)
  Purchases of short-term investments......              --        (3,035,061)    (30,514,885)    (11,077,977)    (10,614,439)
  Proceeds from sales and maturities of
    short-term investments.................              --                --      28,644,215      10,952,121       8,947,892
  Investment in joint venture..............              --                --              --              --        (998,208)
  Increase in other assets.................          (1,393)               --        (181,960)       (215,550)       (279,267)
                                                   --------        ----------      ----------      ----------      ----------
         Net cash used in investing
           activities......................         (68,935)       (3,659,564)     (4,836,624)     (1,641,721)     (5,106,501)
                                                   --------        ----------      ----------      ----------      ----------
Cash flows from financing activities:
  Proceeds from issuance of note payable...              --                --              --              --         991,268
  Proceeds from sale of preferred stock and
    stock warrants, net....................              --         7,404,528      17,046,966              --              --
  Offering costs...........................              --                --              --              --         (22,807)
  Proceeds from exercise of preferred stock
    warrant................................              --           250,000              --              --              --
  Proceeds from exercise of common stock
    options................................              --             2,153          43,770          20,410          40,167
  Proceeds from sale of common stock.......          72,838                --              --              --              --
  Contribution of capital by founder.......         487,357           372,283              --              --              --
                                                   --------        ----------      ----------      ----------      ----------
         Net cash provided by financing
           activities......................         560,195         8,028,964      17,090,736          20,410       1,008,628
                                                   --------        ----------      ----------      ----------      ----------
Effect of exchange rate changes on cash....              --                --         (10,623)             --         (10,352)
                                                   --------        ----------      ----------      ----------      ----------
         Net increase (decrease) in cash
           and cash equivalents............             350         3,129,044      11,608,412      (2,288,309)     (9,765,890)
Cash and cash equivalents at beginning of
  period...................................              --               350       3,129,394       3,129,394      14,737,806
                                                   --------        ----------      ----------      ----------      ----------
Cash and cash equivalents at end of
  period...................................      $      350       $ 3,129,394    $ 14,737,806    $    841,085    $  4,971,916
                                                   ========        ==========      ==========      ==========      ==========
Supplemental disclosure of cash flow
  information -- cash paid during the
  period for interest......................      $       --       $     1,853    $      4,430    $         --    $     26,633
Supplemental disclosure of noncash
  financing and investing activities:
  Exchange of common stock for Series A
    preferred stock........................      $       --       $   932,385    $         --    $         --    $         --
  Accretion of redemption value of
    redeemable, convertible preferred
    stock..................................      $       --       $        --    $     31,000    $         --    $    133,780

 
          See accompanying notes to consolidated financial statements.
 
                                       F-6
   76
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1996 AND 1997
 
            (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
 
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (a) Nature of Business
 
     RealNetworks, Inc. (formerly Progressive Networks, Inc.) and subsidiaries
(Company) is a leading provider of branded software products and services that
enable the delivery of streaming media content over the Internet and intranets.
Streaming technology enables the transmission and playback of continuous
"streams" of multimedia content, such as audio and video, over the Internet and
intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site and a network of
advertising-supported content aggregation Web sites.
 
     Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. The Company's success may depend in part upon the emergence of the
Internet as a communication medium, the acceptance of the Company's technology
by the marketplace and the Company's ability to generate license and advertising
revenues from the use of its technology on the Internet.
 
  (b) Basis of Presentation
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
  (c) Cash Equivalents
 
     The Company considers all short-term investments with a remaining
contractual maturity at date of purchase of three months or less to be cash
equivalents.
 
  (d) Short-Term Investments
 
     Short-term investments consist principally of short-term investment-grade,
interest-bearing debt securities.
 
     The Company classifies its short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximated cost, and there were no unrealized holding gains or
losses at December 31, 1995 and 1996, and June 30, 1997. All short-term
investments have contractual maturities of less than one year at December 31,
1996 and June 30, 1997.
 
  (e) Inventory
 
     Inventory is stated at the lower of cost or market, with cost determined on
the first-in, first-out basis.
 
  (f) Property and Equipment
 
     Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the asset.
 
                                       F-7
   77
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (g) Investment in Joint Venture
 
     The Company accounts for its investment in joint venture using the equity
method. Accordingly, the initial investment is recorded at cost. Subsequently,
the carrying amount of the investment is increased or decreased to reflect the
Company's share of income or losses of the joint venture and is reduced to
reflect dividends received from the joint venture. The Company's share of income
or losses of the joint venture is included in the Company's statements of
operations.
 
  (h) Research and Development
 
     Research and development costs are charged to operations as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
 
     Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.
 
  (i) Revenue Recognition
 
     The Company recognizes revenue from software license fees upon delivery,
net of an allowance for estimated returns, provided that no significant
obligations remain on the Company's behalf and collection of the resulting
receivable is deemed probable.
 
     Revenue from software license agreements with original equipment
manufacturers (OEM) is recognized when the OEM delivers its product
incorporating the Company's software to the end user. In the case of prepayments
received from an OEM, the Company generally recognizes revenue based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue is generally recognized on the
straight-line method over the term of the contract.
 
     The Company recognizes revenue from software license agreements with
value-added resellers (VAR) upon delivery to the VAR, provided necessary
conditions are met. If these conditions are not met, revenue is recognized upon
redistribution by the VAR to the end user.
 
     Revenues from advertising appearing on the Company's World Wide Web (Web)
sites are recognized on the straight-line method over the terms of the
advertising contracts. The Company guarantees to certain advertising customers a
minimum number of page impressions to be delivered to users of its Web sites for
a specified period. To the extent guaranteed minimum page impression deliveries
are not met, the Company defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of December 31, 1996
and June 30, 1997, no revenues had been deferred as a result of these
guarantees.
 
     Service revenue includes revenue from upgrade and support agreements,
consulting, content hosting, and fees from user conferences. Service revenue
from upgrade and support agreements is recognized ratably over the term of the
related agreements. Other service revenue is recognized when the service is
performed.
 
  (j) Financial Instruments and Concentrations of Risk
 
     The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts receivable, accounts payable, accrued
expenses, and note payable. The fair value of
 
                                       F-8
   78
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
these instruments approximates their financial statement carrying amount. The
Company maintains substantially all of its cash and cash equivalents and
short-term investments with two financial institutions. Management believes that
the financial risks associated with such deposits are minimal. Credit is
extended to customers based on an evaluation of their financial condition, and
collateral is not required. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses.
Substantially all of the Company's accounts receivable are derived from domestic
sales.
 
