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

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

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

COMMISSION FILE NUMBER 0-23137

REALNETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

WASHINGTON 91-1628146
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)

1111 THIRD AVENUE, SUITE 2900 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(206) 674-2700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

The number of shares of the registrant's Common Stock outstanding as
of April 30, 1998 was 28,817,077. In addition, there were 3,338,374 outstanding
shares of the registrant's Special Common Stock, par value $0.001 per share,
that automatically convert on a one-for-one basis into Common Stock on a bona
fide sale to a purchaser who is not an affiliate of the holder.

REALNETWORKS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1998

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements........................................................................ 3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds................................................... 16

Item 6. Exhibits and Reports on Form 8-K............................................................ 16

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)

December 31, March 31,
---------------------------
1997 1998
--------- ---------

ASSETS

Current assets:
Cash and cash equivalents ........................................ $ 62,255 $ 45,309
Short-term investments ........................................... 29,773 45,262
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns .................................... 5,073 4,650
Other receivables ................................................ 10,706 10,982
Prepaid expenses and other current assets ........................ 2,052 2,813
--------- ---------
Total current assets .......................................... 109,859 109,016

Property and equipment, net ........................................... 5,143 5,166
Investment in joint venture ........................................... 816 691
Goodwill .............................................................. -- 1,488
Other assets .......................................................... 886 940
--------- ---------
Total assets .................................................. $ 116,704 $ 117,301
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable ................................................. $ 2,136 $ 2,742
Accrued compensation ............................................. 974 993
Other accrued expenses ........................................... 2,679 5,543
Deferred revenue ................................................. 16,550 19,807
--------- ---------
Total current liabilities ..................................... 22,339 29,085

Deferred revenue ...................................................... 15,500 13,083
Notes payable ......................................................... 963 1,005

Shareholders' equity:
Preferred stock, $0.001 par value
Authorized 60,000 shares; no shares issued and outstanding .... -- --
Common stock, $0.001 par value
Authorized 292,952 shares; issued and outstanding 27,528 shares
at December 31, 1997 and 28,766 shares at March 31, 1998 ...... 28 29
Special common stock, $0.001 par value
Authorized 7,048 shares; issued and outstanding 3,338 shares
at December 31, 1997 and March 31, 1998 ....................... 3 3
Additional paid-in capital ....................................... 95,557 111,884
Accumulated deficit .............................................. (17,524) (37,612)
Accumulated other comprehensive loss ............................. (162) (176)
--------- ---------
Total shareholders' equity .................................... 77,902 74,128
========= =========
Total liabilities and shareholders' equity .................... $ 116,704 $ 117,301
========= =========

See accompanying notes to condensed consolidated financial statements

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REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)

Quarter Ended March 31,
------------------------
1997 1998
-------- --------

Net revenues:
Software license fees ................................. $ 4,538 $ 9,418
Service revenues ...................................... 1,282 2,622
Advertising ........................................... 536 462
-------- --------
Total net revenues ................................ 6,356 12,502

Cost of revenues:
Software license fees ................................. 543 1,586
Service revenues ...................................... 1,327 521
Advertising ........................................... 151 332
-------- --------
Total cost of revenues ............................ 2,021 2,439
-------- --------

Gross profit ...................................... 4,335 10,063

Operating expenses:
Research and development .............................. 2,725 4,419
Selling and marketing ................................. 4,350 6,830
General and administrative ............................ 1,171 2,100
Acquisition related charges ........................... -- 17,879
-------- --------
Total operating expenses .......................... 8,246 31,228
-------- --------

Operating loss .................................... (3,911) (21,165)

Other income, net ......................................... 205 1,077
-------- --------

Net loss .................................................. $ (3,706) $(20,088)
======== ========

Basic and diluted net loss per share ...................... $ (6.35) $ (0.65)

Shares used to compute basic and diluted net loss per share 594 31,042

See accompanying notes to condensed consolidated financial statements

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REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Quarter Ended March 31,
------------------------
1997 1998
-------- --------

Net cash used in operating activities .................... $ (2,904) $ (1,020)

Cash flows from investing activities:
Purchases of property and equipment ............... (980) (637)
Purchases of short-term investments ............... (2,042) (25,594)
Proceeds from sales and maturities of short-term
investments .................................... 1,973 10,105
Cash obtained through acquisition ................. -- 203
-------- --------
Net cash used in investing activities ... (1,049) (15,923)
-------- --------

