Updated from 11:40 a.m. EDT

Microsoft ( MSFT) and RealNetworks ( RNWK) announced a $761 million deal Tuesday to settle their antitrust case and create a new partnership to distribute Real's music and digital game services through the MSN network.

RealNetworks shares soared 35% before the market opened on reports that the companies were near a settlement of RealNetworks' 2003 antitrust suit. Shares of Real were recently trading up $2.04 at $7.78, while shares of Microsoft shed 11 cents to $24.35.

Under the agreement, Microsoft will pay Real a $460 million up-front cash payment to resolve all damages claims and give Real expanded access and long-term licenses to a wide range of Windows Media and securities technologies.

Under separate music and games agreements, Microsoft is scheduled to pay Real an additional $301 million in cash and provide services over 18 months in support of Real's product development, distribution and promotional activities. Microsoft will promote Real's Rhapsody subscription service on MSN Web sites and offer RealNetworks' digital games through MSN Games and Xbox Live Arcade for Xbox 360. Microsoft will earn credits toward the $301 million for subscribers that MSN delivers to Real.

Real and Microsoft also will collaborate on casual games, with Real creating a new subscription service to be offered on MSN Games and developing a series of new casual games for Xbox Live.

In addition, Real will take steps to support MSN Search, Microsoft's Internet search product that competes against Google ( GOOG) and Yahoo! ( YHOO), and Real and Microsoft will jointly promote use of Windows Media technologies with Rhapsody to Go.

Microsoft's Bill Gates and RealNetworks chief Rob Glaser were scheduled to hold a press conference about the agreements at 1 p.m. EDT in Seattle.

RealNetworks sued Microsoft in December 2003, charging the software titan violated antitrust laws in the media-player market. Seattle-based RealNetworks charged its Redmond rival with abusing its monopoly power by restricting how PC makers install competing media players while forcing every user of the Windows operating system to take the Microsoft media player.

RealNetworks' suit piggybacked a similar antitrust in the European Union, which has required Microsoft to sell versions of its Windows operating system without its media player. Microsoft is currently appealing the EU ruling but a final ruling could take years.

The pact with Real is the latest in a string of settlements that Microsoft has entered to put its legal battles behind it. Earlier this year, Microsoft agreed to pay IBM ( IBM) $850 million in an antitrust settlement. In April 2004, Microsoft and Sun Microsystems ( SUNW) settled an antitrust and patent dispute in a deal valued at nearly $2 billion. Microsoft previously paid Time Warner's ( TWX) AOL $750 million in 2003 to resolve their legal differences.

"This was probably the largest outstanding adversary that they were still doing battle with," said Tony Ursillo, a software analyst with Loomis Sayles, which owns Microsoft shares but doesn't have a stake in RealNetworks in its $68.4 billion in assets under management. "It's been important for Microsoft to get back to the business of creating software and discovering new markets. They got to the point where they realized that all of these lawsuits were becoming an obstacle to doing that. Other than that, it's just a case of finding the right price."

Staff reporter Ronna Abramson contributed to this article.

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