     The Company's customers consist primarily of resellers and end users
located in the United States and various foreign countries. Revenues in the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1996
and 1997 by geographic region, as a percent of total net revenues, are as
follows:
 


                                                         DECEMBER 31,        JUNE 30,
                                                         -------------     -------------
                                                         1995     1996     1996     1997
                                                         ----     ----     ----     ----
                                                                        
        United States and Canada.......................   85%      81%      81%      73%
        Europe.........................................    5%       7%       7%      12%
        Asia...........................................    8%       7%       4%      10%
        Other..........................................    2%       5%       8%       5%

 
     One customer accounted for approximately 14% of total net revenues in 1995.
No one customer accounted for more than 10% of total net revenues in 1996 and
the six months ended June 30, 1996 and 1997.
 
  (k) Advertising Expenses
 
     The Company expenses the cost of advertising and promoting its products as
incurred. Such costs are included in selling and marketing expense and totaled
approximately $68,000 and $665,000 during the years ended December 31, 1995 and
1996, respectively, and $96,000 and $560,000 during the six months ended June
30, 1996 and 1997, respectively.
 
  (l) Income Taxes
 
     The Company was an S corporation for federal income tax purposes from
inception through April 8, 1995. Consequently, taxable income or loss of the
Company through April 8, 1995 was attributed to the Company's shareholders.
Effective April 8, 1995, the Company changed its election to utilize the
provisions of subchapter S of the Internal Revenue Code of 1986, as amended, and
elected to be taxed as a subchapter C corporation.
 
     The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that includes the enactment date.
 
     Pro forma income tax information has not been provided for the period from
inception to April 8, 1995. As a result of the operating losses recognized prior
to April 8, 1995, any income tax benefit would
 
                                       F-9
   79
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
have been fully offset by the establishment of a valuation allowance for
deferred tax assets had the Company been taxed as a subchapter C corporation.
 
  (m) Foreign Currency Translation
 
     The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is incorporated. Assets and
liabilities of foreign operations are translated into U.S. dollars using rates
of exchange in effect at the end of the reporting period. Income and expense
accounts are translated into U.S. dollars using average rates of exchange. The
net gain or loss resulting from translation is shown as a cumulative translation
adjustment in shareholders' equity.
 
  (n) Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  (o) Stock-Based Compensation
 
     The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense related to employee stock options would be recorded only
if, on the date of grant, the fair value of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted the disclosure-only
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which
allows entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method of accounting in SFAS No. 123 had
been applied to these transactions.
 
  (p) Impairment of Long-Lived Assets
 
     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
 
  (q) Reclassifications
 
     Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation.
 
  (r) Unaudited Interim Financial Statements
 
     In the opinion of the Company's management, the June 30, 1996 and 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation.
 
                                      F-10
   80
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  (s) Pro Forma Net Loss Per Share
 
     Pro forma net loss per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable, convertible preferred stock by
the weighted average number of shares of common stock and common stock
equivalents outstanding during each period and the shares resulting from the
conversion of all outstanding shares of preferred stock, including Series E
preferred stock, which was issued in July 1997. Common stock equivalents include
all warrants and stock options which would have a dilutive effect, applying the
treasury stock method. Additionally, common and common equivalent shares issued
during the twelve months immediately preceding the initial filing of the
Company's initial public offering (IPO) have been included in the calculation of
common and common equivalent shares as if they were outstanding for all periods
presented, including loss years where the impact of the incremental shares is
antidilutive, using the treasury stock method and an assumed initial public
offering price of $          per share. Due to the significant impact of the
assumed conversion of the preferred stock upon closing of the IPO, historical
net loss per share is not meaningful and, therefore, is not presented.
 
     The Company has not calculated pro forma net loss per share because
information regarding the pricing of the shares of Common Stock under the
contemplated IPO has not yet been determined.
 
  (t) New Accounting Pronouncements
 
     In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share (Statement 128). Statement 128 establishes
standards for the computation, presentation and disclosure of earnings per share
(EPS), replacing the presentation of currently required Primary EPS with a
presentation of Basic EPS. It also requires dual presentation of Basic EPS and
Diluted EPS on the face of the income statement for entities with complex
capital structures. Basic EPS is based on the weighted average number of common
shares outstanding during the period. Diluted EPS is based on the potential
dilution that would occur upon exercise or conversion of securities into common
stock using the treasury stock method. Statement 128 is effective for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. When adopted, the Company will be required to restate its EPS
data for all prior periods presented. The Company does not expect the impact of
the adoption of Statement 128 to be material to its reported EPS amounts.
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not determined the manner in
which it will present the information required by Statement 130.
 
     In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. The
Company has not determined the manner in which it will present the information
required by Statement 131.
 
                                      F-11
   81
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(2) PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following:
 


                                                     DECEMBER 31,
                                               ------------------------     JUNE 30,
                                                 1995          1996           1997
                                               ---------    -----------    -----------
                                                                           (UNAUDITED)
                                                                  
        Computer equipment and software......  $ 529,705    $ 2,210,799    $ 3,630,964
        Furniture, fixtures and leasehold
          improvements.......................    162,340      1,251,354      2,013,870
                                                --------     ----------     ----------
                                                 692,045      3,462,153      5,644,834
        Less accumulated depreciation and
          amortization.......................     98,003        783,355      1,625,579
                                                --------     ----------     ----------
                                               $ 594,042    $ 2,678,798    $ 4,019,255
                                                ========     ==========     ==========

 
(3) COMMITMENTS
 
  (a) Leases
 
     The Company leases facilities under operating lease agreements expiring
through April 2001. Future minimum lease payments under these leases as of
December 31, 1996 are:
 

                                                                   
            1997....................................................  $   739,627
            1998....................................................      764,056
            1999....................................................      886,201
            2000....................................................      886,201
            2001....................................................      295,399
                                                                       ----------
                      Total minimum lease payments..................  $ 3,571,484
                                                                       ==========

 
     Rent expense totaled approximately $76,000 and $610,000 for the years ended
December 31, 1995 and 1996, respectively, and $257,000 and $826,000 for the six
months ended June 30, 1996 and 1997, respectively.
 
     In April 1996, the Company entered into operating lease agreements for
additional corporate office space, with the lease term extending through April
2001. These leases can be terminated beginning October 1998 with nine months'
advance written notice and contain options for two five-year renewals.
 