Net cash provided by financing activities ................ 1 2
-------- --------
Effect of exchange rate changes on cash .................. (9) (5)
-------- --------
Net decrease in cash and cash equivalents (3,961) (16,946)
Cash and cash equivalents at beginning of period ......... 14,738 62,255
-------- --------
Cash and cash equivalents at end of period ............... $ 10,777 $ 45,309
======== ========

See accompanying notes to condensed consolidated financial statements

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REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

RealNetworks, 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, video, and animation, over the Internet and intranets. The Company's
products and services include its RealSystem, a streaming media solution that
includes RealAudio and RealVideo technology, an electronic commerce World Wide
Web (Web) site designed to promote the proliferation of streaming media products
and a network of advertising-supported content aggregation Web sites.

Unaudited Interim Financial Information

The accompanying unaudited condensed 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.

These statements reflect all adjustments which, in the opinion of
the Company's management, are necessary for a fair presentation of the results
of operations for the periods presented. Operating results for the quarter ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for any subsequent quarter or for the year ending December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.

These condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

Revenue Recognition

On January 1, 1998, the Company adopted the provisions of Statement
of Position 97-2, Software Revenue Recognition (SOP 97-2), which provides
specific industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. The adoption of SOP 97-2 did not have a material
effect on revenue recognition for the quarter ended March 31, 1998.

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Prior to January 1, 1998, the Company recognized revenue from
software license fees upon delivery, net of an allowance for estimated returns,
provided that no significant obligations of the Company remain 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 generally is 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), when the following conditions are met: the software
product has been delivered to the VAR, the fee to the Company is fixed or
determinable, and collectibility is probable.

Service revenues include payments under support and upgrade
contracts, and fees from consulting, content hosting, and user conferences.
Support and upgrade revenues are recognized ratably over the term of the
contract, which typically is 12 months. Other service revenues are recognized
when the service is performed.

Revenues from advertising appearing on the Company's Web sites are
recognized ratably over the terms of the advertising contracts. The Company
guarantees to certain advertising customers a minimum number of page impressions
to be delivered to users of its Web sites for a specified period. To the extent
minimum guaranteed page impression deliveries are not met, the Company defers
recognition of the corresponding revenues until guaranteed page impression
delivery levels are achieved.

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Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (Statement 130), which establishes standards for the reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company has not determined the manner in which it will
present the information required by Statement 130 in its annual financial
statements for the year ending December 31, 1998. The Company's total
comprehensive loss for the quarters ended March 31, 1997 and 1998 was
$(3,715,000) and $(20,102,000), respectively, and consisted of net loss and
foreign currency translation adjustments.

Net Loss Per Share

Basic earnings per share is computed by dividing the sum of net
income (loss) plus accretion of redemption value of redeemable preferred stock
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing the sum of net income (loss)
plus accretion of redemption value of redeemable preferred stock by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. As the Company had a net loss attributable to common
shareholders in each of the periods presented, basic and diluted net loss per
share are the same.

The following table reconciles the Company's reported net loss to
net loss attributable to common shareholders used to compute basic and diluted
net loss per share:

Quarter Ended March 31,
---------------------------
1997 1998
-------- --------
(in thousands)

Net loss $ (3,706) $(20,088)
Accretion of redemption value of
redeemable preferred stock
prior to conversion into
common stock (67) --
-------- --------
Net loss attributable to common
shareholders $ (3,773) $(20,088)
======== ========

Excluded from the computation of diluted earnings per share for the
quarter ended March 31, 1998 are options to acquire 7,463,000 shares of common
stock with a weighted-average exercise price of $4.79 and warrants to acquire
674,000 shares of common stock with a weighted-average exercise price of $9.4125
because their effects would be anti-dilutive.

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NOTE 2 - ACQUISITION

In March, 1998, the Company completed the acquisition of Vivo
Software, Inc. (Vivo), a developer of streaming media creation tools. Under the
terms of the acquisition, the Company issued approximately 1,102,000 shares of
its common stock in exchange for all outstanding shares of Vivo common stock. In
addition, the Company issued options to purchase approximately 48,000 shares of
the Company's common stock in exchange for outstanding unvested options to
purchase Vivo common stock. The acquisition was accounted for using the
purchase method of accounting, and, accordingly, the results of Vivo's
operations are included in the Company's condensed consolidated financial
statements from the date of acquisition.