  (b) Royalties
 
     The Company has arrangements with several Internet content providers
whereby it is committed to pay a percentage of certain advertising revenues
generated from its Web sites. As of December 31, 1996 and June 30, 1997,
royalties under these arrangements have not been significant.
 
(4) INCOME TAXES
 
     The expected U.S. federal income tax benefit determined by applying the
statutory U.S. federal income tax rate of 34% to pretax loss for the period from
February 9, 1994 (inception) to December 31, 1994 and the years ended December
31, 1995 and 1996 differs from the U.S. federal income tax benefit in the
consolidated financial statements due primarily to the increase in the valuation
allowance for deferred tax assets.
 
                                      F-12
   82
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The tax effects of temporary differences and tax loss and credit
carryforwards that give rise to significant portions of federal deferred tax
assets are comprised of the following:
 


                                                         DECEMBER 31,
                                                   ------------------------     JUNE 30,
                                                     1995          1996           1997
                                                   ---------    -----------    -----------
                                                                               (UNAUDITED)
                                                                      
    Deferred tax assets:
      Net operating loss carryforwards...........  $ 216,000    $   918,000    $ 2,641,000
      Deferred revenue...........................    112,000        530,000        635,000
      Allowances for doubtful accounts and
         sales returns...........................     44,000        130,000        196,000
      Start-up costs capitalized for tax
         purposes................................     84,000         70,000         53,000
      Research and experimentation credit
         carryforwards...........................      7,000        102,000        102,000
      Other......................................     30,000         78,000        269,000
                                                    --------     ----------     ----------
    Gross deferred tax assets....................    493,000      1,828,000      3,896,000
      Less valuation allowance...................    493,000      1,828,000      3,896,000
                                                    --------     ----------     ----------
    Net deferred tax assets......................  $      --    $        --    $        --
                                                    ========     ==========     ==========

 
     The valuation allowance for deferred tax assets increased $493,000,
$1,335,000, and $2,068,000 for the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, respectively.
 
     At December 31, 1996 and June 30, 1997, the Company had available net
operating loss carryforwards of approximately $2,700,000 and $7,800,000,
respectively, expiring in 2010 through 2012 available to offset future U.S.
federal taxable income, if any. In addition, the Company has research and
experimentation tax credit carryforwards of approximately $102,000, expiring in
2010 and 2011, which are available to offset future income taxes, if any.
 
     The utilization of tax net operating loss carryforwards may be limited
under Internal Revenue Code Section 382 due to ownership changes that occurred
during the year ended December 31, 1996 or changes in ownership that may occur
if the Company raises additional equity.
 
(5) 401(k) RETIREMENT SAVINGS PLAN
 
     The Company has a 401(k) Retirement Savings Plan that covers all employees
who have met certain employment requirements. Employees can contribute a portion
of their salary to the maximum allowed by the federal tax guidelines.
 
(6) BANK LINE OF CREDIT AND TERM LOAN AND NOTE PAYABLE
 
     At December 31, 1996, and June 30, 1997, the Company had available a
$1,000,000 domestic bank line of credit and a $1,500,000 bank term loan. The
line of credit and term loan bear interest at the prime rate plus 0.75% and 1.0%
per annum, respectively. There were no borrowings outstanding under the line of
credit or the term loan as of December 31, 1996 and June 30, 1997.
 
     At June 30, 1997, the Company had outstanding a note payable to one of its
joint venture partners. The note is denominated in Japanese yen, bears interest
at a rate not to exceed the Japanese Short Term Prime Rate (1.75% at June 30,
1997) and is secured by the Company's shares in the joint venture. Interest on
the note is payable monthly and the principal is due in May 2000. The principal
amount of the
 
                                      F-13
   83
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
note is 115,200,000 Japanese yen ($991,268 at June 30, 1997), and the Company
may, under certain circumstances, tender its shares in the joint venture as
repayment of the note.
 
(7) SHAREHOLDERS' EQUITY
 
  (a) Preferred Stock
 
     The Company has authorized and issued convertible preferred stock and
redeemable, convertible preferred stock as follows:
 


                                                              ISSUED AND OUTSTANDING SHARES
                                                        -----------------------------------------
                                                               DECEMBER 31,
                                         AUTHORIZED     --------------------------     JUNE 30,
                              SERIES       SHARES          1995           1996           1997
                              -------    ----------     -----------    -----------    -----------
                                                                                      (UNAUDITED)
                                                                       
Convertible preferred.......     A       13,713,439      13,713,439     13,713,439     13,713,439
Redeemable, convertible
  preferred.................     B        3,059,701       3,059,701      3,059,701      3,059,701
Redeemable, convertible
  preferred.................     C        3,004,305       2,904,305      2,904,305      2,904,305
Redeemable, convertible
  preferred.................     D        3,280,300              --      2,381,010      2,381,010

 
     The following table summarizes activity of the Company's redeemable,
convertible preferred stock for the years ended December 31, 1995 and 1996, and
the six months ended June 30, 1997:
 


                                                          PRICE
                     DESCRIPTION                        PER SHARE      SHARES         AMOUNT
- ------------------------------------------------------  ---------     ---------     -----------
                                                                           
Balances at December 31, 1994.........................                       --     $        --
Sale of Series B preferred stock, net of issuance
  costs of $40,000....................................   $0.6700      2,686,567       1,760,000
Sale of Series C preferred stock, net of issuance
  costs of $57,784....................................    1.9634      2,904,305       5,644,528
Exercise of warrants for Series B preferred stock.....    0.6700        373,134         250,000
                                                                      ---------     -----------
Balances at December 31, 1995.........................                5,964,006       7,654,528
Sale of Series D preferred stock, net of issuance
  costs and warrant value of $889,186 and $1,579,000,
  respectively........................................    7.5300      2,381,010      15,467,966
Accretion of redemption value.........................                       --          31,000
                                                                      ---------     -----------
Balances at December 31, 1996.........................                8,345,016      23,153,494
Issuance costs related to sale of Series D preferred
  stock (unaudited)...................................                       --         (22,807)
Accretion of redemption value (unaudited).............                       --         133,780
                                                                      ---------     -----------
Balances at June 30, 1997 (unaudited).................                8,345,016     $23,264,467
                                                                      =========     ===========

 
     The rights, preferences and restrictions of the Series A, B, C and D
preferred stock are as follows:
 
     - Each of the Series B, C and D preferred stock are redeemable by the
       holder, on, or at any time after, December 31, 2002 with the written
       consent of at least two-thirds of the respective outstanding Series B, C
       and D shareholders. The stated redemption price at date of issuance was
       $0.67, $1.9634 and $7.53 per share for the Series B, C and D preferred
       stock, respectively, and is to be adjusted for inflation from the
       issuance date to the redemption date. Redemption payments would be made
       in three equal installments commencing on the initial redemption request
       date, and each year thereafter, for a period of two years. The Company
       accounts for the difference
 
                                      F-14
   84
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
       between the carrying amount of redeemable preferred stock and the
       redemption amount by increasing the carrying amount for periodic
       accretion against accumulated deficit using the interest method, so that
       the carrying amount will equal the redemption amount at the redemption
       date.
 
     - Each share of Series A, B, C and D preferred stock is convertible at the
       option of the holder at any time into one share of Series A common stock,
       subject to certain antidilution provisions. The holders of Series A
       preferred stock have the right, under certain circumstances, to convert
       one share of Series A preferred stock to one share of Series D common
       stock.
 
     - Conversion of all Series A, B, C and D preferred stock is automatic upon
       the earlier of the closing of a public offering of the Company's common
       stock at a purchase price of not less than $13.554 per share with
       aggregate proceeds of not less than $20,000,000, or the affirmative vote
       or written consent of the holders of at least two-thirds of the then
       outstanding shares of Series D preferred stock.
 
     - Series A, B, C and D preferred stock have a liquidation preference of
       $0.0729, $0.67, $1.9634 and $11.295 per share, respectively, plus all
       declared but unpaid dividends, if any. No dividends have been declared
       through December 31, 1996 and June 30, 1997.
 
     - Series A, B, C and D preferred stock have the same voting rights as
       Series A common stock based upon the number of shares of Series A common
       stock into which they are convertible; however, Series A, B, C and D
       preferred stock have preferential treatment over all common stock with
       respect to any payment of dividends when and if declared by the board of
       directors and any distributions of assets upon liquidation.
 
     Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Company has classified redeemable, convertible preferred stock
outside of shareholders' deficit.
 
  (b) Common Stock
 
     Common stock at December 31, 1995 and 1996, and June 30, 1997, consists of
the following:
 


                                                                    ISSUED AND OUTSTANDING SHARES
                                                                 -----------------------------------
                                                                    DECEMBER 31,
                                                                 ------------------       JUNE 30,
                                           AUTHORIZED SHARES      1995       1996           1997
                                           -----------------     ------     -------     ------------
                                                                                        (UNAUDITED)
                                                                            
Series A.................................      30,000,000             1           1              1
Series B.................................      10,000,000         2,400     463,018        297,727
Series C.................................       9,999,999        34,547      72,472        451,792
Series D.................................               1            --          --             --

 
     At January 1, 1995, 10,000 shares of common stock were issued and
outstanding. In April 1995, these 10,000 shares of common stock were exchanged
for 13,713,439 shares of Series A preferred stock and one share of Series A
common stock.
 
     Series A and B common stock entitle the holder to fifteen votes for each
share held. Series C common stock entitles the holder to one vote for each share
held. Series B common stock is reserved for issuance to employees, directors or
affiliates of directors. Each share of Series B common stock automatically
converts to one share of Series C common stock upon termination of the holder's
employment, or status as a director or an affiliate of a director.
 
                                      F-15
   85
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Series D common stock shall have the right to elect one member of the board
of directors, the "Policy Director." Such director shall have the authority to
adopt or change editorial policies relating to the Company's Internet Web site
publishing.
 
  (c) Stock Warrants
 
     In connection with the sale of Series B preferred stock, the Company issued
a warrant to purchase 373,134 additional shares of Series B preferred stock at
an exercise price of $0.67 per share. No separate value was assigned to the
warrant as the value was not significant at the date of issuance. This warrant
was exercised in 1995.
 
     In connection with the sale of Series C preferred stock, the Company issued
warrants to purchase up to 100,000 additional shares of Series C preferred stock
at an exercise price of $1.9634 per share, and warrants to purchase up to
183,755 shares of Series B common stock at an exercise price of $0.20 per share.
No separate value has been assigned to the warrants as the values were not
significant at the date of issuance. These warrants vest on the earlier of
January 26, 1997 or, if certain conditions are met, upon the closing of an IPO
of the Company's common stock. These warrants expire on the earlier of the
closing of an IPO by the Company with aggregate proceeds of not less than
$10,000,000 and at not less than $4.00 per share or October 26, 2000. No
warrants to purchase Series C preferred stock or Series B common stock have been
exercised as of December 31, 1996 and June 30, 1997.
 
     In connection with the sale of Series D preferred stock, the Company issued
warrants to purchase up to 714,303 additional shares of Series D preferred stock
at an exercise price of $9.4125 per share. The value of the warrants,
$1,579,000, was recorded as additional paid-in capital. These warrants are
exercisable at December 31, 1996, and expire on November 27, 1998. Upon a merger
or consolidation in which the Company is not the survivor, the warrants are
canceled and all rights granted shall terminate. If an event causing conversion
of the Company's Series D preferred stock shall have occurred prior to the
exercise of the warrants, then all warrants shall be exercisable for the number
of shares of common stock of the Company into which the Series D preferred stock
not purchased upon any prior exercise of the warrants would have been so
converted.
 
  (d) Stock Option Plans
 
     Under the Company's 1995 Stock Option Plan (1995 Plan), 3,600,000 shares of
common stock are reserved for the issuance of stock options. Options generally
vest over a period of one to five years from the date of grant, expire 20 years
from the date of grant and terminate, to the extent not exercised, three months
after the termination of employment. In 1996, the Company adopted the 1996 Stock
Option Plan (1996 Plan). A total of 3,000,000 shares of common stock were
reserved for issuance of stock options under the 1996 Plan as of December 31,
1996. In January 1997, the Company reserved an additional 2,800,000 shares of
common stock for issuance under the 1996 Plan. The terms of the 1996 Plan are
substantially similar to the terms of the 1995 Plan.
 