A summary of the purchase price for the acquisition is as follows
(in thousands):

Stock and stock options $16,526
Direct acquisition costs 445
Accrued expenses assumed 1,640
Other current liabilities assumed 1,021
Non-current liabilities assumed 36
-------
Total $19,668
=======

A summary of the allocation of the purchase price is as follows (in
thousands):

In-process research and development $17,729
Cash acquired 203
Other current assets acquired 148
Property and equipment 100
Goodwill 1,488
-------
Total $19,668
=======

In-process research and development represents the fair value of
technologies acquired for use in the Company's own development efforts. The
Company determined the amount of the purchase price to be allocated to
in-process research and development based on the time and cost to incorporate
the acquired technology into the Company's development projects, expected
incremental revenues and expenses associated with the development projects
utilizing the acquired technology, and risks and uncertainties associated with
the acquired technology. Such risks and uncertainties include inherent
difficulties and uncertainties in incorporating the acquired technology into
the Company's development projects and risks related to the viability of and
potential changes to target markets. The Company also concluded that the
acquired technology had no alternative future use.

Goodwill represents the excess of the purchase price over the fair
value of identifiable tangible and intangible assets acquired and is amortized
using the straight-line method over its estimated life of five years.

The acquisition of Vivo was a tax free reorganization under the
Internal Revenue Code (IRC). Therefore, the charge for in-process research and
development is not deductible for income tax purposes. The Company acquired a
net operating loss carryforward of approximately $16,000,000, which expires
from 2008 to 2012. Under the provisions of the IRC, the amount of these net
operating loss carryforwards available annually to offset future taxable income
is significantly limited. No value has been attributed to these net operating
losses in the purchase price allocation due to these limitations.

In connection with the acquisition, approximately 220,000 shares of
common stock issued were placed in escrow to secure indemnification obligations
of former shareholders of Vivo.

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The following table presents pro forma results of operations as if
the acquisition had occurred, and the acquisition related charges of $17,879,000
had been incurred, at the beginning of each of the periods presented. The pro
forma information is not necessarily indicative of the combined results that
would have occurred had the acquisition taken place at the beginning of 1997 or
at the beginning of 1998, nor is it necessarily indicative of results that may
occur in the future.

Proforma
Quarter Ended March 31,
--------------------------------
1997 1998
-------- --------
(in thousands except per share data)

Revenues $ 6,837 $ 13,155
Net loss (22,876) (21,218)
Net loss per share (13.53) (0.66)

NOTE 3 - LEASE COMMITMENT

In January 1998, the Company entered into a lease agreement for new
corporate offices. The lease commences on April 1, 1999, and expires on April 1,
2011, with the option to renew the term for either a three or ten year period.
Average rent over the lease term is approximately $4,000,000 per year.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND
CERTAIN ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THE COMPANY'S ACTUAL ACTIONS OR RESULTS MAY DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH HEREIN UNDER "OVERVIEW", "RESULTS OF OPERATIONS," AND
"LIQUIDITY AND CAPITAL RESOURCES," IN THE SECTION TITLED "CERTAIN RISK FACTORS
THAT MAY AFFECT THE COMPANY'S BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION" INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, AND IN THE SECTIONS TITLED "RISK FACTORS" AND
"BUSINESS" INCLUDED IN THE COMPANY'S FINAL PROSPECTUS DATED NOVEMBER 20, 1997.
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE INFORMATION
SET FORTH IN OTHER REPORTS OR DOCUMENTS THAT THE COMPANY FILES FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.

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 RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites.

In March 1998, the Company completed the acquisition of Vivo
Software, Inc. ("Vivo"), a developer of streaming media creation tools. Under
the terms of the acquisition, the Company exchanged approximately 1,102,000
shares of its common stock in exchange for all outstanding shares of Vivo
common stock. The acquisition was accounted for using the purchase method of
accounting. Of the total purchase price, $17,729,000 was allocated to
in-process research and development and was charged to the Company's results
of operations for the quarter ended March 31, 1998. The remaining purchase
price of $1,939,000 was allocated to tangible assets acquired and goodwill.
Goodwill is amortized over its estimated life of five years. See Note 2 of
Notes to Condensed Consolidated Financial Statements. Although the Company
believes that the acquisition of Vivo is in the best interests of the Company
and its shareholders, acquisitions involve a number of special risks,
including: the integration of acquired products and technologies in a timely
manner; the integration of businesses and employees with the Company's
business; adverse effects on the Company's reported operating results from
acquisition-related charges and amortization of goodwill; potential increases
in stock compensation expense and increased compensation expense resulting
from newly-hired employees; distraction of the