                                      F-16
   86
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     A summary of stock option activity under the 1995 Plan and the 1996 Plan is
as follows:
 


                                                                 OUTSTANDING OPTIONS
                                                             ----------------------------
                                                SHARES                        WEIGHTED
                                              AVAILABLE       NUMBER          AVERAGE
                                              FOR GRANT      OF SHARES     EXERCISE PRICE
                                              ----------     ---------     --------------
                                                                  
        Balances at December 31, 1994.......          --            --         $   --
        Plan introduction...................   3,600,000            --             --
        Options granted.....................  (3,313,214)    3,313,214           0.07
        Options exercised...................          --       (30,750)          0.07
        Options canceled....................     450,000      (450,000)          0.07
                                              ----------     ---------
        Balances at December 31, 1995.......     736,786     2,832,464           0.07
        Plan introduction...................   3,000,000            --             --
        Options granted.....................  (3,766,364)    3,766,364           0.34
        Options exercised...................          --      (498,543)          0.09
        Options canceled....................     765,250      (765,250)          0.10
                                              ----------     ---------
        Balances at December 31, 1996.......     735,672     5,335,035           0.27
        Plan amendment (unaudited)..........   2,800,000            --             --
        Options granted (unaudited).........  (1,581,430)    1,581,430           1.94
        Options exercised (unaudited).......          --      (213,029)          0.19
        Options canceled (unaudited)........     366,950      (366,950)          0.39
                                              ----------     ---------
        Balances at June 30, 1997
          (unaudited).......................   2,321,192     6,336,486         $ 0.67

 
     The Company applies APB Opinion No. 25 in accounting for the 1995 Plan and
the 1996 Plan, and no compensation cost has been recognized for its employee
stock options in the consolidated financial statements. Had the Company
determined compensation cost of employee stock options based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
 


                                                                DECEMBER 31,
                                                         ---------------------------
                                                            1995            1996
                                                         -----------     -----------
                                                                   
        Net loss:
          As reported..................................  $(1,501,302)    $(3,789,245)
          Pro forma....................................   (1,510,513)     (3,865,415)
        Net loss per share:
          As reported..................................                  $
          Pro forma....................................

 
     The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss and net loss per share
amounts presented above because compensation cost is recognized over the
options' vesting period. The Company has not calculated pro forma net loss per
share because information regarding the pricing of the shares of Common Stock
under the contemplated IPO has not yet been determined.
 
     The per share weighted-average fair value of stock options granted during
1995 and 1996 was $.01 and $.07, respectively, on the date of grant using the
minimum value method with the following weighted average assumptions:
1995 -- expected dividend yield of 0%, risk-free interest rate of 5.9%, and an
expected life of 3.5 years; 1996 -- expected dividend yield of 0%, risk-free
interest rate of 6.1%, and an expected life of 4.5 years.
 
                                      F-17
   87
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes information about stock options outstanding
under the 1995 Plan and the 1996 Plan at December 31, 1996:
 


                        OPTIONS OUTSTANDING
             -----------------------------------------        OPTIONS EXERCISABLE
                              WEIGHTED-                    -------------------------
                               AVERAGE       WEIGHTED-                     WEIGHTED-
                              REMAINING       AVERAGE                       AVERAGE
EXERCISE       NUMBER        CONTRACTUAL     EXERCISE        NUMBER        EXERCISE
 PRICES      OUTSTANDING        LIFE           PRICE       EXERCISABLE       PRICE
- --------     -----------     -----------     ---------     -----------     ---------
                                                            
 $ 0.07        1,786,695     18.33 years       $0.07         493,845         $0.07
   0.20        2,825,995     19.25 years        0.20          58,543          0.20
   0.85          322,000     19.66 years        0.85           3,750          0.85
   1.00          400,345     19.82 years        1.00           5,045          1.00
               ---------                                     -------
               5,335,035     18.96 years       $0.27         561,183         $0.09
               ---------                                     -------

 
(8) SUBSEQUENT EVENTS (UNAUDITED)
 
     In July 1997, the Company amended its articles of incorporation to
designate 7,047,679 shares of common stock as Series E common stock, designate
7,047,679 shares of preferred stock as Series E preferred stock, and reduce the
number of shares designated as Series D preferred stock to 3,095,313.
 
     In June 1997, the Company entered into a strategic agreement with Microsoft
Corporation (Microsoft) pursuant to which the Company granted Microsoft a
nonexclusive license to certain substantial elements of the source code of the
Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio/RealVideo Version 4.0 technology to third parties under
certain conditions. The agreement also provides for substantial refunds to
Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote the Active Streaming Format as a standard file
format for streaming media. The agreement also requires the Company to provide
Microsoft with engineering consultation services, certain error corrections, and
certain technical support over a defined term. In July 1997, the Company
delivered the specified source code in exchange for a license fee of
$30,000,000. The Company will recognize revenue, commencing with delivery of the
source code, over the three-year term of its ongoing obligations.
 
     In connection with the agreement, Microsoft purchased a minority interest
in the Company in the form of 3,338,374 shares of Series E preferred stock at a
price of $8.99 per share. The Series E preferred stock is redeemable, at the
option of the holder, on or at any time after December 31, 2002 at a redemption
price of $8.99 per share and also has a liquidation preference of $8.99 per
share plus any declared but unpaid dividends. Each share of Series E preferred
stock is also convertible at the option of the holder at any time into either
one share of Series A common stock or one share of Series E nonvoting common
stock. Conversion of Series E preferred stock is automatic upon either the
closing of a public offering of the Company's common stock at a purchase price
of not less than $13.554 per share with aggregate proceeds of not less than
$20,000,000, or the affirmative vote or written consent of the holders of at
least two-thirds of the then outstanding shares of Series D preferred stock. The
conversion rate is subject to certain antidilution provisions. In connection
with the offering, the Company also issued warrants to purchase up to 3,709,305
shares of Series E preferred stock at an exercise price of $13.48
 
                                      F-18
   88
 
                               REALNETWORKS, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
per share. The warrants are exercisable at any time through January 21, 2000 and
will terminate automatically upon either completion of an IPO by the Company, or
completion of a merger in which the Company is not a survivor.
 
     In September 1997, the Company amended its articles of incorporation as
follows:
 
     - increased the number of authorized shares of common stock and preferred
       stock to 300,000,000 and 60,000,000, respectively;
 
     - established par value of $0.001 per share for both common stock and
       preferred stock;
 
     - changed the designation of series of common stock to:
 


                                                                  COMMON
                                    SERIES                         STOCK
                ----------------------------------------------  -----------
                                                             
                  A...........................................  207,047,679
                  B...........................................   30,000,000
                  C...........................................   30,000,000
                  D...........................................            1
                  E...........................................    7,047,679

 
     - provided an alternative automatic conversion provision for all series of
       preferred stock such that conversion is automatic on the closing of a
       public offering of the Company's common stock with aggregate proceeds of
       not less than $20,000,000, provided that holders of at least two-thirds
       of the then outstanding Series D preferred stock have consented to such
       conversion;
 
     - provided that on the closing of an offering as described above, the
       designations of Series A through D common stock terminate and Series A
       through D common stock convert into one class of common stock, with each
       share entitled to one vote;
 
     - provided that on the closing of an offering as described above, the
       designation of Series E common stock terminates and Series E common stock
       converts into either common stock, with each share entitled to one vote,
       or Special Common Stock, with no voting rights except as required by
       applicable law; shares of Special Common Stock convert into shares of
       common stock solely with the prior written approval of the Company's
       Board of Directors; and
 
     - created, upon the closing of an offering as described above, a Strategic
       Transactions Committee of the Board of Directors, consisting of three
       members of the Board of Directors; without the prior approval of this
       committee, the Board of Directors is prohibited from (i) adopting a plan
       of merger; (ii) authorizing sales of (A) assets representing more than
       50% of the Company's assets, or (B) any asset on which the long-term
       business strategy of the Company is substantially dependent; or (iii)
       authorizing the voluntary dissolution of the Company.
 
     In September 1997, the Company adopted the 1998 Employee Stock Purchase
Plan which will become effective January 1, 1998. The Company has reserved
1,000,000 shares of common stock for issuance under the plan.
 
     In September 1997, the Company adopted the Amended and Restated 1996 Stock
Option Plan which provides for the grant of incentive and nonqualified options
to purchase up to an aggregate of 9,692,736 shares of common stock to employees,
officers, directors, consultants and independent contractors of the Company. The
amount of shares reserved can be increased up to 11,233,209 after taking into
account 1,540,473 shares subject to options outstanding under the 1995 Plan to
the extent such options terminate without having been exercised in full.
 
     In September 1997, the Company terminated its line of credit and bank term
loan.
 
                                      F-19
   89
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Montgomery Securities and
Robertson, Stephens & Company are acting as representatives, has severally
agreed to purchase from the Company, the respective number of shares of Common
Stock set forth opposite its name below:
 


                                                                              NUMBER OF
                                                                              SHARES OF
                                                                                COMMON
                                   UNDERWRITER                                  STOCK
      ---------------------------------------------------------------------   ----------
                                                                           
      Goldman, Sachs & Co..................................................
      Montgomery Securities................................................
      Robertson, Stephens & Company........................................
 
                                                                                --------
        Total..............................................................
                                                                                ========

 
     Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
 
     The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $       per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $       per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
 
     The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the             shares of Common
Stock offered.
 
     As of the date of this Prospectus, The Goldman Sachs Group, L.P., an
affiliate of Goldman, Sachs & Co., beneficially owns 66,401 shares, and a
warrant to purchase 19,920 shares, of Series D Preferred Stock. These shares and
the warrant were purchased on November 27, 1996 in reliance on the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving a public offering.
 
     The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the Common Stock
without the prior written consent of the representatives, except for the shares
of Common Stock offered in connection with the offering.
 
     In addition, the officers, directors and certain persons who prior to
closing of the offering hold shares of capital stock of the Company (including
but not limited to all holders of 1% or more of the Company's capital stock)
have agreed that they will not offer, sell or otherwise dispose of any shares of
Common Stock owned of record or beneficially as of the date of the Prospectus,
including securities convertible into or exercisable or exchangeable for shares
of Common Stock as of said date, as well as any shares of
 
                                       U-1
   90
 
Common Stock later acquired by reason of the conversion, exercise or exchange of
such securities, or enter into any swap or other transaction with respect to the
shares that would transfer the economic consequences of ownership of the Common
Stock to another person, for a period of 180 days following the date of this
Prospectus, except that persons other than officers, directors and holders of 1%
or more of the capital stock of the Company each will be free to sell or
otherwise dispose of up to 5,000 shares of Common Stock to the extent
permissible under Rule 144 or Rule 701.
 
     At the request of the Company, the Underwriters have reserved up to
            shares of Common Stock for sale, at the initial public offering
price, to employees of the Company and to certain distributors. The number of
shares of Common Stock available for sale to the general public in the public
offering will be reduced to the extent such persons purchase such reserved
shares.
 
     The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.
 
     Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
 
     In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market in the
over-the-counter market or otherwise.
 
     The Common Stock will be available for quotation on the Nasdaq National
Market under the symbol "RNWK." The Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
 
                                       U-2
   91
 
                                [SCREEN-SHOTS OF
                             WEB PAGES SUPERIMPOSED
                               OVER COMPANY LOGO]
   92
 
============================================================
 
  NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 


                                            PAGE
                                            -----
                                         
Prospectus Summary........................      3
Risk Factors..............................      6
Use of Proceeds...........................     20
Dividend Policy...........................     20
Capitalization............................     21
Dilution..................................     22
Selected Consolidated Financial Data......     23
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations..............................     24
Business..................................     34
Management................................     49
Certain Transactions......................     57
Principal Shareholders....................     60
Description of Capital Stock..............     62
Shares Eligible for Future Sale...........     65
Legal Matters.............................     67
Experts...................................     67
Additional Information....................     67
Index to Consolidated Financial
  Statements..............................    F-1
Underwriting..............................    U-1
  THROUGH AND INCLUDING             , 1997 (THE
25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
 
=================================================

 
============================================================
 
                                          SHARES
 
                               REALNETWORKS, INC.
                    (FORMERLY "PROGRESSIVE NETWORKS, INC.")
 
                                  COMMON STOCK
                          (PAR VALUE $.001 PER SHARE)
                              [REALNETWORKS LOGO]
                              GOLDMAN, SACHS & CO.
                             MONTGOMERY SECURITIES
                         ROBERTSON, STEPHENS & COMPANY
 
                      REPRESENTATIVES OF THE UNDERWRITERS
============================================================
   93
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
 

                                                                        
        Securities and Exchange Commission Registration Fee..............  $  10,455
        NASD Filing Fee..................................................      3,950
        Nasdaq National Market Listing Fee...............................     50,000
        Legal Fees and Expenses..........................................     **
        Accountants' Fees and Expenses...................................    225,000
        Blue Sky Filing and Counsel Fees and Expenses....................      5,000
        Printing and Engraving Expenses..................................    150,000
        Transfer Agent and Registrar Fees................................     10,000
        Directors' and Officers' Liability Insurance.....................    200,000
        Miscellaneous Expenses...........................................     **
                                                                            --------
                  Total..................................................  $  **
                                                                            ========

 
- ---------------
 
 * All expenses other than the Securities and Exchange Commission Registration
   Fee, the NASD Filing Fee and the Nasdaq National Market Fee are estimated.
 