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Company's management from the day-to-day business and operations of the Company;
the assumption of unknown liabilities; and the possible failure to retain key
acquired personnel. Because most software business acquisitions involve the
purchase of significant amounts of intangible assets, acquisitions of such
businesses typically result in goodwill and amortization charges and may also
involve charges for acquired research and development projects. If the Company
were to incur additional charges for acquired in-process research and
development and amortization of goodwill with respect to future acquisitions,
such charges could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company recently announced the introduction of RealSystem G2, a
next generation streaming media delivery system. The Company expects to
distribute RealSystem G2 in beta form to the public prior to finalizing product
features, functionality and operability. This may cause certain customers to
delay purchasing decisions until commercial versions of the products are
available, which could have a material adverse effect on the Company's future
revenues and quarterly results of operations. In addition, software products as
complex as those offered by the Company frequently contain errors or failures,
especially when new versions are released. Although the Company conducts
extensive product testing during product development, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new versions of its products after commencement of
commercial shipments, which errors could result in the loss of revenue or delay
in market acceptance of the Company's products, diversion of development
resources, damage to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there
can be no assurance that the Company will not experience delays in the
development, introduction, marketing and distribution of RealSystem G2, which
delays, if they were to occur, could have a material adverse effect on the
Company's business, financial condition and results of operations.

In August 1997, the 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 Corporation ("Microsoft"), with subpoenas to produce certain
documents. The Company continues to supply documents and information in
response to the subpoenas. 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 Department of Justice could decide to take actions
that could materially and adversely affect the Company's current relationship
with Microsoft or other companies, affect Microsoft's obligations with respect
to the distribution of the Company's products, result in certain penalties,
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.

Due to the foregoing factors, it is likely that the Company's
operating results in some future quarters will fall below the expectations of
securities analysts and investors, which would likely have a material adverse
affect on the trading price of the Company's common stock.

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RESULTS OF OPERATIONS

REVENUES

Software License Fees. Software license fees were $4,538,000 and
$9,418,000 for the quarters ended March 31, 1997 and 1998, respectively. The
increase was due primarily to a greater volume of products sold as a result of
growing market acceptance of the Company's products, the introduction of new
products, successful product promotions and increased sales from electronic
distribution. In addition, in June 1997, the Company entered into a $30,000,000
license agreement with Microsoft. The agreement requires the Company to
provide Microsoft with engineering consultation services, certain error
corrections and certain technical support over a defined term. The Company
recognizes revenue from the agreement over the three-year term of the Company's
ongoing obligations. Included in software license fees for the quarter ended
March 31, 1998 was $2,418,000 related to the Microsoft license agreement.

Service Revenues. Service revenues were $1,282,000 and $2,622,000
for the quarters ended March 31, 1997 and 1998, respectively. This increase was
primarily due to a greater installed base of the Company's products and the
introduction of support and upgrade contracts for the Company's RealPlayer Plus.
Service revenues for the quarter ended March 31, 1997 also included $498,000
related to the Company's first RealNetworks Conference. No similar revenues were
recognized for the quarter ended March 31, 1998 as the Company's 1998
RealNetworks Conference will be held in the second quarter of 1998.

Advertising Revenues. Advertising revenues were $536,000 and
$462,000 for the quarters ended March 31, 1997 and 1998, respectively. The
Company is currently in the process of developing its advertising sales force.

COST OF REVENUES

Cost of Software License Fees. Cost of software license fees
includes costs of product media, duplication, manuals, packaging materials,
royalties paid for licensed technology, and order fulfillment costs. Cost of
software license fees was $543,000 and $1,586,000 for the quarters ended March
31, 1997 and 1998, respectively, and 12% and 17%, respectively, of software
license fees. The increase in absolute dollars was due primarily to higher sales
volumes and payments of royalties due to incorporation of new third-party
technologies into the Company's products. The increase in cost of software
license fees as a percentage of software license fees was primarily due to
increased sales of the Company's lower margin player product, the introduction
of new, lower margin products, and a greater percentage of sales sold through
indirect channels.

Cost of Service Revenues. Cost of service revenues includes the cost
of in-house and contract personnel providing consulting, support and other
services, bandwidth expenses for hosting services and user conference expenses.
Cost of service revenues was $1,327,000 and $521,000 for the quarters ended
March 31, 1997 and 1998, respectively, and 104% and 20%, respectively, of
service revenues. Cost of service revenues for the first quarter of 1997
includes $1,000,000 of costs associated with the Company's first RealNetworks
Conference. The Company's 1998 RealNetworks Conference will be held in the
second quarter of 1998 and, therefore, no comparable expenses were incurred in
the first quarter of 1998. Excluding the impact of the RealNetworks Conference,
cost of service revenues was $327,000 and $521,000, for the quarters ended March
31, 1997 and 1998, respectively, and 42% and 20%, respectively, of service
revenues. The increase in absolute dollars was primarily due to increased staff
and contract personnel to provide services to a greater number of customers. The
decrease in percentage terms was primarily due to increased utilization of
service personnel associated with a larger customer base.

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Cost of Advertising Revenues. Cost of advertising revenues includes
personnel associated with content creation, bandwidth expenses and fees paid to
third parties for content included in the Company's Web sites. Cost of
advertising revenues was $151,000 and $332,000 for the quarters ended March 31,
1997 and 1998, respectively, and 28% and 72%, respectively, of advertising
revenues. The increases in both absolute dollars and percentage terms were
primarily due to increases in the quality and quantity of content available on
the Company's Web pages and increased costs associated with the maintenance of
newly developed Web sites.

Gross margins may be affected by the mix of distribution channels
used, the mix of products sold, licensed third-party technology incorporated
into the Company's products, the mix of product versus services revenues and the
mix of international versus U.S. revenues. If sales through indirect channels
increase as a percentage of total net revenues, service revenues increase as a
percentage of total net revenues, or sales of the Company's lower margin
products 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 to support product development and
costs of technology acquired from third parties to incorporate into products
under 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. Costs incurred between
completion of a working model and general release of products have been
insignificant. Research and development expenses were $2,725,000 and $4,419,000
for the quarters ended March 31, 1997 and 1998, respectively, and 43% and 35%,
respectively, of total net revenues. The increase in absolute dollars was
primarily due to increases in internal development personnel and consulting
expenses. The decrease in percentage terms was a result of revenues growing at a
faster rate than expenses. Research and development expenses were primarily
related to development of new technology and products and enhancements made to
existing products. The Company believes that significant investment in research
and development is a critical factor in attaining its strategic objectives and,
as a result, expects to increase research and development expenditures in future
periods.

Selling and Marketing. Selling and marketing expenses consist
principally of salaries, commissions, consulting fees paid, trade show expenses,
advertising, promotional expenses and cost of marketing collateral. Selling and
marketing expenses were $4,350,000 and $6,830,000 for the quarters ended March
31, 1997 and 1998, respectively, and 68% and 55%, respectively, of total net
revenues. The increase in absolute dollars was due to the expansion of the
Company's direct sales organization, the creation of additional sales offices,
promotions and expenses related to the continued development of the "Real"
brand. The decrease in percentage terms was a result of revenues growing at a
faster rate than expenses. The Company intends to continue its branding and
marketing efforts and, therefore, expects selling and marketing expenses to
increase significantly in future periods.

General and Administrative. General and administrative expenses
consist primarily of personnel costs, fees for professional services and
corporate infrastructure costs. General and administrative expenses were
$1,171,000 and $2,100,000 for the quarters ended March 31, 1997 and 1998,
respectively, and 18% and 17%, 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 and costs associated with
operating as a public company. The decrease in percentage terms was due to
revenues growing at a faster rate than expenses. The Company expects general and
administrative expenses to increase as the Company expands its staff, incurs
additional costs related to the growth of its business,

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assimilates acquisitions of acquired technologies and businesses and incurs
additional costs related to operating as a public company.

Acquisition Related Charges. Acquisition related charges include
acquired in-process research and development and other acquisition related
costs. During the quarter ended March 31, 1998, the Company incurred $17,879,000
in expenses associated with the acquisition of Vivo. The Company may, in the
future, acquire businesses or technologies that are complimentary to those of
the Company, the results of which could include significant charges for acquired
in-process research and development and the amortization of acquired intangible
assets.

OTHER INCOME, NET

Other income, net consists primarily of earnings on the Company's
cash and cash equivalents and short-term investments. Other income, net was
$205,000 and $1,077,000 for the quarters ended March 31, 1997 and 1998,
respectively. The increase was due primarily to interest earned on proceeds from
the issuance of common and preferred stock in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $2,904,000 and $1,020,000
for the quarters ended March 31, 1997 and 1998, respectively. Cash used in
operating activities for the quarter ended March 31, 1997 was due primarily to a
net loss of $3,706,000, offset by increases in accrued expenses and deferred
revenue. For the quarter ended March 31, 1998, cash used in operating activities
of $1,020,000 resulted from a net loss of $20,088,000, largely offset by
$17,879,000 of non-cash acquisition related charges and increases in accrued
expenses and deferred revenue.