** To be provided by amendment.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "Washington Act") authorize a court to award, or a
corporation's board of directors to grant, indemnification to directors and
officers on terms sufficiently broad to permit indemnification under certain
circumstances for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article VI, Section 6.4, of the Registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) and Article
X of the Registrant' Restated Bylaws (Exhibit 3.2 hereto) provide for
indemnification of the Registrant's directors, officers, employees and agents to
the maximum extent permitted by Washington law. The Registrant has entered into
agreements with all officers and directors to indemnify them against certain
liabilities arising out of their service as officers and directors, as
applicable, and to advance expenses to defend claims subject to indemnification.
The directors and officers of the Registrant also may be indemnified against
liability they may incur for serving in that capacity pursuant to a liability
insurance policy maintained by the Registrant for such purpose.
 
     Section 23B.08.320 of the Washington Act authorizes a corporation to limit
a director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, self-dealing or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VI, Section 6.5, of the Registrant's Amended and Restated
Articles of Incorporation contains provisions implementing, to the fullest
extent permitted by Washington law, such limitations on a director's liability
to the Registrant and its shareholders.
 
     Reference is also made to the Form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors of the Registrant by the Underwriters.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Since September 1, 1994, the Registrant has issued and sold unregistered
securities as follows:
 
          (1) An aggregate of 2,686,567 shares of Series B Preferred Stock
     issued in April 1995 to   investors. The aggregate consideration received
     for such shares was $1,800,000.
 
                                      II-1
   94
 
          (2) An aggregate of 2,600 shares of Series B Common Stock issued in
     September 1995 to 26 employees in exchange for services, and 100 shares of
     Series C Common Stock issued in September 1995 to one individual in
     exchange for services.
 
          (3) An aggregate of 2,904,305 shares of Series C Preferred Stock
     issued in October 1995 to   investors. The aggregate consideration received
     for such shares was $5,702,312.
 
          (4) An aggregate of 3,497 shares of Series C Common Stock issued in
     October 1995 to one individual in exchange for services.
 
          (5) An aggregate of 2,381,010 shares of Series D Preferred Stock
     issued in November 1996 to      investors. The aggregate consideration
     received for such shares was $17,929,005.
 
          (6) An aggregate of 1,000 shares of Series C Common Stock issued in
     March 1997 to one individual in exchange for services.
 
          (7) An aggregate of 3,338,374 shares of Series E Preferred Stock
     issued in July 1997 to one investor. The aggregate consideration received
     for such shares was $30,000,000.
 
          (8) An aggregate of 1,531,594 shares of Series B Common Stock and
     Series C Common Stock issued to employees and consultants upon the exercise
     of options. The aggregate consideration received for such shares was
     $187,914.
 
          (9) An aggregate of 373,134 shares of Series B Preferred Stock issued
     to an investor upon the exercise of warrants. The aggregate consideration
     received for such shares was $250,000.
 
     No underwriters were engaged in connection with these issuances and sales,
which were made in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, relating to sales by an issuer not involving
a public offering.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(A) EXHIBITS
 


    NUMBER                                     DESCRIPTION
    -------  -------------------------------------------------------------------------------
          
     1.1*    Form of Underwriting Agreement
     3.1     Amended and Restated Articles of Incorporation filed September 19, 1997
     3.2     Articles of Amendment to the Amended and Restated Articles of Incorporation
             filed September 25, 1997
     3.3     Form of Amended and Restated Articles of Incorporation
     3.4     Bylaws
     4.1*    Specimen Stock Certificate
     5.1*    Opinion of Graham & James LLP/Riddell Williams P.S.
    10.1     RealNetworks, Inc. 1995 Stock Option Plan
    10.2     RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
    10.3     Form of Stock Option Agreement
    10.4     1998 Employee Stock Purchase Plan
    10.5     Form of Warrant to Purchase Series D Preferred Stock
    10.6     Warrant to Purchase Series E Preferred Stock dated July 21, 1997 between the
             Registrant and Microsoft Corporation
    10.7     Lease Agreement dated March 4, 1996 by and between the Registrant as Lessee and
             Wright Runstad Properties L.P. as Lessor

 
                                      II-2
   95
 


    NUMBER                                     DESCRIPTION
    -------  -------------------------------------------------------------------------------
          
    10.8     Sublease Agreement dated March, 1996 by and between the Registrant as Sublessee
             and Legent Corporation as Sublessor
    10.9     Antenna Site License Agreement dated August 12, 1997 by and between the
             Registrant and Wright Runstad & Company
    10.10**  Agreement between Microsoft Corporation and the Registrant on Media Streaming
             Technology dated June 17, 1997
    10.11    Offer letter dated February 16, 1996 between the Registrant and Bruce Jacobsen
    10.12    Offer letter dated May 2, 1995 between the Registrant and James Wells
    10.13    Offer letter dated May 24, 1994 between the Registrant and Andrew Sharpless
    10.14    Form of Director and Officer Indemnification Agreement
    10.15    Limited Proxy and Voting Agreement dated July 21, 1997 by and between the
             Registrant and Microsoft Corporation
    10.16    Shareholders' Buy-Sell Agreement dated March 31, 1995 by and among the
             Registrant, Robert Glaser and certain shareholders of the Registrant
    10.17    Voting Agreement dated September 25, 1997 by and among the Registrant, Robert
             Glaser, Accel IV L.P., Mitchell Kapor and Bruce Jacobsen
    10.18    Agreement dated September 26, 1997 by and between the Registrant and Robert
             Glaser
    10.19    Second Amended and Restated Investors' Rights Agreement dated July 21, 1997 by
             and among the Registrant and certain shareholders of the Registrant
    11.1*    Statement re: Computation of Pro Forma Net Loss Per Share
    21.1     Subsidiaries of the Registrant
    23.1     Consent of Graham & James LLP/Riddell Williams P.S. (included in its opinion to
             be filed as Exhibit 5.1 hereto)
    23.2     Consent of KPMG Peat Marwick LLP
    24.1     Power of Attorney (included on signature page)
    27.1     Financial Data Schedule

 
- ---------------
 
 * To be filed by amendment.
 
** Confidential treatment requested.
 
(b) FINANCIAL STATEMENT SCHEDULE
 
     Schedule II -- Valuation and Qualifying Accounts
 
                                      II-3
   96
 
ITEM 17. UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
     The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this registration statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be a part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-4
   97
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on September 26, 1997.
 