Net cash used in investing activities of $1,049,000 and $15,923,000
for the quarters ended March 31, 1997 and 1998, respectively, was primarily a
result of increases in short-term investments and purchases of property and
equipment.

Net cash provided by financing activities for the quarters ended
March 31, 1997 and 1998 was primarily a result of stock option exercises.

At March 31, 1998, the Company had $45,309,000 in cash and cash
equivalents and $45,262,000 in short-term investments. As of March 31, 1998, the
Company's principal commitments consisted of obligations under operating leases
and $1,005,000 in notes payable. Since its inception, the Company has
experienced a substantial increase in its capital expenditures to support
expansion of the Company's operations and information systems. In January 1998
the Company entered into a lease agreement for a new location for its corporate
offices. The Company anticipates the new lease will require significant capital
expenditures associated with leasehold improvements. In the past, the Company
has completed acquisitions of businesses and technologies, and will continue to
evaluate acquisitions of, or investments in, businesses, products,
joint-ventures, or technologies that are complementary to the operations of the
Company. Such acquisitions or investments, which the Company believes have been,
and will continue to be, in the best interest of the Company, involve risks and
may require additional cash investments by the Company.

Since its 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 and that such expenses
will be a material use of the Company's cash resources. The Company believes
that its current cash, cash equivalents, and short-term investments will be
sufficient to meet its anticipated cash

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needs for working capital and capital expenditures for at least the next 12
months. The Company may, in the future, seek to raise additional funds through
public or private equity financings, or through other sources such as credit
facilities. The sale of additional equity securities could result in dilution to
the Company's shareholders.

The Company is not aware of any material operational issues or costs
associated with preparing its current products and internal processing systems
for year 2000 compliance.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(1) An aggregate of 1,000 shares of Common Stock

was issued in February 1998 to one individual in exchange for
services valued at $19,000.

(2) An aggregate of 1,101,733 shares of Common
Stock was issued in March 1998 to 70 individuals and entities in
exchange for all of the outstanding shares of common stock of Vivo
Software, Inc., a Massachusetts corporation. The aggregate
consideration received for such shares was valued at $17,100,000.

(3) Between January 1, 1998 and March 31, 1998, an
aggregate of 136,200 shares of Common Stock was issued to employees
and consultants upon the exercise of options. The aggregate
consideration received for such shares was $65,149.

Use of Proceeds

The Company's registration statement under the Securities Act of
1933, as amended, for its initial public offering became effective on November
20, 1997. Offering proceeds, net of aggregate expenses of approximately $4.6
million, were approximately $38.5 million. The Company has used all of the net
offering proceeds for the purchase of temporary investments consisting of cash,
cash equivalents and short-term investments. The Company has not used any of the
net offering proceeds for construction of plant, building or facilities,
purchases of real estate, acquisition of other businesses, or repayment of
indebtedness. None of the net offering proceeds were paid directly or indirectly
to directors, officers, or general partners of the Company or their associates,
persons owning 10% or more of any class of the Company's securities, or
affiliates of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits required by Item 601 of Regulation S-K:

2.1 Agreement and Plan of Merger among RealNetworks, Inc., Vivo
Software, Inc. and RN Acquisition Corp. dated as of February
20, 1998 (incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 8, 1998 (File
No. 0-23137))

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10.1 Lease dated January 21, 1998 between RealNetworks, Inc. and
2601 Elliott, LLC

10.2 Amendment No. 1 to 1998 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 10.4.1 to the
Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1998 (File
No. 0-23137))

10.3 Third Amended and Restated Investors' Rights Agreement dated
March 24, 1998 among RealNetworks, Inc. and certain
shareholders of RealNetworks, Inc. (incorporated by
reference from Exhibit 10.16 to the Company's Annual Report
on Form 10-K filed with the Securities and Exchange
Commission on March 30, 1998 (File No. 0-23137))

27.1 Financial Data Schedule

(b) Reports on Form 8-K:

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 1998.

REALNETWORKS, INC.

By /s/ Robert Glaser
----------------------------------------
Robert Glaser
Chairman of the Board, Chief Executive
Officer and Treasurer

By /s/ Mark Klebanoff
----------------------------------------
Mark Klebanoff
Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit Number Description
- -------------- -----------

10.1 Lease dated January 21, 1998 between RealNetworks, Inc. and
2601 Elliott, LLC

27.1 Financial Data Schedule