                                          REALNETWORKS, INC.
 
                                          By: /s/ ROBERT GLASER
                                            ------------------------------------
                                            Robert Glaser
                                            Chief Executive Officer
 
                               POWER OF ATTORNEY
 
     Each person whose individual signature appears below hereby constitutes and
appoints Robert Glaser and Bruce Jacobsen, and each of them, as his true and
lawful attorney-in-fact, with full power of substitution, to execute in the name
and on behalf of such person, individually and in each capacity stated below,
and to file, any and all amendments to this Registration Statement, including
any and all post-effective amendments, and any related registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
 


                  SIGNATURE                               TITLE                    DATE
- ---------------------------------------------   -------------------------   -------------------
 
                                                                      
 
              /s/ ROBERT GLASER                 Chairman of the Board,       September 26, 1997
- ---------------------------------------------     Chief Executive
                Robert Glaser                     Officer, Secretary and
                                                  Treasurer (Principal
                                                  Executive Officer)
 
             /s/ BRUCE JACOBSEN                 President, Chief             September 26, 1997
- ---------------------------------------------     Operating Officer and
               Bruce Jacobsen                     Director
 
             /s/ MARK KLEBANOFF                 Chief Financial Officer      September 26, 1997
- ---------------------------------------------     (Principal Financial
               Mark Klebanoff                     and Accounting Officer)
 
               /s/ JIM BREYER                   Director                     September 25, 1997
- ---------------------------------------------
                James Breyer
 
             /s/ MITCHELL KAPOR                 Director                     September 22, 1997
- ---------------------------------------------
               Mitchell Kapor

 
                                      II-5
   98
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
                      REALNETWORKS, INC. AND SUBSIDIARIES
         PERIOD FROM FEBRUARY 9, 1994 (INCEPTION) TO DECEMBER 31, 1994
                 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
 


                                        BALANCE AT     CHARGED TO                       BALANCE AT
                                        BEGINNING      COSTS AND        COSTS AND         END OF
            DESCRIPTION                 OF PERIOD       EXPENSES      DEDUCTIONS(1)       PERIOD
- ------------------------------------    ----------     ----------     -------------     ----------
                                                                            
Year ended December 31, 1996:
  Valuation accounts deducted from
     assets:
     Allowance for doubtful accounts
       receivable and sales
       returns......................     $ 129,869     $  563,046       $(309,565)      $  383,350
     Valuation allowance for
       deferred tax assets..........       493,000      1,335,000              --        1,828,000
                                           =======      =========        ========        =========
Year ended December 31, 1995:
  Valuation accounts deducted from
     assets:
     Allowance for doubtful accounts
       receivable and sales
       returns......................            --        129,869              --          129,869
     Valuation allowance for
       deferred tax assets..........            --        493,000              --          493,000
                                           =======      =========        ========        =========
Period from February 9, 1994
  (inception) to December 31, 1994:
  Valuation accounts deducted from
     assets:
     Allowance for doubtful accounts
       receivable and sales
       returns......................            --             --              --               --
     Valuation allowance for
       deferred tax assets..........            --             --              --               --
                                           =======      =========        ========        =========

 
- ---------------
 
(1) Represents amounts written off.
   99
 
                                 EXHIBIT INDEX
 


EXHIBIT
 NUMBER                                DESCRIPTION
- --------  ----------------------------------------------------------------------
                                                                              
 1.1*     Form of Underwriting Agreement........................................
 3.1      Amended and Restated Articles of Incorporation filed September 19,
          1997..................................................................
 3.2      Articles of Amendment to the Amended and Restated Articles of
          Incorporation filed September 25, 1997................................
 3.3      Form of Amended and Restated Articles of Incorporation................
 3.4      Bylaws................................................................
 4.1*     Specimen Stock Certificate............................................
 5.1*     Opinion of Graham & James LLP/Riddell Williams P.S....................
10.1      RealNetworks, Inc. 1995 Stock Option Plan.............................
10.2      RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan........
10.3      Form of Stock Option Agreement........................................
10.4      1998 Employee Stock Purchase Plan.....................................
10.5      Form of Warrant to Purchase Series D Preferred Stock..................
10.6      Warrant to Purchase Series E Preferred Stock dated July 21, 1997
          between the Registrant and Microsoft Corporation......................
10.7      Lease Agreement dated March 4, 1996 by and between the Registrant as
          Lessee and Wright Runstad Properties L.P. as Lessor...................
10.8      Sublease Agreement dated March, 1996 by and between the Registrant as
          Sublessee and Legent Corporation as Sublessor.........................
10.9      Antenna Site License Agreement dated August 12, 1997 by and between
          the Registrant and Wright Runstad & Company...........................
10.10**   Agreement between Microsoft Corporation and the Registrant on Media
          Streaming Technology dated June 17, 1997..............................
10.11     Offer letter dated February 16, 1996 between the Registrant and Bruce
          Jacobsen..............................................................
10.12     Offer letter dated May 2, 1995 between the Registrant and James
          Wells.................................................................
10.13     Offer letter dated May 24, 1994 between the Registrant and Andrew
          Sharpless.............................................................
10.14     Form of Director and Officer Indemnification Agreement................
10.15     Limited Proxy and Voting Agreement dated July 21, 1997 by and between
          the Registrant and Microsoft Corporation..............................
10.16     Shareholders' Buy-Sell Agreement dated March 31, 1995 by and among the
          Registrant, Robert Glaser and certain shareholders of the
          Registrant............................................................
10.17     Voting Agreement dated September 25, 1997 by and among the Registrant,
          Robert Glaser, Accel IV L.P., Mitchell Kapor and Bruce Jacobsen.......
10.18     Agreement dated September 26, 1997 by and between the Registrant and
          Robert Glaser.........................................................
10.19     Second Amended and Restated Investors' Rights Agreement dated July 21,
          1997 by and among the Registrant and certain shareholders of the
          Registrant............................................................
11.1*     Statement re: Computation of Pro Forma Net Loss Per Share.............
21.1      Subsidiaries of the Registrant........................................
23.1      Consent of Graham & James LLP/Riddell Williams P.S. (included in its
          opinion to be filed as Exhibit 5.1 hereto)............................
23.2      Consent of KPMG Peat Marwick LLP......................................
24.1      Power of Attorney (included on signature page)........................
27.1      Financial Data Schedule...............................................

 
- ---------------
 
 * To be filed by amendment.
 
** Confidential treatment requested.